moneyFYI
Financial Freedom Is Merely Organized Common Sense
Shareholder Agreements Are A Necessity
If your business has more than one owner, you need a shareholder or partnership agreement. I had an experienced corporate lawyer tell me once that to get into a partnership is as easy as throwing a stone off the top of the Empire State Building and getting out is as easy as throwing it back on the top. You must anticipate and provide a course of action.
If you have an agreement, it will be wise to review it periodically to check for new circumstances. The agreement should answer as many questions as possible.
The common ones include:
- Why are we in business?
- How will reinvest cash flow?
- How will we guarantee debt for the business?
- How will we share the burden of achieving the goals of our business?
- What happens if we cannot agree on the goals or who shall do what to achieve them?
- What if someone does not fulfill their duties?
- How will we handle a shareholder who wants to leave?
- How will we handle a shareholder who dies.
- How will we handle a shareholder who becomes disabled and who cannot attend to his duties?
- How will we handle a shareholder who has personal financial problems or a divorce?
- Should we require shareholders to have a prenuptial or post-nuptial agreement? A will?
- How will we value the business when someone is leaving or perhaps coming in?
- What happens when something happens that is not considered in our agreement?
- What if our personal tax planning conflicts with the corporate plan?
- Should there be a difference between withdrawing immediately and retirement?
There are as many questions as there are situations. You should explore them. Just don’t let that difficulty prevent you from having a starter agreement that covers the basics. Perfection will be a long time off.
A question arises around funding of some of the conditions. Death is easy to insure and insurance should be a given. Disabilities and sickness are insurable and insurance will usually buy some time to work things through. It is very difficult to assess whether someone who has had a stroke will want to come back to work and can fulfill their duties even then.
It is wisest to avoid partnerships with people who are out for themselves and care little for you, and it is unwise to rely on just goodwill in other cases. Find the questions that matter to you and work it through.
Use life insurance when possible, it is cheaper than any other choice. Do not wait for the agreement to be finalized. If a death occurs before the agreement is finished, would you rather have the agreement or the money? You would be surprised how many people put off buying insurance until the agreement is finished. Not smart.
Shareholders agreements are like Robert Frost’s observation in the poem, “Mending Wall”:
“Good fences make good neighbours.”
In a similar way, good agreements make good partners.”
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. don@moneyfyi.com 866-285-7772
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