When setting up a business with a family member or close friend, it can be difficult to envision any problems in the future that may cause you to fall out, or result in the business breaking down. Nevertheless, these things do happen and it could be to your detriment. Without drawing up a shareholders’ agreement, you could find that you don’t get anything from the business you worked so hard to build up, while facing an expensive legal dispute. This is why establishing a shareholders’ agreement is imperative when setting up a business.
What is a shareholders’ agreement?
A shareholders’ agreement is exactly that; an agreement between the shareholders of a company. It helps to determine how a company is run, ensuring it’s done fairly while protecting each shareholder’s investment. However, it may only exist between certain shareholders, rather than all of them.
Although certain documents are required by law when setting up a business, a shareholders’ agreement is not. Creating an agreement is sometimes put off when a business is set up to save time, but it shouldn’t be overlooked altogether.
Why is it important?
There are various scenarios that could threaten your business if a shareholders’ agreement isn’t put in place. For example, if other shareholders wanted to leave the company, they could sell their shares to whoever they wished and you wouldn’t have a say. A shareholders’ agreement can also anticipate changes that may happen in the future, and allow business owners to adequately prepare for them. It can also stop others from doing anything to your share. Ultimately, a shareholders’ agreement provides protection.
When should I set one up?
A shareholders’ agreement should be set up as soon as a company is formed, when the relationships between the shareholders are the best they could be, and before there’s any opportunity for something to go wrong. That way, the shareholders are protected right from the start, should anything happen.
What do I need to do?
When setting up a limited liability company there are several things you need to do. This includes making an operating agreement, which is declaring the number of shares and their value; outlining prescribed particulars, which are the rights each shareholder has according to each class of share; and getting the articles of association (written rules), which are required by law. Once these are in place, a shareholders’ agreement can be established.
