Why Does Your Small Business Need A Shareholder’s Agreement?

If you have decided to take control of your own future and form a limited company, you may want to think about writing a shareholder’s agreement now, rather than waiting until later in your firm’s life cycle. Explaining further, Turner Little asks: why does your business need a shareholder’s agreement?

What is a shareholder’s agreement?

A shareholder’s agreement is a written document stating the rights and obligations of everyone who owns shares in your limited company. This is designed to control how business is carried out between your company and its shareholders, so the firm grows and your shareholders profit. You are not legally required to write a shareholder’s agreement, and you do not need to file it at Companies House, but we recommend that you compose one during incorporation, for the following reasons…

Job-sharing business duties

As a company director, you have many duties, from handling the firm’s tax obligations to recruiting staff. In a shareholder’s agreement, you can stipulate that some tasks e.g. approving large financial transactions, should only be carried out by the shareholders. This will allow you to ease the burden of directorship – especially if you are not a shareholder, so you can manage your time more efficiently.

Every shareholder is protected

If you write a shareholder’s agreement early, you will ensure all your shareholders’ rights are protected. You can serve your majority shareholders’ interests by including a ‘drag-along’ provision, so they can compel minor shareholders to accept an offer to buy all shares in the firm, if they are opposed. Also, you can ensure that certain decisions – e.g. the allotment of more shares, are reserved for all shareholders, so major parties cannot overrule minor ones, shielding their interests too.

Handle share issues

You can use your agreement to restrict people who may damage your company from buying into it. You can include a mechanism to ensure that when a shareholder wants to sell, other shareholders or the company itself gets first refusal. You can also determine how shares should be valued in the agreement, so one does not try to profit by selling their shares to a third party at a higher price.

You should hire an accountant to value your shares. They have the expertise and experience needed to handle this task, and prevent your shareholders from getting into disputes. It is also wise to adopt a flexible dividend policy in your document. This will allow you to divide shares into classes, giving you the means to pay different dividends to different owners depending on their class to maximise profit.

Give your business a direction

It is key that you know what you want your company to achieve long-term, so you can implement the measures needed to promote growth and profitability. A shareholder’s agreement can help, as you can include provisions in the document, which will allow you to deal with negative future events as efficiently as possible, restricting damage to the business. This can also be useful when you are seeking credit facilities, as lending institutions often view businesses with these mechanisms favourably.

An agreement can also help govern shareholder/staff relations. You can ensure that if, as its director, you decide to leave the company later, or any shareholding employees choose to go, the shares are returned to the company or sold to parties who will put its best interests first. You can even include different ways of assessing these shares, depending on how the employee leaves the company, so it is in their best interests to depart as amicably as possible, safeguarding the business’ image.

Address shareholder disputes

It is wise to prepare for the eventuality of shareholder disputes now, in case they occur in the future. In your agreement, you can stipulate measures that ensure that if a conflict arises, for example one shareholder wants to sell, and the others want to levy restrictions on the deal, negotiations remain amicable, shielding the business’ interests. You can even incorporate specific means of resolving disputes, such as mediation, so the matter does not turn into a costly legal battle.

Build a strong foundation

Your business needs a shareholder’s agreement from the beginning, therefore, as it will establish the strong foundations upon which you can build a lucrative venture. There are other issues you should consider, however, if you want to construct this strong foundation, such as your articles of association, and we suggest that you hire experts to help you construct these documents, to ensure your enterprise gets the best start. As experienced hands in this matter, here at Turner Little we can guide you through the limited company formation process, so you can build profit and change your life forever.

Turner Little

Turner Little can help you draw up a strong shareholder’s agreement. Our expert team will ensure that your shareholder’s agreement is tailored to the requirements of your business, including the necessary provisions you need to ensure that this document serves as a solid foundation for you to build your venture upon. Please get in touch with us for more information.

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Why Does Your Small Business Need A Shareholder’s Agreement?
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