When most people hear the term shareholder, they think of large corporations that are traded on the stock market. It is true that each investor into these companies is a shareholder, and each shareholder has certain rights and responsibilities. What many people overlook, however, is that even with small and medium sized private companies, there are often shareholders. If you and a friend start a business, it is likely that you will each be shareholders based on how you divide up ownership of the company.
If there are more than one shareholder in a company, it is possible, and even likely, that disputes will occur. If one person owns 95% of the shares and the other only 5%, the dispute can typically be resolved by the majority holder simply overruling the minority holder. When it is evenly split, or there are multiple shareholders involved, it can be more complicated. Shareholder disagreements can be a big problem for businesses, so it is best to avoid them whenever possible. The following steps can help to minimize the risk of problems.
Create a Clear Shareholder Agreement
The best way to avoid disagreements is to create a strong and detailed shareholder agreement when the business is started. In the beginning, you are going to be on the same page for most things, so it is easier to negotiate everything that needs to be done. By including information about how things will be handled for the business today, and in the future, it is possible to avoid many problems. Some common disagreements that can be addressed in a shareholder agreement include:
- How the Company will Raise Money
- Details Regarding How and When a Shareholder can Sell their Position in the Company
- What Additional Rights a Minority Shareholder has
- How and When Shareholders will Receive Compensation or Benefits
Clear Separation of Duties
Another way to avoid conflict with shareholders is to have a clear separation of duties in place. If you and a business partner got together to start a company, it is likely that you each brought something unique to the table. If you are generally more passionate about creating new products, for example, and your partner prefers marketing, then make it clear that you are each responsible for those areas in which each of you have strengths. While all shareholders should be able to give input, final decisions should likely come from the person who specializes in a specific area whenever possible.
Think About the Money Now
It is far too common for businesses to start off with the understanding that it is not going to be making much money for the first few years, so how money will be handled is not properly discussed. Disagreements about money can have a huge impact on a business, so they should always be settled ahead of time. Even if you know you will not be profitable for some time, you should have a discussion about when the shareholders will receive compensation and what percentage of future profits will be reinvested into the company.
Work with an Experienced Attorney
Another great way to avoid shareholder disagreements is to work with an experienced attorney. An attorney can help you to create a good shareholder agreement that will cover the most likely challenges you will face. They can also help to serve as an arbitrator should conflict arise. No matter what type of business you are starting or running, contact us to discuss your situation and how you can protect your company going forward.
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