How to use a Shareholders Agreement to protect your business
We all set up in business with co-shareholders when everythings positive, but reality can cause problems! As a result, it’s really important to protect the business from unforeseen circumstances with a Shareholders Agreement. Watch this to find out why…
Hi and welcome to another episode of BaranovTV, designed to demystify the world of accounts and tax and to help your business grow.
We set up in business for lots of different reasons and we set up within business with lots of different people. You could be a married couple, you could be cousins, you could be brothers-in-law. You may be really close friends. You might just be acquaintances or you might actually be former colleagues. Regardless of what that relationship is you need to make sure that you protect it.
The last thing you want is to go into business together and end up falling out because of a disagreement over the running of that business.
The important thing to do here is make sure that you have a shareholders agreement.
That can cover off lots of different situations and provide some guidance of what happens in those situations.
- So for example, if you have a falling out it could be that one shareholder wants to go one direction with a business and the other wants to go the polar opposite direction. You need to have in a shareholders agreement, a methodology of breaking that deadlock.
- A second potential problem is protracted illness. It’s a very sad statistic that one in three people will suffer from some kind of cancer during their lives. Obviously, priorities massively shift at that point and the person who’s unwell needs to take the time, go off and get better with whatever treatment’s involved. That is a potential point of conflict because you’ve got one person or maybe more left in the business, running the day to day and still supporting the person who’s off getting well. There’s obviously an area of conflict there.
- The third option, another cheery one for you, is death. If one of the shareholders dies and there is nothing in a shareholders agreement or in a will then their shares will pass in accordance with inheritance tax laws. Sorry, inheritance laws not inheritance tax laws! Inheritance laws, so as the remaining shareholder or the remaining shareholders, you may find that you’re suddenly working, rather than with your colleague that knows you, knows where the business is trying to go, you could be left all of a sudden dealing with inexperienced and grieving relatives. They will potentially know absolutely nothing about your business. So not only have you lost a shareholder and potentially a very active shareholder in the business you’re suddenly dealing with an incoming person that will find that very difficult.
A shareholder’s agreement is essentially a listing and a legally binding agreement that deals with all of these situations plus a lot more. You can get one of these drawn up by a solicitor and you should be speaking to a solicitor and to get your terms and conditions in place as well. So those two things come hand in hand.
If you’re unsure about any of that, do please get in touch.
The other time to think about it obviously is if you’re looking for an investor into your business and you give them some equity. The shareholdings of the business change suddenly and you need to make sure that that’s taken into account. The chances are they would want that anyway and they would drive that because they want to protect their investment but do make sure that you consider it at that point too.
So any advice needed then please get in touch. We’re here to help and we’d love to speak to you! In the meantime please go off and have a look at your shareholder agreement, if you have one. If you don’t, please make sure that you investigate getting one set up.
I’ll leave you with that thought and I’ll see you all very soon.
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