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Business law | How a shareholder's agreement can save the day

When two or more people decide to start a business together, they do so with only the best intentions. Usually, these intentions include making a commitment to put the business first on a long-term basis and agreeing to work together for the good of the company. In this way, business formation is much like a marriage. Also like a marriage, breaking the business up is often quite complicated.

Continuing with the marriage analogy, business partners can remove some of the complexities of ending a business relationship by making a legal agreement much like a prenup. This is called a shareholder's agreement and it offers many benefits in terms of business law. Some of these benefits include:

  • Specifies how shares are purchased or sold if the partnership breaks down
  • Specifies steps to keep the business within the "circle of the founding partners"
  • Prevents an exiting partner from selling his or her shares to an outside interest
  • Sets forth necessary procedures if a partner dies or becomes disabled
  • Specifies how payments will be made if the business becomes involved in a buy-sell process
  • Details any restrictions regarding the transfer of shares to any third parties

Like a marriage prenuptial agreement, a shareholder's agreement can eliminate many of the "breakup" problems that complicate the process of ending a business partnership. This can reduce conflict, shorten the process and help ensure that no parties suffer undue hardships when the partnership ends.

For Arizona residents in the process of forming a business with one or more partners, it is wise to discuss the possibility of creating a shareholder's agreement. An attorney who practices in the field of business law can offer valuable advice about such an agreement.

Source: FindLaw, "Breaking Up is Hard to Do: Why You Need a Shareholders Agreement," accessed Sep. 29, 2017

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