More than a Handshake: Partnership and Shareholder Agreements

05 Apr More than a Handshake: Partnership and Shareholder Agreements

Sometimes a small business built between two partners happens by accident. Maybe it started in your parents’ basement and it became your career over decades of hard work. Maybe it was a burst of inspiration over lunch one day that developed into a brand new business idea.

But as the business grows and becomes established, it isn’t enough to have a simple “gentleman’s agreement” running the business. And even if your partner is a family member, you can’t assume they want what’s best for you and your business – or your family.

One way to manage these expectations is to develop a partnership or shareholder agreement, a formal document that spells out the terms of the arrangement between you and your partner(s).

The most important provisions to include in a partnership or shareholder agreement are:

• When you die, what happens to your share of the business? Perhaps your business partners will be required to buy you out, or maybe your family members will receive your share as part of their inheritance. Sometimes business partners end up paying those family members if they don’t want to be involved. It may be important that your business partners have enough cash to buy you out when the time comes.
• If you have an accident that leaves you disabled, what steps are in place to resolve that? A short-term disability is a challenge that can be overcome fairly easily. But a long-term disability may provide an opportunity for the other partners to buy your share of the business. It may even necessitate such a sale. And again, in the worst case scenario, it will be important that they have enough cash to buy you out.
• If you and your business partner no longer see eye to eye, what will happen to the business? Sometimes a disagreement is just a simple disagreement. Other times, it can lead to an explosion. In these cases, it’s best to have a plan in place to determine whether one partner will have the option to buy out the other, or if the business will have to be sold entirely.

It’s all part of protecting your business in case the worst happens. Each of these circumstances must be carefully considered so that the pieces work together seamlessly.

If you’re planning to rely on an insurance policy to fund a buy-out in any of these circumstances, it will be helpful to consult with your broker to ensure your policy is in alignment with your current business agreement. You’ll want to confirm the policy is named appropriately and the beneficiaries are correct.

To learn more about protecting your business, contact us.

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.