Clarity & Direction: How a Stockholders’ Agreement Can Save A Lot of Hassle

Stockholders’ agreements aren’t for everyone, but if you meet certain criteria, they can save you a tremendous amount of hassle down the road.   

First of all, you don’t need one if you’re a single stockholder – if you’re the 100 percent owner. A lot of small businesses don’t have stockholders’ agreements, particularly if they’re between husband and wife. If the value of the company is $100,000 or less, and it is not expected to grow too much, you probably don’t need one. 

But for a business that you’re counting on to pay your mortgage and your children’s education, to pay for your lifestyle, a business that you want to grow, that you need different partners to operate well – then yes, a stockholders’ agreement is useful because people don’t proceed through life in lockstep.  

Even the best of friends who go into business together may have different world views. Someone may want to retire early. Someone may prioritize higher income, whereas the other partner might want to defer a lot of income, re-invest in the business, and expand nationwide. These are all reasonable business decisions, but they’re in conflict. 

So, a stockholder’s agreement really addresses two primary things: Number one, how the company is run and who gets to make decisions. Sometimes those decisions are run-of-the-mill (“Do we take on this customer? Should we switch banks?”) – and sometimes they’re significant (“Should we open a new office in North Carolina? Should we take on another partner? Should we take out a million-dollar loan to build a new facility?”). A stockholder’s agreement will determine how those decisions are made.  

A stockholders’ agreement will also determine how the money flows. Whether that money is during the course of the company’s operations, upon the sale of the company, or when somebody wants to be bought out. All of these things are vastly preferable to discuss before anybody has an agenda. If you have that discussion and agreement beforehand, then you can generally come to a much fairer resolution down the line. 

Learn more about stockholders’ agreements in one of our free downloadable resources:

The Business Owner & Entrepreneur’s Pocket Guide, or;

Eliot’s ‘Fire, Aim, Ready…: Partnership’ e-book

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