Generally, most new businesses are closely held between family and friends. The ownership of the stock is thus held by the closely interrelated parties. Many times these stockholders may also be a part of the company, such as when a couple college friends join together to start a business.
One key part of good prebusiness planning should be an Ownership Change in the Shareholder Agreement. The Shareholder Agreement, you could call it a premarital agreement for business partners, can establish the relationship between business partners. A Shareholders Agreement would be for a Corporation that an Operating Agreement is to LLCs.
An Ownership Change Agreement, to handle how the business will be divided if the partners want to go separate ways, can be included in the Corporations By-Laws, be a portion of a Shareholders Agreement or a stand alone document.
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A common provision in Shareholder Agreements are Buy-Sell provisions. The Buy-Sell provision controls changes in the ownership, especially under certain conditions death, divorce, personal bankruptcy of one owner, retirement of an owner or simply one participant desiring to move on to other business opportunities.
Another KEY provision of a Buy-Sell Clause would be the establishing the formula for the value of the shares. The Shareholder Agreement or Buy-Sell Agreement will address not only when ownership may transfer but more importantly show who can assume control of the shock. For obvious reasons, the initial partners/investors may want to prevent outside parties from buying in to the company to prevent control of the company being passed to 3rd party individuals. Many businesses are formed so that future generations of the founding partners can take over the business. Allowing outside investors in without planning, could jeopardize that goal.
In the event of death, divorce or incapacitation of any of the original investors/partners, the remaining partners way be forced to deal with someone that is unqualified or unable to fulfill the responsibilities for which they are suddenly thrust. If the person that they are replacing was a key employee that provided specifically trained experience, the business would be missing the knowledge that person contributed. And it is possible that the new member of the management team might have a negative affect on the remaining parties. Simply consider the affect that a spousal of an original partner who never liked (personally) any of the other original partners is now a part of the management team.
Part 2
