Shareholder Agreement

The Importance Of Shareholders’ Agreement

Linkilaw Company Law, Record Keeping & Taxes

If you’re reading this post, we can assume that you are least considering the idea of setting up a Limited Company for your business. This entity would be the appropriate commercial vehicle for a multi-owner business with complete separation from its shareholders’ personal assets.

Choosing a proper legal structure is the first action to set up any business, and you want to be sure this one is the right vehicle for the way your firm will operate. It’s a discussion to have with a corporate business lawyer, who will be instrumental in making certain your shareholder documents spell out maximum liability protection with minimum chances for upsets within the ranks down the road.

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What defines a Limited Company?

A Limited Company is held completely separately from any co-owners and their personal assets and liabilities. It pays its own corporate taxes, and shares profits with its members and its rules and policies are created and enforced by the directors (who may or may not be shareholders). All members will each have functions or duties commensurate with of the value of their shares.

The Limited Company must secure a Certificate of Incorporation, by registering with the Companies House and filing annual returns. It must compile statutory accounts, and if the directors earn a salary, they must submit paid Self Assessment tax returns and National Insurance. If the Limited Company’s takings are over £82,000 per year, it must register with VAT and make those payments.

Why do you need a Shareholders’ Agreement?

To have in place a formal document (agreed upon by all owners), that prevents unforeseen issues between co-owners which might impact success, is invaluable. Essentially, it is the outline of your business relationship, rights, liabilities, and the obligations of all parties. Importantly, it also helps to determine whether all potential members are on the same page.

[tweet_box design=”default”]Sometimes things don’t go as planned, and the Shareholders’ Agreement will prevent one member from exploiting or manipulating the others. The intention of the agreement is to make sure the members are treated fairly while maintaining the best interest of the Company at all times. [/tweet_box]Having a legally compliant agreement, drawn up by a solicitor well-experienced in business laws, and tailored to your industry is of utmost importance.

Building the Framework

To create the framework for your Limited Company, each backer should be offered a fair portion of the share, with enough held back to be able to bring in investors in the future. Additionally, you may want to think toward the future, and set aside a small percentage of unassigned shares which would allow a scheme for employee ownership in your company.

All the defined policies and procedures of the shareholders must be spelt out, requiring the signature with all parties. Any future investors will also need to agree to and sign the Shareholders’ Agreement. Changes in your agreement, as well as the names and addresses of the company or its shareholders, must be filed with the HMRC. Though many actions will require a majority vote, other decisions may need to be unanimous.

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Formalising the Relationships

These questions are some of the more vital to be addressed as you move forward to make your Shareholders’ Agreement a legally binding document:

  • Who are the shareholders?
  • Who will capitalize the Limited Company?
  • What percentage of shares will be allocated to each shareholder?
  • How much risk is assigned to each shareholder?
  • How will shareholders be replaced? (by resignation, buyout, deceased, bankruptcy)
  • Who will be on the board of directors?
  • What is each director’s role and limits of authority?
  • How will distribution of profits be made?
  • Should a business plan be in place?
  • How will conflicts of interest be resolved?
  • What will be the process for resolving disputes?
  • What are the voting and majority rights?

Make sure your business is legally healthy - Shareholder Agreement