Do I need a partnership or shareholders agreement?
by Jack W. Hope

Partnership and Shareholders Agreements are important because they both set out the rights and obligations of the people involved in a business and provide for future eventualities, both foreseeable and unexpected.  In many businesses, whether partnerships or corporations, not everyone is going to take an equal role.  In some partnerships everyone owns an equal part, in others the partners own different shares.  In some businesses, everyone is expected to contribute equally to the business if it experiences financial shortfall. In other businesses only certain people are expected to contribute money whereas others are expected to contribute knowledge, skill or work.  All these details should be set out clearly in a partnership or shareholders agreement so that everyone is aware of everyone else’s expectations and of their own legal obligations.  In this manner, business can continue smoothly and disputes are avoided. 

Partnership and shareholder agreements are also very useful in avoiding future disputes by setting out the rules for certain eventualities at the outset of the business.  For instance, if a partner, or shareholder, wishes to leave the business and sell his share to the other partners or shareholders will they be obliged to buy it?  If so, how will they determine a fair price?  If a partner or shareholder dies will the remaining partners or shareholders be obliged to buy that deceased partner's or shareholder's share from his or her estate?  If so, how will they work out a fair price, how long will they have to pay for it and where will the money come from?  Should partners or shareholders arrange for life insurance payable to the company to finance such a buy-out in the case of their death?  If a partner or shareholder becomes insolvent or bankrupt, what happens to that interest or share?  What if a partner or shareholder fails to put in a fair day's work for the business or fails to meet his or her financial obligations?  What steps can be taken?  These are simply examples of the types of questions that are dealt with in partnership or shareholder agreements.  It is usually much easier to work out a formula for solving these types of problems at the outset of the business, well in advance of any disputes. In this manner disputes, when they arise, can be disposed of with considerably less aggravation and expense than might otherwise be the case. 

To contact the author, please email jhope@smhilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.