While there are differences between a Shareholders’ Agreement and an Operating Agreement, there are many advantages to entering into such an agreement. Putting such an agreement in place is often not addressed when starting a new business, but it is advisable to have such an agreement in place from the beginning as often views will differ, circumstances will change and disagreements can build between the owners leading to issues in the company.
Although there is no legal requirement to have a formal agreement between the shareholders of a corporation or the members of a limited liability company , every entity with more than one shareholder or member should strongly consider having one. These agreements address the appropriate running of the company and the responsibilities of the owners. They also provide clarity and certainty as to what can or cannot be done and the decisions that can be made by consensus and discussion. As a result, it will reduce the potential for conflict between the owners and help the company to be run smoothly.
Some of the key benefits of having such an agreement in place include:
- An agreement can address the appointment and removal of directors by allowing a shareholder or member or a group of shareholders or members each to appoint one or more directors
- An agreement can address the raising of capital to avoid dilution of shareholdings
- An agreement can address restrictions on changes to the nature of the company’s business
- An agreement can provide for the resolution
- An agreement can be used to protect the position of minority shareholders by requiring a supermajority or unanimous approval for important company decisions
- An agreement can prevent situations where changes in one owner’s personal circumstances can have an effect on the company or other owners within the company
- An agreement can address the disposition of ownership interests in the event of death, disability, divorce or disagreement
The agreement will remain private and confidential and will not be open to view by others such as creditors or non-member employees. The existence of such an agreement is often required by banks when opening a bank account and it can assist in raising finance from banks or creditors and also demonstrates the stability of the business to other potential partners.
Unfortunately, in their hurry to start doing business, too often individuals choose not to enter into such an agreement and end up losing control of the business and the process. Serious consideration should be given to entering into an operative agreement as early in the process as possible.