I’m not going to spend a ton of time going over every single piece of documentation, clauses and agreements that you should have in your business, however I am going to spend a few paragraphs on what I believe to be the important one.
On the business side every corporation should have up to date minute books and a well drafted unanimous shareholder agreement (USA).
Your minute books will usually include meeting minutes that happened, share ledgers, incorporation documents, and changes that have been made to your business over the years.
There are too many individual items in your minute books to include in this email to go over, however, there’s one important element that you should take note of. If the eventual plan for your business is to sell, then keeping an up to date and ‘clean’ book is very important. Buyers want to see that you’ve taken care of your business and everything is recorded accurately and is easily understood.
If you can’t understand what’s been happening in your business via the minute book, then most certainly a buyer who has no knowledge of your business will not be able to.
The other document that I want to speak about briefly is your shareholders agreement. This is essentially the document that outlines the relationship and guidelines between all the shareholders.
Some key terms to be aware of:
Restrictions on transfer or issuance of shares
- Can anyone sell their shares?
- Does any sale have to be preapproved?
- Can new shares be issued?
- If so, what procedure applies?
- Transfers to related corporations
- Assign or encumber shares
Rights of transmission of shares (on death, retirement, sale)
- Does a new buyer have to sign the shareholder agreement?
- Rights of first refusal
- Piggy-back and drag-along sales
- Shotgun provisions
Selecting directors and officers
- How are directors’ votes on and officers appointed?
- Job description of officers
- Renumeration for directors and officers
- Who’s responsible for day-to-day operations?
- Salaries, bonuses and benefits
- Signing authority
- Approval of shareholders for certain matters
- Approving dividends
- Shareholder benefit and loans
As you can see there is a lot of thought that needs to be put into your agreement and there is a lot of difficulties that happen if you don’t structure it properly.
Let’s give a quick example:
- Joe, Rick and Catherine are equal shareholders in a corporation that has been operating for over a decade successively. They never took the time to draft a proper USA and hence have no buy/sell agreement in place. Rick tragically gets into a car accident and passes away suddenly.
- Joe and Catherine assume that they will be able to purchase the shares from Rick’s estate or Rick’s wife Susan and continue business. Unfortunately, since there was no agreement in place Susan has no obligation to sell the shares of the corporation.
- Susan decides that instead of selling the shares she would like to enter the business as it’s all she has to hold onto of her husband Rick.
- Now this may be to the benefit of Joe and Catherine, but it may not. Susan may not be business savvy and may not be in the proper state to start running a company.
This is but one of MANY different examples I can give you, the important thing to understand is having a proper agreement in place is crucial to the survival of your business in the event of any dispute between shareholders or related parties.
I will encourage you to schedule a free 30-minute strategy session with me.
What this session will highlight is:
- If you have unforeseen liabilities threatening your future
- How you can be more efficient with your finances and save on taxes
- How you can receive maximum after-tax value from your company if/when you sell
- How you can pass down your business to your family without sacrificing your goals
- If your planning has something missing from it
So please schedule a session and I look forward to exploring how we can help you.