S Corp Shareholder Agreement Can Provide an Orderly Transition for Shareholders
If you run a small business and hold an ownership interest with others in an S Corp, it often makes sense to consider having an S Corp Shareholder Agreement (sometimes also referred to as a “Buy-Sell Agreement”) prepared that provides for an orderly transition of your ownership interest in the event of the happening of important events that can affect you and the business.
The purpose of an S Corp Shareholder Agreement is to provide for an orderly transition of a business owner’s ownership interest on the occurrence of specified events.
Typical “triggering events” that are commonly addressed in a Shareholder Agreement are:
- Changes in employment status
However a carefully prepared and drafted S Corp Shareholder Agreement may also contemplate additional events, in addition to the circumstances under which an owner may sell his or her interest, who is a permitted buyer, and how the purchase price for the S Corp shares will be determined and how it will be paid.
Benefits to the Parties
A carefully prepared Buy-Sell Agreement primarily benefits business owners, and the business entity as follows:
- After the occurrence of a triggering event, the remaining owners will remain in control of the S corp;
- Outsiders (who may have conflicting interests from the remaining owners) will be prevented from obtaining an ownership interest;
- The remaining owners will be ensured to remain their management and control;
- An S Corporation Shareholder Agreement will increase job stability for minority owners and key non-owner employees;
- An S Corporation Shareholder Agreement will provide for the orderly liquidation of the owners’ interests in the event of death, disability, retirement, or other forced or voluntary withdrawal;
- It will prevent the continued involvement in the business of retired or inactive owners;
- It will create a market for the shares of deceased, retiring, or withdrawing owners;
- It should be structured to prevent the loss of an S corporation election by preventing a transfer of S Corporation stock to an ineligible shareholder (e.g., a corporation).
If you require legal assistance in preparing a Shareholder Agreement for your S Corporation or other business law matters, please contact Stephens & Kray and we will be happy to provide legal assistance.