Shareholder Agreements          

If you are one of a number of shareholders in a corporation, it is wise to have in place what is called a "shareholder's agreement." This type of agreement governs the rights of the shareholders in relation to each other with respect to the corporation's stock. A shareholder agreement usually affects when stocks can be transferred, issued and redeemed. Most shareholder agreements also include other items that the shareholders consider important.

Every corporation that has more than one shareholder can benefit from having such an agreement, even if all the shareholders are family members.

Shareholders of professional practices and other small businesses view their fellow shareholders as partners and will typically be selective in choosing fellow shareholders. A shareholder agreement can prevent the transfer of shares to unknown or unwanted persons. Sometimes these transfers are involuntary. Involuntary transfers may take place by operation of law, as in the case of divorce, death or bankruptcy. A shareholder may also be forced to sell if faced with a medical disability.

In the case of an "S" corporation, the shareholder agreement should also contain provisions that prevent the voluntary transfer of shares that can terminate the corporation's tax-free status.

Examples of common provisions                   

• a means by which unhappy or needy shareholders can liquidate their interests

• estate-planning guidance to minimize shareholders' income tax liability in the event of the transfer of their shares

• the automatic purchase of the stock of a shareholder upon his death, disability, or termination of employment

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