Head off disputes and save tax with shareholders' agreements.

AuthorBissonette, Laurie
PositionBUSINESS SENSE

Co-owning a small business with a partner can be a recipe for success for many entrepreneurs. The partners' different skills and experience can come together to make a stronger business than either of them would have separately.

With all the demands on their attention, busy entrepreneurs can easily overlook important long-term planning, such as creating a shareholders' agreement. These agreements can ensure that shareholders' rights and obligations are clearly understood and can protect the company's future in case something goes wrong. Of course, it's vital that these agreements achieve their business objectives but it's also important to carefully consider their tax consequences.

A shareholders' agreement sets ground rules for important issues such as who can own shares of the business. For example, is ownership restricted to the partners and their family members or will key employees be able to own shares as well? And how will the shares be valued if they're transferred among the owners? These agreements also deal with more difficult issues, such as what will happen in case of a future disagreement or death or disability of one of the key shareholders, usually by specifying a process for one side to buy out the other and how the buyout will be funded.

Though business partners may be reluctant to bring up these issues, it's best to create a shareholders' agreement when things are going well. In my experience working with private company owners, people often regret not having put things in writing when disagreements arise and they realize they misunderstood each other's intentions.

If you're a co-owner and you are considering the options for your shareholders' agreement, keep in mind that the tax implications of your choices can be significant.

For example, you'll need to consider what will happen to a shareholder's shares on his or her death. Private companies often take out life insurance policies on their *Icey shareholders so the business will have funds to redeem the shares. Many flexible insurance products are available to create these arrangements. When you're considering the options, remember...

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