Shareholder agreements are becoming more and more popular as an alternative to corporations and LLCs, but they’re not without their risks. The use of shareholder agreements has increased in recent years, largely due to the shift toward a global economy. As this trend continues, many companies are turning to these legal documents because they are more cost-effective and easier to manage than traditional business entities. But despite their growing popularity, some critics say that the limited liability protection and unanimous governance that shareholder agreements offer don’t always match up with the potential dangers they present.
The benefits of shareholder agreements
- The limitations of public corporation structures.
Many share-owning companies, like publicly-traded corporations, see the need to protect their officers and management from the consequences of their decisions. This can be achieved through corporate governance, ultimately leading to fewer layoffs and a more stable business environment. Shareholder agreements also allow companies to remain privately owned while still retaining certain benefits of public ownership. For example, micro-businesses are often more nimble than large businesses because they have fewer legal responsibilities and obligations that can get in the way of each owner’s day-to-day responsibilities.
- Limited liability.
Many shareholders believe that having a limited liability company (LLC, or “LLC”) in place is a more attractive alternative to public corporation structures because it allows their business representatives to focus on managing the business rather than worrying about the consequences of their actions. Shareholder agreements also give owners some limited liability protection so they can continue to invest and work without having to worry about getting sued for their mistakes.
- Simplified management, financial reporting and tax filing.
Another important benefit of shareholder agreements is their simplicity. Shareholder agreements are very easy to use and don’t require shareholders to handle complex taxation and accounting in order to manage the business. Shareholders also have more time to focus on running the company because they don’t have to worry about payroll, bookkeeping and filing taxes. This simplifies the management process for many small businesses.
- Unanimous decision-making.
Shareholder agreements are all or nothing, which means that every shareholder must agree on an issue before it can be implemented. This process helps resolve disputes quickly and efficiently by requiring each owner to make a strong case based on solid evidence as part of a consensus before an issue can move forward.
- Standardization.
Shareholder agreements are very standardized and customizable, which means that each owner is covered for many of the same reasons under the same conditions when compared to a corporation or LLC. This can help reduce confusion and provide more clarity for both owners and shareholders.
- Filing and administration costs.
Filing and administrative costs are another benefit of shareholder agreements because the agreement is simpler than a corporation. This could mean that companies with limited resources can save money on the legal fees associated with running their businesses.
Disadvantages of shareholder agreements
- Lack of accountability for shareholders.
One problem that has often been associated with shareholder agreements is that they don’t allow shareholders to be held accountable for their actions as under a traditional corporate structure. Shareholders are much more limited than corporate officers in their ability to manage the company in ways considered unfair by other members of the business, which can create problems for both owners and other shareholders if there’s dissension along the way.