Shareholder agreements are a good idea for family businesses

This article looks at why spouses who run a family business should draft a shareholder agreement.

Many small businesses in Canada can better be described as family businesses, since spouses, children, siblings, and other relatives often help out to keep those countless businesses running. As the Globe and Mail reports, about 80 percent of small businesses are family-run, often by husband and wife teams. In those cases, a family dispute, such as a divorce, can have a profound impact on the future of the business. That's why a shareholder agreement is such an important legal document for those who are going into business with a spouse or other family member.

The business side of divorce

When business owners divorce, the worlds of family and business law collide in some significant ways. In many divorces where one spouse owns a small business then both spouses typically are entitled to a share of that business. That share can increase depending on each spouse's income and how much they may have contributed to the business.

A prenuptial agreement is one way to spell out in advance what will happen to the family business if the spouses divorce. However, while prenuptial agreements are important, they are limited in scope as they tend not to deal with the details of one spouse's exit from the business. For that reason, they shouldn't be relied upon entirely to protect a small business from the fallout of a divorce.

Shareholder agreements

Shareholder agreements, on the other hand, deal in much greater detail with each spouse's role in the business, including what happens when one of those spouses decides to exit the business due to a divorce. As Advisor.ca points out, a shareholder agreement is designed to make sure that the business remains intact during the divorce. It could, for example, specify that each spouse sell their shares in the business back to the company if they divorce.

Furthermore, a shareholder agreement is an opportunity to clarify each spouse's precise role in the business. Defining that role is sometimes tricky for family businesses, since a spouse may often perform duties for the business that are not entirely within her or his job description. That can lead to uncertainty during a divorce if one spouse feels as though their job title doesn't adequately reflect how much labour they have put into the company. With a shareholder agreement, each party has a much clearer idea of what their role in the company is and what portion of the company belongs to them.

Business law help

When it comes to drafting an effective shareholder agreement, it is important to talk to an experienced business lawyer. Because shareholder agreements can help preserve one's business and livelihood, it is imperative that such agreements be treated with the care and respect they deserve. A business lawyer can help business owners draft an agreement that ensures their businesses and their best interests are better protected against any unforeseen circumstances.