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3 considerations when a shareholder leaves a business

On Behalf of | Aug 28, 2023 | Business Law |

A Massachusetts business must have a solid legal foundation to get off the ground the way its owners envisioned it would. A well-defined business entity allows it to withstand inevitable changes in management, and human and material resources.

For small business owners, structuring their private startups as a corporation means that shareholders invest their money to ensure the company’s financial stability. By doing so, they become part owners. In exchange, they gain specific privileges to influence significant decisions and reap economic profits from the company’s success.

But what happens when a shareholder suddenly leaves? Without a plan in place, personal and professional relations may be in a state of total confusion and conflict.

Preparing for a shareholder departure

Several life events can trigger a shareholder to leave the business: bankruptcy, retirement, divorce, illness or incapacitation, death or if they simply want to sell their shares.

While these are severe and often unavoidable circumstances, business owners can mitigate a shareholder departure’s negative impact on daily business operations through the following measures:

  • Draft a buyout agreement: Whether written as a separate agreement or included in the provisions of the company’s bylaws, clear buyout terms outline who can buy the withdrawing shareholder’s stocks and for how much. This document also protects the remaining parties from having an unwelcome buyer among their ranks.
  • Secure funds for a potential buyout: A shareholder ready to sell does not necessarily mean that a company is also ready to pay for the shareholder’s valued ownership interest. Instead of a lump sum payment, the owners can offer an installment scheme. After an initial downpayment, the remaining balance may be payable within the agreed period.
  • Brace for tax implications: Taxation adjustments are likely to happen. This process necessitates a ton of paperwork and legwork. It will be wise to do this under the supervision of an accountant or tax professional.

As business owners may know, these considerations may have varying outcomes and still cannot guarantee total prevention from potential risks. The effects of a shareholder departure may also depend on the current standing of the business, and other evolving industry or global market variables.

So much at stake

With a lot on the line, business owners must recognize that they can’t leave anything to chance. As in all things, when someone goes, the ones left behind must find means to keep themselves afloat. One of the ways to do that is to seek the help of a legal representative adept at complex shareholder negotiations. They can work out plans of action tailored to the needs of the business.