When you’re incorporating a company with more than one shareholder, it’s easy to get caught up in the excitement of launching a new venture. Everyone is optimistic, focused on growth, and eager to get started. However, just as couples entering a marriage benefit from a contract that plans for the future, business owners should consider a shareholder agreement as an essential foundation for their company.

What is a Shareholder Agreement?

Think of a shareholder agreement as a business version of a marriage contract. At the outset, everyone is happy and confident that things will go smoothly. But just as in marriage, it’s wise to consider what might happen if things don’t go as planned. Shareholder agreements help address the “what-ifs” that can arise down the road, which are often overlooked in the early, optimistic days of a business.

Planning for the Unexpected

One of the key benefits of a shareholder agreement is that it forces business owners to think through and plan for unexpected events. What happens if a shareholder passes away, becomes disabled, or simply wants to leave the business? A well drafted agreement provides a legally binding roadmap for handling these situations, ensuring that the company can continue to operate smoothly and that everyone’s interests are protected.

For example, if a shareholder dies, the agreement might require the company to have insurance in place to fund a buyout of the deceased’s shares. This ensures that the remaining shareholders retain control of the business, while the estate of the deceased receives fair market value for the shares up to the date of death. This approach protects both the company and the family of the deceased shareholder.

Managing Disputes and Exits

Disagreements between shareholders are not common, but they do happen. Sometimes, business partners who started out with shared goals and vision find themselves at odds and in need of a “business divorce.” A shareholder agreement sets out clear rules for how someone can exit the company, making it easier to resolve disputes fairly and efficiently.

Without a shareholder agreement, if shareholders can’t agree on a way forward, the only option may be to dissolve the company, a drastic step especially if the business is profitable. By establishing procedures for resolving conflicts and facilitating exits, a shareholder agreement helps preserve the value of the company and the relationships between its owners.

Conclusion

Every business is unique, and so is every shareholder agreement. That is why its important to work with a lawyer towards drafting the shareholders agreement. A tailored agreement ensures that the specific needs and goals of your business are addressed, providing clarity and peace of mind for all parties involved.

Written by Heather Dixon and Wyatt Shipley

Updated August 26, 2025. Originally posted May 21, 2019.