From the U.K., many small ecommerce companies are set up as limited companies. The arrangement is the legal equivalent of U.S.-based C or S corporations and limited liability companies. Each is a different entity owned by shareholders. It’s a fantastic means of protecting owners out of business liabilities and dividing responsibility.
Company owners — i.e., shareholders — frequently forget that the company is a separate legal entity. The inventory, assets, and indeed the money belong to the firm. It can become controversial when one shareholder abuses this and chooses things as though he owns it. The matter could be ignored when a company is profitable. But when times are hard, it can easily create conflicts.
Business owners… frequently forget that the company is a separate legal entity.
All too often when a business is created optimism abounds. After all, why put up a company? But that assurance can cause owners to overlook checks and balances. Who’s in charge? If two shareholders each own 50 percent, what happens when they disagree? If one spouse walks out or becomes incapacitated, can the other owners buy his shares? Who sets the price of the stocks? What happens if they can’t agree?
Not a pre-nuptial
These issues and more must be addressed in the beginning, when everybody is cooperating. It’s too late to address them through an argument. It might appear awkward at the beginning to plan for disagreements. But that’s business. It isn’t pre-nuptial agreement. If you can’t think about and plan for every sensible outcome, do not begin the business.
One way to approach the subject is to call it an exit program. You’re not going to stay in business forever, after all. So indicate what should happen if a single person had to leave. There are numerous reasons to exit a business. Not all are confrontational. Use these as examples. Emphasize with fellow owners who signed agreements covering these possibilities would be one less stressful thing to worry about.
Shareholders should also make a will. What happens to their resources upon their passing ? Shares in the company are resources. But they are not a normal asset such as a home, car, or cash. A business can be tough to sell or value.
A shareholder could divide her assets equally with her kids. But this could be hard or even impossible with stocks in a corporation. By way of instance, if you owned 60 percent of a business you are clearly in charge. However, in the event you left 30 percent to each of your two kids, the dynamics change. The 40-percent owner could take over with the support of one of your kids. Another could be ignored.
So, business owners must develop a program. Involve different owners and family members in the conversation. Come to an equitable solution that keeps the business in a way that fulfills your wishes.
There are numerous possibilities. Alternatives include (a) different classes of shares with a few being non-voting, (b) dividing the stocks in an unequal percentage to give 1 person control, and (c) placing a controlling interest in trust or assigning to a third party with guidelines. Everything depends on your own circumstances. Figure it out today, so your fellow shareholders and your family will have one less worry.