Shareholders are owners of a corporation, whether a large public corporation like Apple or a small, private corporation started by two or three people. Their level of ownership depends on the amount of stock they own. A shareholder agreement is an important contract that outlines the relationship between the shareholders and the company.
An operating agreement serves a similar function but for a limited liability company, or LLC. There is some overlap in both their design and purpose. They outline current and future policies. They address inevitable challenges before they occur, helping avoid conflict and litigation between equity owners.
Shareholder Agreements
The purpose of a shareholder agreement is to prepare the business for the future. More appropriately, it works to ensure the business survives in the way the shareholders want. Consider it as a roadmap for contingencies. Though the unexpected will happen, that doesn’t mean there are legal and efficient ways to prepare for a host of variables.
Especially in small, privately-held corporations, decisions and strategies revolve around crucial personnel. If one of those people were to pass away unexpectedly, wants to sell his or her shares or decides to retire, there must be a plan forward.
The shareholder agreement allows people to have control over an unpredictable future. It may outline the procedures for when a shareholder leaves and how they will be bought out. Some methods prohibit one shareholder from selling their shares to an outside party—provided that the current shareholders can purchase the shares.
Operating Agreements
An operating agreement is similar to a shareholder agreement, but applies to limited liability companies. The equity owners of LLCs are called members rather than shareholders. The operating agreement creates an established set of rules that govern their actions.
There is some freedom in how you create these. Though they circumvent common problems, the solution is up to you. Here are some goals of an operating agreement:
- Rights, duties, and responsibilities of the members to each other
- Chain of command, hierarchy, and management structure
- Decision-making procedures
- Restrictions on the transfer of members’ equity interests, just as in a shareholder agreement
Nothing requires an LLC to have an operating agreement, but that does not mean they aren’t valuable. Without one, your LLC follows the law of the state in which it was formed, which may not be as favorable to the members’ wishes.
Spitz Legal Counsel LLC
Attorney Mark Spitz spent more than fifteen years as in-house and general counsel before opening his own firm. If you have any further questions about shareholding or operating agreements, contact Spitz Legal, LLC for a free consultation. Our goal has always been the same: to help your business succeed. We offer tailored solutions to meet the needs of your business objectives.