This document can reduce tax and smooth family spats – but only if it's signed
Shareholder agreements are uber-critical to family business. But creating one can be a struggle, and getting it signed might be worse
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Shareholder agreements are critical. These company playbooks ensure that all of a business’s shareholders are treated fairly. They lay out how a company will be managed, spell out the rights of various shareholders and establish guidelines for who makes company decisions.
They also govern how profits are distributed and shares can be bought back.
But about half never get signed, due to disagreements, key omissions in the document, or it has become outdated and needs revisions.
This topic is so important to the management and financial health of a family businesses that we offer three articles to cover all the angles.
Shareholder agreements: So critical, yet often a family ‘hot potato’
Shareholder agreements might sound simple in concept, but creating one can lead to family conflict. Or, if one is completed and agreed upon, it might be signed too late in the game, or it never gets finalized.
Half of shareholder agreements are never signed, according to data from BDO Canada.
The reasons for this are myriad. Sometimes the original agreement no longer reflects the wishes of all family members or the current state of the business. Or there are no guidelines for managing conflict, or it lacks rules spelling out how money is distributed to shareholders.
As a result, it often falls to the family office advisor to act as a catalyst for signing.
Tax bills can be minimized with a well written shareholders’ agreement
Before a shareholder agreement is signed, taxes must be considered.
That’s because Canada’s Income Tax Act has been amended several times in recent years regarding how family relationships are defined, how capital gains are calculated and how life insurance policies are handled.
Failing to address these issues can lead to costly tax payouts for a family business and potentially threaten its viability.
Smart planning can minimize these issues, says George Angelopoulos, vice-president, tax department at Richter in Montreal.
Break glass in case of divorce: Shareholders’ pact to the rescue
Starting a family business together can be a great way for spouses to unite in a common goal. But fast-forward several years and the business might be flourishing while the marriage is not.
Now, not only are you dealing with a divorce, but also a business problem.
While some clients are able to soldier on and manage their operations, for others the result is an epic battle. If there’s no documentation, the future and viability of the business can be threatened.
It’s why family offices strongly recommend common-law and married couples sign shareholders’ agreements. These documents stipulate each shareholder’s role and obligations, spelling out who retains the business in the event of a divorce, the types of shares each party holds, voting powers and how the shares would be distributed.
A shareholder agreement is not a cure-all – you could still end up in a legal battle. But your biggest asset is your business. It’s the goose that lays the golden egg.
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