What Happens When a Shareholder Leaves a Company?
Ownership changes can have a big impact on your small business. If you've planned in advance for the eventual withdrawal of a shareholder, the transition can be quick and easy. Small corporations with buyout provisions in their bylaws or a separate buyout agreement in place with shareholders can avoid shareholder disputes regarding the transition that may disrupt the business or lead to legal action.
One of the benefits of organizing your small business as a corporation is the easy transfer of ownership interests in the company without disrupting operations. Absent restrictions on the transfer of shares, a shareholder can withdraw from the business by selling or otherwise transferring his shares of stock. A corporation is managed by a board of directors who act on behalf of the shareholders. Unless a shareholder is a director, officer or employee of the company, he doesn't have a legal right to participate in the day-to-day management of the business. So when a shareholder leaves the corporation under normal circumstances, the corporation simply records the transfer of shares and the new owner's personal information in its stock ledger and continues operating.
Owners of a corporation can control the transfer of shares by placing provisions in the company's bylaws or executing a separate buyout agreement. The transfer restrictions often require a shareholder to sell her shares back to the corporation or to one of the other shareholders if she wants to leave the business. A buyout agreement typically includes a fair way to determine how much the withdrawing shareholder should be paid for her interest, so completing the ownership transfer is a simple matter of executing a stock purchase agreement, exchanging money and updating the corporation's stock ledger.
Many factors can complicate the ownership transfer process. Some small corporations have a limited number of shareholders, and they're all significantly involved in the business. The withdrawal of a key shareholder can leave a management hole that the corporation may find hard to fill. The shareholders may have neglected to put a buyout agreement in place in advance, leading to disagreements about how much the withdrawing shareholder's interest is worth. The shareholders may have to call in an outside party to conduct a business valuation that can facilitate the stock sale process.
A withdrawing shareholder typically wants to be paid back any money or other assets he loaned to the corporation, compensated for any salary he deferred and paid a fair price for his ownership interest. If the corporation failed to keep an accurate record of the nature of each shareholder's investments in the company, it can make the buyout process more contentious. A buyout is also contingent on the corporation having enough money available to pay for the withdrawing shareholder's interest. The shareholder may have to agree to a payment plan if the corporation can't afford to pay a lump sum.