Having a business partner has advantages even if you intend to operate the business yourself. Business ownership and management arrangements are as varied as the individuals involved. They don’t all involve equal ownership percentages or management authority. In addition, there’s no law requiring identical time commitments for every individual. The right business partner can be someone who is only supplying capital along with occasional expertise.
A corporation provides an ideal structure permitting you to give shares to an important source of funds. By granting equity you save the business from having to pay interest payments with crucial working capital that’s needed for growth. In addition, as a corporation, your investor has the limited liability of a shareholder.
A shareholder who provides the business with essential capital can own any percentage of the corporation but not possess management authority. You can retain control over all decisions while providing your investor with the benefits of ownership. He gains when the business is sold.
You can even establish an arrangement to repurchase the shares of your investor with your portion of future profits. This is attractive for an investor to realize a gain from investing in a business that he really doesn’t want to operate anyway. By establishing a predetermined price, the investor expects a gain that’s more than just earning a standard interest rate. The opportunity to realize this gain is based upon the projection of success for the business. The price for executing the purchase right is specified in a shareholder agreement as a formula, independent valuation procedure, or negotiation method.
Separate sections of the shareholder agreement address the rights of each shareholder. There are statements regarding the voting authority of shareholders. Your investor shareholder can have an ownership position in the corporation but little or no control over electing members of the board of directors.
However, you might want to grant an investor shareholder a position on the board of directors. After all, most investors with an interest in small business likely earned their money by previously owning a business. But you can still retain management authority by being the only corporate officer.
Shareholder agreements for closely held corporations often have special clauses dealing with death or disability of a primary shareholder. The remaining shareholders are customarily granted a right to purchase the shares of a deceased or permanently disabled shareholder. So, your shareholder agreement will need to address what happens to the corporation in the event of a premature death or disability by you or your investor shareholder.