A growing law firm recently asked me to prepare a Shareholders’ Agreement for its two shareholders.  Making this request unusual is the fact that the shareholders are married to one another.  Do married shareholders need a Shareholders’ Agreement?  I think it’s a good idea.

The prospect of divorce is one reason married shareholders might want to have a Shareholders’ Agreement.  Certainly, where married individuals are shareholders of a closely held company along with other shareholders, a Shareholders’ Agreement is a must for the protection of all the shareholders.  One of the common reasons driving the need for a Shareholders’ Agreement is concern that, upon the divorce of a shareholder, a former (and perhaps hostile) spouse could end up owning stock.  For married shareholders, divorce could mean an end to the business entirely.  Married shareholders who are concerned about the continuity of the business in the event of their divorce can and should address those concerns in a Shareholders’ Agreement (particularly where one shareholder is much more actively involved in the business than the other).  However, the division of the company stock between divorcing shareholders should also be addressed in a prenuptial or post-nuptial agreement and will likely be addressed by the divorce court as well.  At the very least, a Shareholders’ Agreement can provide an agreed upon method for determining the value of the company stock in the event of divorce.

The prospect of divorce is not the only reason for married shareholders to have a Shareholders Agreement.  Having a Shareholders’ Agreement is part of the “corporate formalities” that are common to closely held corporations.  Observing corporate formalities is important for several reasons, from avoiding individual liability for the shareholders through a “piercing the corporate veil” attack, to establishing that the company is not a “disregarded entity” for Federal income tax purposes, so that profit distributions avoid employment taxes.  In addition, a Shareholders’ Agreement can also keep company stock out of the hands of creditors’ of one (but not both) of the shareholders.  The Shareholders’ Agreement for a married couple, like all Shareholders’ Agreement, should include a buy-out option for the company and/or other shareholder in the event a shareholder’s stock is at risk of being taken to satisfy a claim against the shareholder.

While a company owned by married shareholders might not present all of the same concerns that exist for a company owned by unmarried shareholders, there are special concerns that the married shareholders can address in a Shareholders’ Agreement.