<img height="1" width="1" style="display:none;" alt="" src="https://px.ads.linkedin.com/collect/?pid=938154&amp;fmt=gif">

Chapter 1

Key Considerations for Controlling Shareholders

Issue of Control

One of the most important considerations for shareholders is the issue of control.

In any business, there must be a balance of power between the shareholders and the management team. This balance is essential for the smooth operation of the business and for protecting the interests of all parties involved.

Shareholders must have a clear understanding of how decisions are made within the company and how their investments are being used.

Question of Ownership

Another important consideration is the question of ownership.

Are shareholders owners?

Shareholders must be aware of their rights and responsibilities as owners of the company. This includes understanding the terms of the shareholders’ agreement and the company’s articles of incorporation.

Shareholders should also be aware of their rights to receive dividends and to vote on important matters such as the election of directors or major business decisions.

Exit Strategies

The matter of exit strategies is also a key consideration for shareholders.

This includes understanding the process for selling shares or withdrawing from the company.

Exit strategies can include:

  • Selling shares to other shareholders
  • Selling shares to external buyers
  • Liquidating the company

Shareholders should be aware of the potential risks and rewards of each option and understand the process for implementing an exit strategy.

Rights and Responsibilities

Finally, it is important for shareholders to have a clear understanding of their rights and responsibilities under the company’s articles of incorporation and bylaws.

This includes comprehending the process for amending the articles of incorporation and bylaws, as well as the process for electing directors and making major business decisions.

Shareholders should also be aware of their rights to receive financial information and to inspect the company’s books and records.

Chapter 2

What is a Shareholder Agreement?


A shareholder agreement is a legally binding document that outlines the rights and responsibilities of the shareholders in a company.

It is a document that is created by the shareholders of a company and sets out the rules and regulations that govern their relationship with each other and with the company.

The purpose of a shareholder agreement is to protect the interests of all shareholders, and to provide a clear and concise framework for how the company will be managed and operated.

Shareholder agreements typically include provisions for management, transfer of shares, buy-sell agreements, dissolution of the company, and the rights and responsibilities of the board of directors.

(Download Video Transcript)

Eight Reasons Why You Need Shareholder Agreements

1. Rights and Responsibilities of Shareholders

One of the most important aspects of a shareholder agreement is the definition of the rights and responsibilities of the shareholders.

This typically includes information about how the company will be managed, how decisions will be made, and how profits will be distributed.

The agreement should also include provisions for how disputes will be resolved, and what will happen in the event of a disagreement between shareholders.

2. Transfer of Shares

A shareholder agreement typically includes provisions for the transfer of shares.

This may include information about who can buy and sell shares and under what circumstances shares can be transferred.

This can be particularly important in the event of the death or disability of a shareholder, as it ensures that the shares are passed on to the appropriate person.

3. Dissolution of Company

A shareholder agreement should also include provisions for the dissolution of the company.

This typically includes information about how the company will be dissolved and how the assets and liabilities of the company will be distributed among the shareholders.

4. Buy-Sell Agreements

It is also important to include a provision for buy-sell agreements, also known as buyout agreements.

These agreements set the terms and conditions under which a shareholder can be bought out by the company or by the remaining shareholders.

5. Rights and Responsibilities of Board of Directors

Another aspect of a shareholder agreement is the definition of the rights and responsibilities of the board of directors.

This typically includes information about how the board will be elected, how decisions will be made, and how the board will be held accountable.

The agreement should also include specifications for how disputes between the board and the shareholders will be resolved.

6. Non-Compete Agreement

A non-compete agreement, which prohibits shareholders from competing with the company for a specified period of time after leaving the business, is another type of shareholder agreement.

This can help protect the company’s confidential information and customer relationships.

7. Non-Solicitation Agreement

A non-solicitation agreement prohibits shareholders from soliciting customers, suppliers, or employees for a specified period of time after leaving the company.

This can help protect the company’s customer base and ensure that the company’s employees remain loyal.

8. Amending Articles and Bylaws

Shareholder agreements outline the process for amending articles of incorporation and bylaws and the processes for making major business decisions.

(Download Video Transcript)

Chapter 3

Why Businesses Need Shareholder and Key Person Insurance


Shareholder insurance (also known as key person insurance) is a type of insurance policy that is taken out by a company to protect against the loss of a key individual such as a shareholder or a high-level executive.

The purpose of this insurance is to provide financial protection for the company in the event of a loss of a key person who is critical to the company’s operations and profitability.

(Download Video Transcript)

Reasons a Company Might Take Out Shareholder Insurance

Death or Disability

One reason is to protect against the loss of a key person due to death or disability.

If a key person dies or becomes disabled, the company may suffer significant financial losses as a result of their absence.

Shareholder insurance can help to mitigate these losses by providing the company with a financial payout that can be used to cover expenses and help keep the business running.

Legal Dispute

Shareholder insurance protects against the loss of a key person due to a legal dispute.

If a key person is involved in a legal dispute that results in them being unable to work for the business, the company may suffer significant financial losses as a result.

A shareholder insurance policy can help to alleviate these losses by providing a financial payout.

Buyout or Merger

A company can also take out shareholder insurance as a way to protect against the loss of a key person due to a buyout or merger.

In this scenario, the company may lose a key person as a result of the buyout or merger, and shareholder insurance can help to mitigate the financial losses the business may incur.

Business Protection

When taking out shareholder insurance, it is important to consider the terms and conditions of the policy, as well as the amount of coverage that is needed.

It is also important to consider the potential risks that the company faces and to make sure the policy covers those risks.

Overall, shareholder insurance can be a valuable tool for protecting a business against the loss of a key person. It can provide financial protection in the event of death or disability, legal disputes, or buyouts and mergers.

It is important to carefully consider the terms and conditions of the policy and the amount of coverage needed, as well as the potential risks the company faces when taking out shareholder insurance.


Chapter 4

How Shareholders Earn Money from the Business

Shareholders are individuals or entities that own shares in a company. As owners of the company, shareholders are entitled to a portion of the company’s profits and assets.

Ways Shareholders Can Get Paid


Dividends are payments made by a company to its shareholders. These payments are typically made on a regular basis such as quarterly or annually.

Dividends are usually paid out in cash, but they can also be paid in stock. The amount of dividends a shareholder receives is based on the number of shares they own.

Companies that pay dividends typically have a stable and consistent stream of earnings, and they may also have a strong balance sheet.

Stock Buybacks

Stock buybacks (also known as share buybacks) occur when a company repurchases its own shares from the market.

This can be done for a variety of reasons such as:

  • Increase the value of the remaining shares
  • Return cash to the shareholders
  • Offset the dilution of shares from employee stock options

When a company buys back its own shares, it reduces the number of shares outstanding which can lead to an increase in the value of the remaining shares.

Shareholders can benefit from stock buybacks if they choose to hold on to their shares, as the increased value of the shares can lead to a higher return on investment.

Capital Gains

Capital gains occur when shareholders sell their shares for more than they paid for them.

For example, if a shareholder buys shares of a company at $50 per share and later sells them for $60 per share, they would have a capital gain of $10 per share.

Capital gains can be realized through the sale of shares on a stock exchange or through a private sale.

Initial Public Offering (IPO)

Another way for shareholders to get paid is by participating in the company’s Initial Public Offering (IPO).

An IPO is a process by which a private company becomes publicly traded by issuing shares to the public.

Shareholders who participate in an IPO can make a significant return on their investment if the stock price of the company rises after the IPO.

Shareholders have multiple ways to get paid through their investment in a business.

Dividends, capital gains, stock buybacks, and participating in an IPO are all ways that shareholders can earn a return on their investment. It is important for shareholders to understand the different ways they can get paid, and to consider the potential risks and returns associated with each option.

As always, investors should do their own research and consult a financial advisor before making any investment decisions.



Chapter 5

How to Pay Yourself: Shareholder Salary vs. Dividends or Distributions


Business owners need to understand the tax implications of how they draw income from their companies. This is a complex topic, but let’s start with a quick overview of options.

(Download Video Transcript)

Sole Proprietorship

Sole proprietors are not considered employees and get paid by drawing money from the business.

No FICA taxes are taken from these draws, but sole proprietors will pay self-employment taxes on their individual tax returns on the income generated by the business.


A partner takes distributions from the profits in a partnership.

A partner’s share of the profits will flow through to the partner on a K-1 which will then be reported on their individual income tax return.

Some partners may receive a guaranteed payment, which is similar to a salary and is subject to self-employment taxes.


If you own an LLC, you do not take a salary but instead take a draw, similar to a sole proprietor.

You have more freedom in deciding when you take distributions from the company with all of these options, but it also necessitates the need for careful tax planning.

Often business owners will pay quarterly tax estimates to avoid large balances due and/or underpayment penalties on their individual tax returns which occur if taxes are not paid in throughout the year.

It is best if you have a personal tax planning strategy to help minimize your tax burden as much as possible.

Where Things Get More Complex is When Your Business is Structured as an S or C Corporation

There are three ways to receive payment from a corporation:


Receive a Salary


Through Dividends


Obtain a Shareholder loan, which is required to be repaid


Business Salary

As a business owner in an S corporation, who is involved in the day-to-day operations, the IRS says you are required to take a salary and pay the required employment taxes on that salary. These taxes include FICA payroll taxes and federal unemployment taxes.

It might seem enticing to take a lesser salary to reduce the amount of employment taxation required, but the IRS has rules on how much corporate owners must be paid.

According to the IRS Reasonable Compensation Guidelines, the key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation using these factors:

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula for determining compensation
  • Amounts paid out as salary compared with the amounts distributed as profits

If you underpay yourself, you could face IRS fines. But if you overpay your salary, you may be paying more taxes than you need to. Be sure to review the IRS Reasonable Compensation Guidelines to assist you in determining your salary.


Distributions/Dividends - S Corporation vs. C Corporation

In an S corporation structure, you can also distribute profits from the business, which avoids employment taxation.

S corporations are subject to single-level taxation. Income generated by the corporation is typically not taxed at the corporate level. It is distributed among the shareholders and reported on individual tax returns for payment of tax due on their share of the S corporation’s earnings.

Since an S corporation distributes income as single-level taxation, it will not be taxed a second time.

The taxable income earned by a C corporation is first taxed at the corporate level. When the income is distributed to its shareholders, it is generally taxed as a dividend.

This results in the same income earned by the corporation being taxed twice (double taxation) – once at the entity level and again at the shareholder level.

These tax implications should be reviewed with your accountant as you determine if your business should be an S or C corporation.

Double taxation may not be as big of a concern now that there is a 21% flat income tax rate for C corporations (the top individual income tax rate is currently 37%). S corporations may be able to take advantage of the 20% Qualified Business Income (QBI) deduction.

Income Tax Differences Based on Business Structure

Flow-Through Entity or Sole Proprietorship

C Corporation

One level of taxation: The business's income flows through to the owner(s).

Two levels of taxation: The business is taxed on income and then shareholders are taxed on any dividends they receive.

Losses flow through to the owner(s).

Losses remain at the corporate level.

The top individual tax rate is 37%, but for eligible taxpayers, up to 20% of qualified business income is deductible.

The flat corporate tax rate is 21% and the top rate on qualified dividends is 20%.

Shareholder Loans

There may be a time when you want to take a loan from the company for a larger expense. If there is extra cash in the business, this can be a convenient option. However, it must be treated as a loan.

You will want to be sure the IRS won’t claim that the shareholder received a taxable dividend or compensation, rather than a loan. The IRS considers the following factors when deciding if it is a bona fide loan:

  • The size of the loan
  • The company's earnings and dividend-paying history
  • Provisions in the shareholders' agreement about limits on amounts that can be advanced to owners
  • Loan repayment history
  • The shareholder's ability to repay the loan based on his or her annual compensation
  • The shareholder's level of control over the company's decision-making
  • If there is a written formal payment terms agreement and schedule

Review with a Professional

The decision on how to pay yourself may change over the life of the business. Work with an experienced accounting firm to model out the option that affords you the best tax-advantaged way to draw your business income.

This is not a one-and-done exercise. Compensation should be reviewed every couple of years to ensure the plan still fits your personal and business needs.

(Download Video Transcript)

Chapter 6

What Happens When a Shareholder Dies?

When a shareholder dies, their shares of stock in the company will typically be transferred to their heirs or beneficiaries as part of their estate.

The process for transferring the shares will vary depending on the laws in the jurisdiction in which the shareholder lives and the type of stock ownership.

Transfer Shares Through a Will

One common method for transferring shares is through a will.

If the shareholder had a will in place, their shares will typically be transferred to the designated beneficiaries or heirs as outlined in the will.

If the shareholder did not have a will, their shares will typically be transferred to their next of kin or legal heirs according to the laws of intestacy in the jurisdiction.

Transfer Shares Through a Trust

Another way shares can be transferred is through a trust.

If the shareholder had established a trust, the shares will be transferred to the beneficiaries of the trust as outlined in the trust document.

Joint Ownership

In some cases, the shares can be transferred through joint ownership. This way the shares will pass to the surviving joint owner without going through the probate process.

The Transfer Process

In order to transfer the shares, the executor or administrator of the deceased shareholder’s estate will typically need to provide the company with a death certificate and other legal documents. The company will then update their records to reflect the change in ownership of the shares.

Once the shares are transferred, the new owner(s) will be entitled to all the rights and privileges associated with being a shareholder, such as the right to vote on company matters and the right to receive dividends. They will also be subject to any restrictions or agreements that may be in place regarding the shares, such as a shareholder agreement.

(Download Video Transcript)

It’s recommended that the deceased shareholder’s family or estate consult with a lawyer or financial advisor to ensure that the transfer of shares is done correctly and in compliance with all legal requirements.




Chapter 7

How to Protect Your Business When a Shareholder Gets Divorced

If a shareholder gets divorced, it is important for the business to take steps to protect itself from potential legal and financial implications. Some ways to do this include:

Shareholder Agreement

Having a clear and comprehensive shareholder agreement in place can help to mitigate potential issues that may arise from a shareholder’s divorce.

The agreement should outline the rights and responsibilities of the shareholders including provisions for transferring shares in the event of a divorce.

Right of First Refusal

A “Right of First Refusal” clause in the shareholder agreement can give the other shareholders the right to purchase the shares of a shareholder who is going through a divorce before they are sold to a third party.

This can help to ensure that the shares are transferred to a party that is aligned with the interests of the business.


Buy-Sell Agreement

A buy-sell agreement is a contract between shareholders that outlines the terms and conditions under which shares can be bought and sold.

This agreement can also include a buyout provision that allows the company or other shareholders to purchase the shares of a shareholder who is going through a divorce at a pre-determined price.

Restrictions on Transfers

Some companies may include restrictions on the transfer of shares in the company’s articles of incorporation or bylaws.

These restrictions can help to prevent shares from being transferred to parties that may not be in the best interest of the business.


Keep the lines of communication open with the shareholder going through a divorce and be aware of any potential legal proceedings that may affect the company.

Separation of Assets

It’s advisable that the company and the shareholder consider separating the shareholder’s business assets from their personal assets to minimize the potential impact of divorce proceedings on the business.

It’s important to keep in mind that the laws regarding divorce and the division of assets can vary depending on jurisdiction. Therefore, it’s recommended that the business consults with a lawyer or financial advisor to ensure they are complying with all relevant laws and regulations.

Additionally, it is important to ensure that any agreements or provisions put in place are fair and equitable to all parties involved, including the shareholder going through the divorce and the other shareholders.

Chapter 8

How SVA Can Help

It is important to have the right legal documentation established for your shareholders. Enlist a team of trusted advisors including legal counsel, bank representation, and your accountant.


This is not a one-and-done exercise. Your agreements should be reviewed often and updated as required to ensure they are current in case they are needed.

Contact SVA


Madison, WI
1221 John Q Hammons Dr, Suite 100
Madison, WI 53717
(608) 831-8181

Milwaukee, WI
18650 W. Corporate Drive, Suite 200
Brookfield, WI 53045
(262) 641-6888

Colorado Springs, CO
1880 Office Club Pointe, Suite 128
Colorado Springs, CO 80920
(719) 413-5551

SVA BBB Business Review Man Standing


(888) 574-4782

Are you in the know on the latest business trends, tips, strategies, and tax implications? SVA’s Biz Tips are quick reads on timely information sent to you as soon as they are published.

Connect With Us

Copyright © 2024 SVA Certified Public Accountants | Privacy Policy | Cookie Policy | CCPA