Getting Ownership Right: Why Every Business Needs a Shareholders’ Agreement

When people decide to go into business together, the focus is usually on customers, premises, staff and funding. The ownership and control arrangements are often left to last or stitched together from a generic template. That can be a costly mistake.

A well‑drafted shareholders’ agreement records how decisions are made, how profits are shared, and what happens when someone wants to leave, retire, or join the business. Done properly, it protects both the venture and the relationships behind it.

What is a shareholders’ agreement?

A shareholders’ agreement is a private contract between the owners of a company. It sits alongside:

• The companies legislation in your country; and

• The company’s constitution (if it has one).

The law provides broad default rules, but these rarely reflect the specific needs of a small or medium business. A tailored agreement lets the owners:

• Decide how major decisions will be made.

• Agree how profits will be split and how much is reinvested.

• Set clear rules for bringing in, rewarding and buying out owners.

For most businesses, a good agreement is never litigated – that is the point. If it is clear and practical, it greatly reduces misunderstandings and disputes.

Why “equal profits for everyone” is often the wrong answer

A common starting point is: if there are two owners, each has 50%; if three, 33⅓% each; and profits follow those percentages. This can work in the early stages but often becomes unfair as soon as contributions diverge.

Typical issues include:

• One owner brings in most of the customers or sales, but profits are shared equally.

• One shareholder provides most of the capital or guarantees the bank, yet receives the same

  return as someone with little financial risk.

• A part‑time or passive owner draws the same distributions as full‑time owners who manage staff,

  systems and day‑to‑day operations.

Over time, this erodes goodwill and can drive good people out of the business.

A more robust approach is to separate two questions:

1. Who owns the equity and therefore benefits from long‑term value and any future sale?

2. How do we want to share the year‑to‑year profits from our work and capital?

Once you separate ownership from yearly profit allocation, you can adopt a profit‑sharing model that reflects actual contribution and risk while keeping a stable equity base.

Practical profit and cost‑sharing models

Different businesses need different models. Here are four broad approaches that can be adapted to trades, retail, services, manufacturing, tech and more.

1. Fixed return on capital plus performance pool

Under this model:

• Each shareholder receives a basic return on capital contributed and/or guarantees given (for example, a priority return on shareholder loans or current accounts).

• The remaining profit goes into a “pool” that is split using agreed measures such as sales generated, gross margin, operational responsibilities, or agreed performance targets.

This model works well where one or two owners have put in significantly more capital or carry the main banking risk, but others contribute materially to sales and operations.

2. “Eat what you kill” with shared overhead

This is useful where each owner effectively runs their own mini‑unit under a common brand (for example, multiple salespeople or separate branches):

• Revenue is tracked by owner, branch or segment.

• Shared overheads (rent, administration, IT, marketing) are split by formula – for example, proportional to revenue, or via a base contribution plus a variable element.

• Each owner’s net profit becomes their revenue minus their share of overhead; any residual overall surplus can still be divided by equity percentages.

  
  

This creates strong incentives but needs clear rules for cross‑referrals, shared customers and pricing

3. Working vs non‑working shareholders

Over time, many businesses end up with a mix of:

• Working shareholders: involved day‑to‑day in operations and management.

• Non‑working shareholders: founders who have stepped back, family members or external investors.

The agreement can:

• Provide fair market‑based remuneration for working roles (managing director, operations

• manager, sales lead, etc.).

• Limit participation in performance‑based profit pools to working shareholders.

• Provide that non‑working shareholders receive only dividends based on equity.

This helps manage succession while still recognising capital left in the business.

4. Different share classes or “income units”

What should a shareholders’ agreement cover?

1. Roles, time commitment and expectations

Who is expected to work in the business and in what role.

• Minimum time or involvement expectations, and how part‑time or side ventures are dealt with.

• Restrictions on competing businesses and conflicts of interest.

Capturing expectations in writing early helps prevent resentment later.

2. Governance and decision‑making

• Who can appoint and remove directors.

• What decisions the board can make on its own, and what requires shareholder approval.

• Higher thresholds for major matters such as borrowing, leases, capital expenditure, issuing new

• shares, changing the business model, or selling key assets.

This strikes a balance between protecting important decisions and keeping daily management agile.

3. Profit, salary and drawings

The agreement should:

• Set out the structure for salaries or management fees paid to working shareholders.

• Describe the chosen profit‑sharing model and key metrics.

• Explain how and when profits can be drawn (for example, interim drawings versus final

• distributions after annual accounts).

• Build in rules to ensure legal solvency tests are met before money is taken out.

Good financial rules reduce the risk of over‑drawn current accounts and cash‑flow stress.

4. Funding and further capital

• How the business will be funded (bank debt, shareholder loans, new equity).

• How future capital calls are handled: must all shareholders contribute, and what if someone

• cannot or will not?

• What happens to voting and profit rights when new capital is introduced.

This avoids stalemates when the business needs funding to grow or to survive a downturn.

5. Bringing in new owners

For growing businesses, the agreement should cover:

• Who decides that someone can become a shareholder.

• How the buy‑in price is set (formula, band, or independent valuation).

• Whether there is a vesting period or staged increase in ownership.

Clear, pre‑agreed terms make it easier to attract talent and plan succession.

6. Exits, retirement and “what if things go wrong?”

Circumstances change; your agreement should be ready for that. It should address:

• Voluntary exit: notice periods, who can buy the shares (company, existing owners, new entrants) and the pricing mechanism.

• Retirement or step‑back: options for staged exits, reduced roles, or partial sell‑downs.

• Death or disability: compulsory transfer of shares under a buy‑sell arrangement, ideally backed by insurance.

• Serious misconduct or breach: how “bad leavers” are treated and at what price their shares are bought back.

Agreeing these rules in calm times prevents rushed, emotional decisions later.

7. Restraints, customers and intellectual property

Every business needs clarity on:

• Who “owns” customers and supplier relationships.

• What happens if an owner leaves and customers follow.

• Reasonable restraints of trade and non‑solicitation clauses (territory, duration and type of

• business).

• Ownership of intellectual property – product designs, software, brand assets, processes, or

• content.

Well‑designed restraints protect the business while still allowing former owners to earn a living.

8. Dispute resolution and deadlock

No document can prevent all disagreements. Your agreement should set out a staged process, such as:

1. Good‑faith discussions between owners.

2. Mediation with an agreed independent mediator.

3. If needed, arbitration or a buy‑sell mechanism as a last resort.

For 50/50 ownership, particular care is needed to handle deadlock, such as involving an independent director or pre‑agreed buy‑sell options.

A simple example

Three people form a company:

• Owner A brings most of the customers and provides most of the capital and bank guarantees.

• Owner B brings important operational skills and some capital.

• Owner C brings product or technical expertise but less capital and initial revenue.

Instead of giving each one‑third and splitting profits equally, they agree:

• Equity: A 50%, B 30%, C 20%.

• Salaries: each is paid a fair salary for their role (e.g. sales director, operations manager, technical lead).

• Profit: each year, half of the remaining profit is shared in proportion to equity; the other half is shared based on a mix of sales, gross margin and key performance indicators.

• Capital: A receives a modest priority return recognising the extra capital and guarantees.

Their shareholders’ agreement documents this structure, sets clear rules on decision‑making, exits, valuation and restraints, and can be adjusted as the business grows. Everyone understands the rules, which makes commercial decisions easier.

How our firm can help

We regularly assist business owners to:

• Design ownership and profit‑sharing structures that match each person’s contribution, risk and long‑term goals.

• Model different options so owners can see the impact on cashflow and exit value.• Work alongside your lawyer to ensure the shareholders’ agreement, constitution and tax position all line up.

If you are starting a new business or thinking about changing your current shareholding arrangements, we can help you work through the options and the numbers before you commit. That up‑front clarity usually saves time, cost and stress later.