When starting a business, one of the first big decisions you`ll need to make is what type of legal entity your business will be. Many small businesses opt to become S corporations because of the tax benefits and liability protection.
An S corporation agreement is a legal document that lays out the terms and conditions of the corporation. It is executed by the shareholders and includes important information such as the purpose of the corporation, the rights and responsibilities of the shareholders, how profits will be distributed, and how the corporation will be managed.
If you`re starting an S corporation, you`ll need to develop an S corporation agreement. While it`s always recommended that you work with an attorney to draft your legal documents, there are many online resources that provide sample agreements that can help you get started.
Here are some key things to keep in mind when creating an S corporation agreement:
1. Purpose of the Corporation: Your agreement should clearly state the purpose of the corporation. What is the business`s primary reason for existing? What will it strive to achieve? This language will help ensure that everyone is working towards the same goals.
2. Shareholder Rights: In an S corporation, shareholders have certain rights, such as the right to vote on important matters and the right to receive their share of the profits. Your agreement should detail these rights and any restrictions that may apply.
3. Management and Control: Your agreement should outline how the corporation will be managed and who will be responsible for making decisions. This may include appointing officers or a board of directors.
4. Profit Distribution: S corporations are pass-through entities, meaning that profits are distributed to shareholders based on their ownership stake. Your agreement should lay out the details of how profits will be allocated and any rules around distribution.
5. Transfer of Shares: If a shareholder wants to sell their shares, there may be restrictions in place. Your agreement should outline any requirements for transferring shares, including first right of refusal for existing shareholders.
Ultimately, your S corporation agreement should protect the interests of all shareholders while also providing a clear framework for how the corporation will operate. Be sure to consult with an attorney to ensure that your agreement is legally sound and meets all state and federal requirements.