When it comes to establishing a company, there are several legal agreements that need to be put in place. Two such agreements that often cause confusion for new business owners are the shareholder agreement and subscription agreement. While both agreements are important, they serve different purposes and understanding the differences between them is crucial for the smooth operation of your business.

Shareholder Agreement

A shareholder agreement is a legal agreement between the shareholders of a company that outlines the rights and obligations of each shareholder. It is a private document that is not typically filed with the state and is not subject to public disclosure. This agreement helps to establish the rules for how the business will be run and the expectations of each shareholder.

The main purpose of a shareholder agreement is to ensure that all shareholders are on the same page and that there is a clear understanding of the rules and regulations that govern the company. It covers several aspects, including the appointment of directors, voting rights, share transfers, and dividend distributions. It also outlines the procedures for selling or disposing of shares, the process for resolving disputes, and the procedure for winding up the company.

Subscription Agreement

On the other hand, a subscription agreement is a contract between the company and the investors who subscribe for shares in the company. It is a private offering document that is filed with the state and outlines the terms and conditions of the investment. The subscription agreement typically includes the number of shares being offered, the price per share, the type of security being sold, and the rights and restrictions associated with the shares.

The main purpose of a subscription agreement is to protect the company by ensuring that investors understand the risks involved in the investment. It also helps to ensure that the company is in compliance with state and federal securities laws. Subscription agreements are typically used in private placements, which involve a limited number of investors who are expected to have knowledge of the business and the risks involved.

Key Differences

So, what are the key differences between shareholder agreements and subscription agreements? The most significant difference is that shareholder agreements are legal agreements between the shareholders of a company, while subscription agreements are contracts between the company and the investors who subscribe for shares. Shareholder agreements focus on the governance and management of the company, while subscription agreements focus on the terms and conditions of the investment.

Another difference is that shareholder agreements are private documents, while subscription agreements are filed with the state and subject to public disclosure. Shareholder agreements are typically created when the company is established, while subscription agreements are created each time new investors subscribe for shares in the company.

Conclusion

In summary, shareholder agreements and subscription agreements serve different purposes in the operation of a business. A shareholder agreement is crucial for governing the relationships between the shareholders of a company and ensuring that everyone is on the same page. A subscription agreement, on the other hand, is designed to protect the company and investors by outlining the terms and conditions of the investment. Understanding the differences between these two agreements can help new business owners to make informed decisions and avoid potential legal issues down the line.