Transfer Shares
According to “experts”, using a corporation has one bid advantage over other entities. The advantage is the ability to freely transfer shares without impacting the business or viability of the corporate structure. Consider the following example.
If I own a 60 percent interest in a general partnership, I can’t just sell it to someone else. In most states, the transfer of more than 50 percent of an interest in a partnership automatically terminates it. With a corporation, however, there is no such prohibition.
Instead, I am free to transfer shares without restriction and the business just purrs along without any interruption.
As with many assumptions, the “free transferability” assumption runs into problems in the real world. This is particularly true if the corporation has entered into contracts with other large companies.
Accidentally Terminating Contracts
State laws govern the formation and running of most business entities. These laws, however, do not trump general contract law. Instead, deference is given to the terms two or more parties agree upon in the formation of a contract and this is where the free transferability experts fall on their faces.
In our modern economy, a majority of companies will require language in a contract stating that any transfer of more than “xxx” percentage of shares automatically voids the contract between the parties. The reason for this is parties want to know whom they are doing business with at all times. Assume I want to do business with a corporation that has three engineers who are the best in their field. I don’t want to sign a five-year contract with them only to see the three engineers sell their shares and leave the company during the term of the contract. In requiring the language restricting share transfers, I am making sure I will benefit from their expertise.
Many shareholders in small businesses fail to take into account share restriction language in contracts. Instead, they go out and sell their shares to a third party with dreams of retirement on a white beach somewhere. They are more than a little surprised when served with a lawsuit by the share buyer who is angry because a number of contracts for the corporation have been terminated. In Seinfeld terminology, “No white beaches FOR YOU!”
Before you get excited about selling your shares in a corporation make sure you check the language of all contracts with third parties. You don’t want to have to come back from that white beach.
Related Articles
Time and Money Around The World
By: Jim Edwards | 13/09/2005 | Free
This year I've converted my money into 4
different currencies and, if you've ever traveled abroad, you
know you lose money every time you change your money from one
currency.
Writing Contracts: Representations
By: Bob Miles | 22/04/2007 | Law
A good understanding of representations is important to drafting many kinds of contracts. If your representations are well written, they can prevent a dispute later. Even if they don't, skillfully drafted representations can win a contract dispute for you if it ever comes up.
A representation is a statement intended to...
How To Use Available Legal Forms
By: Wade Anderson | 16/11/2007 | Law
The use of legal forms is necessary in most business environments and varies according to the purpose for which they are intended. Using legal forms is beneficial to both small as well as large companies.
Sony Ericsson W980i: Mobile With Style
By: Mark Hirst | 15/04/2008 | Cell Phones
You have an mp3 player. You have a stereo. With the new Ericsson W980i, say goodbye to excess baggage. Trust me, you won’t be needing any of those anymore.
The W980i is a Sony Ericsson walkman phone guaranteed to make you go mobile with style. It has a striking array of incredible features that will knock your socks off, and we’ve barely even started.
Sony Ericsson W980i: Organizer
By: Mark Hirst | 24/04/2008 | Cell Phones
The Sony Ericsson W980i is an all- around device. This means that if you need your video and music fixes, it is there for you. If you need to get yourself on the Internet, it can do that for you too. Of course, if you want to send and receive messages, it is built for that. Another aspect in which the W980i functions greatly at is being an organizer.
Methods For Getting Referrals From Inbound Calls
By: David Gass | 07/08/2006 | Sales
Describes how best to get referrals from inbound calls.
Strange Things About Different Business Entities
By: SD Lawyer | 22/10/2007 | Law
If you are contemplating forming an entity for your business, there is a lot of information to consider. Here are some of the more esoteric things you will not see discussed in most how to guides.
The Next Google – Ambition and hope are the two attributes of any new business. Nobody starts a business because they think it will produce just enough profit to get by. You, me and the guy down the street all think we are going to make billions and be the next Google. Obviously, most of us are wrong.
Why you Need a Business Entity
By: SD Lawyer | 22/10/2007 | Small Business
When starting or expanding a business, many owners wonder if they should form a business entity and, if so, which one they should use. There is a wide variety of information and "pitches" being made on the Internet regarding the benefits of certain entities versus others. When you cut through the flak, however, the primary reason for forming a business entity is to create protection from personal liability arising from your business activities.
Got a Question? Ask.
Ask the community a question about this article:
Frequently Asked Questions
Cancel agreement with internet company for refund
By: Sincere | 03-06-2008
Am I entitled to a full refund? The agreement states, "This agreement can only be voided within the first three business days, and will be penalized with a 15% processing fee for a cancellation after three business days." The agreement was made on 5/29/08 and I email the company a cancellation email with the agreement attached on 5/31/08. Should I get a full refund or partial?
Item rental contracts
By: hotkitty228 | 01-06-2008
Hello,you can call me hotkitty228 even though I'm very shy! Anyway I seem to have hit a block in starting a business like n*tfl*x.I want to start a rent to own business but don't know what papers & forms I would need. Does anyone know what I should look into first?
Voiding a Contract
By: rgrlry | 14-05-2008
I contracted with a company to pave my drive. Then, I received a much lower bid from a different company. Can I void my first contract?
How can i find my ein number
By: hmgcontractorinc01 | 07-05-2008
how can i find my ein number
I already process the ss-4pr form and received a ...
By: hmgcontractorinc01 | 07-05-2008
i already process the ss-4pr form and received a letter with the pin number but the ein number only shows the last four digits
When would I choose to be taxed as a corportion within an LLC?
By: cowgirl1 | 30-04-2008
If I have an LLC and have to keep alot of profit in the business for inventories, would it be better to select to be taxed as a corporation instead of a sole proprietor?
Q&A Powered by:
Latest Business Articles
Undersell, Overdeliver
By: Charlie Karlheinz Lang | 08/07/2008
This article shows us how salespeople can undersell and overdeliver to get more success in sales.
Would You Like to Take the Pain Out of Giving Constructive Feedback? the Seven Steps
By: Julie Ellis | 08/07/2008
Pretty much all of us feel uncomfortable about giving feedback. If we don't know how to do it effectively, we can either avoid it or make a mess of the communication. This article gives the 7 steps in how to give constructive feedback in a way that works. It begins by asking us first to take responsibility for our own reactions so that they don't get in the way and then gives a step by step guide to achieving a positive outcome.
Are You a 'people-friendly' Manager?
By: Pat Brill | 08/07/2008
A "people friendly" environment reduces stress, decreases turnover, and supports higher levels of performance with employees. Organizations today are addressing the "people friendly" environment with additional programs that support work-life balance. And..that is great.
Locate Employment 101
By: Ed Opperman | 08/07/2008
Most people find services more convenient and easy. It takes away much of the arguments that come along with serving papers or repossessing property.
Connaught Opens Fund For Investors Tired of Products
By: Mark Smalls | 08/07/2008
Connaught Asset Management has launched a Guaranteed Low Risk Income fund, which company executives said is aimed at investors who have lost their appetite for investment products.
It promises to pay a guaranteed annual return of at least 8.15 per cent, by investing in low-risk, short-term bridging financing.
Investors who put in...
Capita Buys up Land For Future Planning
By: Nigel Walter | 08/07/2008
Funds seeking the UK sites most likely to obtain planning permission for buildings.
Capita is to launch two funds to snap up land that could be used to meet the government's target to develop 4.2m homes over the next 20 years.
Connaught Asset Management has been appointed by Capita as the specialist...
How to Expand an Office Cleaning/ Janitorial Business
By: Brent Wale | 08/07/2008
If you own and operate an office cleaning/ janitorial business, or looking to start one,Here's a way you can explode your income in your office cleaning/janitorial business without even getting any new accounts.
Feedback as a Competitive Sport
By: Jennifer Selby Long | 08/07/2008
A common roadblock to success is the use of feedback to win, to dominate the person seen as the opponent. Dealing with this can affect your happiness and your sanity. Organizations in which leaders and managers routinely share high-quality feedback are easier to scale and have fewer nagging problems and less operational drag.
More from SD Lawyer
Should you Start a Business With a Friend?
By: SD Lawyer | 22/10/2007 | Business
Starting a business is a scary and exciting time. It takes a leap of faith, but also offers up the hope of successfully doing something you love. Still, there are things to be wary of.
Checklist for Going Into Business for yourself
By: SD Lawyer | 22/10/2007 | Business
If you are considering going into business for yourself, it makes absolute sense to be as prepared as possible. Here is a checklist of things you need to consider.
Avoid Common Business Start-up Mistakes
By: SD Lawyer | 22/10/2007 | Business
If you are considering starting up a business, you are facing both an exciting and stressful time. To succeed, you should avoid the common mistakes many new business owners make.
A Key Step for New Business Owners
By: SD Lawyer | 22/10/2007 | Business
Many a guru has opined on the keys to business success. While everyone has an opinion, I am going to focus on a more practical step you can take that will make a big difference.
What are Professional Corporations?
By: SD Lawyer | 22/10/2007 | Business
Many professionals are barred from forming limited liability companies or basic corporations for their practices. Instead, there only option is often to form a professional corporation.
Free and Low Cost Pc Offers – the Catch
By: SD Lawyer | 22/10/2007 | Computers
You've probably seen the ads for "low cost" PC's - "PC's for $199" - or even "free" computers. If you're in the market for a personal computer, you should know "free" doesn't always mean free. Very often, certain conditions and restrictions found in the fine print of advertisements for "free" or "low cost" PC's can turn a so-called deal into an expensive purchase.
Resolve Disputes With your Partners Before They Happen
By: SD Lawyer | 22/10/2007 | Management
A majority of businesses have ownership groups of less than five individuals. While this provides for efficient and effective management, difficulties arise when something happens to one of the owners.
Running a Corporation – Shareholders and Directors
By: SD Lawyer | 22/10/2007 | Management
If you form a corporation for a business, it can become very confusing when the issue of running the actual business arises. For instance, what is the difference between shareholders and directors?
Business 
