A non-equity shareholder holds shares in a corporation that do not represent an ownership percentage in the corporation. They are used to reward employees or provide them with voting rights or authority to sit on certain committees. Non-equity shareholder or non-equity partner status is common in law firms, and used as a pre-partnership designation. The status is conferred by contract, so if you have a small incorporated company and want to bring your children into the business, but limit their ownership powers and their liability, you can do that via a non-equity shareholder contract. Corporations are governed by state law, so check with your attorney to assure compliance with legal details.
1. Read your corporate by-laws with attention to how you want to position your children within your company as non-equity shareholders. Make a list of your intentions before consulting an attorney and accountant so you will be able to describe what you want to accomplish by making your children non-equity shareholders. There might be options you have not considered, tax and corporate governance consequences, as well.
2. Assign duties to the non-equity shareholder designation. A non-equity shareholder might not be part of the executive committee, but can require shareholder status to vote or be on certain committees. Your by-laws might need to be changed to include special provisions for non-equity shareholders.
3. Compensate non-equity shareholders with a salary. They can participate in revenue distributions, but these must be in the form of bonuses and cannot exceed a certain percent of their annual salary. The allowable percentage has changed from time to time, so consult your advisers regarding the current best practices.
4. Describe any benchmarks, requirements or events that will make the non-equity shareholder position convert to a full-equity shareholder position. You might want your children to become full shareholders upon your retirement or death. You can sell the business, so consider whether you would want to convert non-equity positions to full-equity prior to the sale. Another event to consider is bankruptcy. It can be a remote possibility, but it will have an affect on non-equity shareholders. Again, these are questions to ask an attorney and accountant.
- In your planning, decide how many non-equity shares will be created, how they will be assigned or purchased, and how they will be redeemed. Your board of directors has the power to declare non-equity shares, state their value and repurchase those shares at a price they declare, but not less than par value. This means you must assign a par value to the shares, which can be $1, or whatever your attorney and accountant suggest. Non-equity shares are not transferable to another person without action by the board of directors. In the event of sale, dissolution of your company or bankruptcy, the shares do not have a right to any assets of the firm.
- Non-equity shares don't dilute the full shareholders, so there is a certain amount of controversy over whether they are actually shares, just as there is controversy over whether non-equity partners are actually partners.
- CoastCapital Savings: Class P Non-Equity Shares
- Lexis-Nexus; Equity vs. Non-Equity Partnerships; by Mira Serrill-Robins
- Workman Nydegger: J. LAVAR OLDHAM Non-Equity Shareholder
- State of Florida Commission on Ethics: Conflict of Interest
- New York Law Journal; A Different Kind of Divorce; by Bettina D. Hindin, Esq.
- American Bar Association; What Being a Nonequity Partner Means: From Lifestyle to Leadership Choices; by Robert W. Denney
- Kansas University School of Law; The Partnership Paradigm and Law Firm Nonequity Partners; by Douglas R. Richmond
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