ABA Family Legal Guide

Forming and Operating a Small Business

Types of Business Organizations

Corporations

Can shareholders of all corporations, large or small, transfer their shares?

Being able to transfer shares freely to anyone gives an investor the right to liquidate his or her investment at any time. This right to transfer makes shares of the stock very marketable--provided, of course, there is someone who wants to buy them. The shares of all the corporations whose stock is registered with a stock exchange like the New York Stock Exchange are, for example, freely transferable.

But in a small corporation with only a few shareholders, free transferability of stock can often be a detriment. For example, imagine there are three founding shareholders of a small company and one shareholder decides to sell his shares to someone the other two intensely dislike. For the store to be successful, all three shareholders have to work there regularly without undue friction between them, so it could be a disaster.

In many states, a complete prohibition against the transferability of stock is not possible. That's why in most small corporations, the shareholders enter into what is known as a shareholder's agreement or a share transfer restriction agreement, which will impose restrictions on the sale of stock. These agreements have to conform to your state's corporation laws, as well as precedents established by other cases. It's a good idea to get legal counsel to draft such an agreement.