I’m going into business with my brother/sister/friend/partner. What do I need to know?
You and your potential business partner have come up with a fantastic and unique business idea, you’ve identified a gap in the market, or you are simply tired of working for others and have decided to take the leap into business together. Regardless of how great your relationship with this person is right now, and regardless of how aligned you are in your vision for the business, it is always a good idea to protect yourself and your investment with some simple but important steps.
Firstly, you need to think about your business structure. All business involves risk, and if you want to protect your personal assets then it is usually a good idea to form a limited liability company from which the business will be run. In most circumstances, this will limit your liability (as a shareholder) to the amount of capital you have contributed to the company, and protect your family home and other personal wealth from risk. Other structures such as a limited partnership or unit trust may also be appropriate. It is advisable to take both tax and legal advice to assist with this decision.
The next step is to negotiate and agree a shareholders agreement (or similar document depending on your business structure) with your business partner. Although it may seem difficult to justify the upfront expense of having such a document prepared and negotiated, be assured that it will pay off in the long run. The document is particularly important in the event there is a falling out between parties, disagreements as to the future of the business, or even if a partner suddenly dies, divorces or otherwise wants to exit the business. Even if you have a 50/50 business (and in fact, particularly if you have a 50/50 business), these founding documents are critical to resolve future deadlocks and disputes. There are many instances of businesses that have been lead to ruin by one party continually exercising its veto and blocking business decisions or by simply refusing to turn up to board meetings and engage on the issues at all. A shareholders agreement will set out a process to deal with these matters and will ensure that a resolution can be reached in the most cost effective and time efficient manner.
From a commercial perspective, another crucial step to getting your business off to a smooth start is to sit down with your business partner and formulate a detailed business plan. This will of course be necessary if you intend to approach any banks for financing, but it is also a good way to check that you are both aligned in your expectations. As part of the business planning you should also decide who will be working in the business, the hours and services expected to be contributed, and whether any salaries are paid to the founding partners over and above any distributions on their equity. If an owner is to be an employee – make sure you put together and sign an employment agreement to make this clear.
And lastly, another often skipped but critical part of the start up process, is to check that your proposed business name is available as a suitable company name, website and trade mark, and get them secured and registered (along with any logos) as early as possible.
Although your relationship with your business partner may seem indestructible at the start of your business journey, similar to a prenuptial agreement, it is crucial to talk about the difficult issues while you are still on good terms (and still talking!). Once you actually need to rely on the provisions of your shareholder agreement, it will be too late to put one in place and much more difficult to resolve issues without one.
If you need assistance setting up your business or in preparing a shareholder agreement or other founding document, do not hesitate to get in touch with the business law team at Lane Neave.
Business Law Team
If you need any assistance with the sale or purchase of your business, do not hesitate to get in touch with the business law team at Lane Neave.
Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Peter Orpin, Joelle Grace, Kristina Sutherland, Danita Ferreira, Jacob Nutt, Angela Sargent, Whitney Moore, Alex Stone, Giuliana Petronelli
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