Freelancer’s Question: What’s the best way for me and a long-time creative industry contact of mine to set up a new business together, so we are its equal partners? He last year handed in his notice and wants the venture to be based on a service he once tried his hand at. I’ve already got a limited company and prefer the new businesses to be a twist on a product-led service I’m regularly asked to provide as a consultancy, but can’t due to limited capacity. Either way, we want the envisioned venture to be 50% mine and 50% his; will this be straightforward?
Expert’s Answer: Firstly, bear in mind that it’s not at all unusual to hear people who have set up in business together refer to themselves as ‘partners,’ when in fact their business is set up as a limited company. What they usually want to indicate by calling themselves partners is that they view themselves as equal in the business, which is a great basis for working together.
They, and perhaps you as well, should realise that a limited company is a very different structure in legal terms from a true partnership, so an intention of being equal ‘partners’ may not be translated into reality. To be equal ‘partners’ in a company, you two would need to:
- own the company equally by each holding the same numbers of shares with the same rights
- be the managers of the company by being the directors of it, and
- if you also work for the company, be employed or engaged on similar terms.
In order to avoid any nasty surprises at a later date, my advice would be for you two ‘partners’ to consider the details of your business relationship and set it out in a shareholders’ agreement. The types of area I would suggest be addressed include:
- How the business should be run – everything from the products and/or services it should offer to financing the business, engagement of staff, purchases for the business, any guarantees or credit to be given, contracts and other arrangements to be entered into by the business and so on.
- Changes to the structure of the company – such as changes to the articles of association (these are rules of the company), its name, the issue of any more shares and the rights they should have.
- What should happen if one of the ‘partners’ wants to transfer or sell his shares.
The last of the above points is probably one of the most important issues to set out and the one most likely to lead to future disagreements if it isn’t agreed at an early stage. The ‘partner’ or ‘partners’ carrying on in the business will usually want some say in who comes in rather than being faced with a complete stranger.
A common way of dealing with this is to give the remaining ‘partners’ a first option to buy the shares with a method for assessing a fair value if the price cannot be agreed. Without such an agreement, the continuing ‘partners’ have no guaranteed way of being able to acquire the shares at a fair price and so could be faced with a stranger coming into the business with them.
I have heard of numerous instances where ‘partners’ in a company who have not put a shareholders’ agreement in place have experienced difficulties in resolving the sort of issues I have outlined. Ensure this does not become the position in your envisioned business, so give serious consideration to drawing up a shareholders’ agreement sooner rather than later.
The expert was Sue Mann, commercial solicitor at legal advisory Cousins Business Law.