If you’re thinking of starting a company with someone else, there are several considerations to make before you take the first step. Sure, it’s great to have a friend or family member in business with you for support, extra brain power, and stress relief. But is it all as rosy as it sounds?
In this blog, we advise how to approach starting a company with someone else. You’ll need to decide who will undertake crucial roles, understand your roles and responsibilities, and learn about the legal considerations. We also explore the pros and cons of starting a company with someone else.
Decide who will own and who will run the company
First, you must decide who will own the company (be a shareholder) and who will run it day-to-day (be a director). If you’re starting a company with more than two people, don’t worry; multiple people can hold each of these positions.
Legal requirements
Depending on the type of company you want to start, you’ll need to meet the minimum appointment requirements. A private company limited by shares requires at least one shareholder and one director (one person can be both).
When you have multiple people, you can assign these roles as you wish. For example, if there are two of you, you can both be shareholders and directors, or you can split the roles between you.
The rules are the same for a company limited by guarantee (a not-for-profit organisation, such as a charity). The only difference is that shareholders are called guarantors.
In a limited liability partnership (LLP), you can have two or more partners. These individuals are known as designated members, which are equivalent to shareholders.
You must have at least two designated members appointed in an LLP at all times to undertake administrative and managerial responsibilities. You can also choose to have non-designated members, who generally have fewer responsibilities.
For public limited companies (PLCs), you need at least two directors and at least one shareholder, so you need at least two people. Both can be directors, and one can be a shareholder, or you can bring in a third person to take on one of these essential roles.
PLCs must also legally appoint a company secretary (an optional role for the other company types), for which there are specific qualifying criteria. You can find details of this in section 46 of the Companies Act 2006.
For the purpose of this article, we will focus on the most popular business structure in the UK, private companies limited by shares.
Who can be a director?
Company directors have a great deal of responsibility and an extensive list of ongoing duties. These include:
- Promoting the success of the company
- Complying with certain laws and regulations (such as employment and consumer law, as well as health and safety)
- Maintaining statutory filing and reporting obligations (such as the annual confirmation statement and registering the company for business taxes)
- Maintaining the company’s statutory Register of Members
Directors make most business decisions (bar high-level ones, like taking out a sizeable business loan, which requires shareholder approval) and act on behalf of the company, so there’s a great deal of responsibility.
Generally, anyone can be a director as long as they are:
- Over 16 years old
- Not disqualified from being a director by a court order
- Not disqualified by the company’s memorandum and articles of association
- Not an undischarged bankrupt
- Not the company’s auditor
They should also possess certain qualities and skills to be successful in the role, such as:
- Leadership
- Risk management
- People management
- Legal and governance knowledge
- Communication
- Confidence
- Integrity and honesty
- Discipline
When appointing the director(s) for your new company, consider the above and ensure everyone knows the role and is well-equipped to do it.
Who can be a shareholder?
Shareholders are the company’s owners. Unlike directors, they are not typically involved in the daily running of the business; their primary role is to assume limited liability for the company’s debts and make important business decisions.
Unlike directors, shareholders do not have specific criteria. Anyone of any age can be a shareholder. However, due to their financial responsibility, a shareholder should be comfortable with the limited risk they are taking.
If you want to, you can apply certain restrictions to who can and can’t be a shareholder in your company (e.g. minors). You can add these provisions to your articles of association, which we explain later.
Discuss portion of ownership and shareholder rights
Next, you need to agree on the portion of ownership and rights each shareholder should have.
Issuing shares
Will you be equal shareholders, or will your ownership vary? Will you both have voting rights? This is your decision, but you should carefully consider the value each owner brings to the company and ensure they are fairly rewarded for their input, be it financial or otherwise.
When starting a new company with someone else, you might wonder how many shares each owner should hold. Each shareholder must own at least one share. So, if there are two shareholders, you’ll need to issue two shares (you can always issue more later), making you equal partners with a 50% stake in the company.
There is no limit to how many shares you can issue, but remember to make strategic decisions. The more shares you give away, the more diluted your ownership and control becomes.
Shareholder rights
Different shareholders can have different rights. For example, dividend rights allow them to receive a percentage of the company’s profits, and voting rights allow them to attend general meetings and participate in important decision-making.
Sign the memorandum of association
Now that you’re clear on who the company owners and directors will be, you should familiarise yourself with the memorandum of association. This is a short document created by Companies House, the registrar of UK companies that all founding shareholders of a limited must sign upon incorporation.
The memorandum effectively confirms that each shareholder agrees to be an owner and take up at least one share in the company. It will be attached to your articles of association, which we go into next.
Set the terms in your articles of association
Your articles of association are your company’s constitution. In other words, it’s the internal rulebook and contract between the owners (and between the company and the owners) that outlines how the business will be structured and managed. As an incorporated company in the UK, you are legally obligated to have articles of association (and memorandum) for your organisation.
It includes details such as how business decisions are to be made, who has the right to make them, shareholders’ rights and liabilities, directors’ powers, and how company profits are to be distributed.
Usually, basic private companies limited by shares, guarantee companies, and PLCs with one director and shareholder opt for model articles, which are default articles provided by Companies House. However, as you are starting a company with someone else, bespoke articles are more suitable.
Bespoke articles allow you to tailor the terms of your agreement to suit your individual needs, circumstances, and company objectives. For instance, if you want to issue multiple share classes or appoint more than one owner. Your articles can be amended later if needed, but you should carefully formulate the terms that each shareholder and director is happy with.
Bespoke articles can be complex to create yourself, so we recommend seeking professional assistance. At QCF, our expert team can help draft your articles as one of our corporate services, ensuring that it is tailored to your company’s requirements.
Create relevant contracts
In addition to your articles, we recommend creating relevant contracts to safeguard your company and its stakeholders.
Shareholders’ agreement
This document concerns only the company owners and is supplementary to the articles of association. Its primary function is to describe how the company should operate, detail each member’s rights and obligations, and, ultimately, protect their investment.
This agreement helps ensure that all members are treated fairly and their rights are protected, especially minority shareholders.
If you’re starting a company with a friend or family member, you might feel that you trust each other enough to omit a shareholders’ agreement, especially as it’s not a legal requirement. However, it’s still a good idea to create this contract.
You never know what could happen, so this is a practical way to reduce risk and protect all members’ best interests. If you need assistance with your shareholders’ agreement, this service is also one of the corporate services QCF can provide.
Directors’ service agreement
A director’s service agreement is another beneficial contract to put in place when starting a company with someone else, especially if you plan to have more than one director. This agreement covers the directors’ specific duties, both statutory and general, and ensures that all parties know them.
While these details can be found in your articles of association and employment contract, a directors’ service agreement is a more extensive document focusing on the director’s role and obligations.
Non-disclosure agreement
When starting a company with someone else, having a non-disclosure agreement is a good idea. This is not essential, but could be helpful if you want to ensure that confidential company information is kept safe between yourself and your fellow partners.
If you plan to employ people straight away, or if directors also intend to be employees, you can ask them to sign a non-disclosure agreement to ensure that private information about the business stays within the confines of your organisation.
Employment contracts
If you’re going to have staff as soon as you start a company with someone else, or if directors are also going to be employees, employment contracts are essential. These documents clarify staff members’ terms of employment, their and the company’s duties, and the company’s rules and policies.
Again, an employment contract is not a legal requirement, but ensuring that all parties are protected and aware of their responsibilities is highly recommended.
Benefits of starting a company with someone else
We’ve covered the primary checklist for starting a company with someone else. Let’s now examine the benefits.
1. Shared workload
We’ve explained that directors have many duties and lawful obligations. This can be an overwhelming job for inexperienced, sole directors. So, if you’re starting a company with someone else, appointing more than one director to share the workload could be beneficial.
2. Access to support
Running a business alone can be alienating. Only you know what’s truly going on in your business, and only you can deal with it. Support is, therefore, vital for business owners.
By starting a company with someone else, you’ll share those experiences and be able to support one another. Whether you’re working towards a mutual business goal, or need help with a personal matter, it’s useful to have someone who knows what you’re going through and can offer guidance.
3. Wider scope of skills, knowledge, and contacts
When you start a business with someone else, each person brings their skills, knowledge, and contacts to the table – the more, the better. This could significantly improve your chances of success compared to if you were to start a business alone.
Also, if someone has a particular field of expertise or is exceptionally skilled in something, it’ll make appointing roles easier, and you’ll know that you have the best person for the job.
For example, if someone is a strong leader, they might be best suited as a director. Or, if someone has substantial marketing experience, they could take ownership of this part of the business. Otherwise, if you were to start a company on your own, you’d have to take care of all areas of the business yourself, or employ someone to do it.
4. Make better decisions
Running a company involves constant decision-making. Some are easier than others, but even the simple ones can be burdensome for a single person.
If you start a company with someone else, you can discuss and explore these situations together. You’ll benefit from more insight, reason, and perspective, which could help you make better business decisions.
5. Shared liability
Another important advantage is that shared owners have shared liability over the company’s debt. Unlike a single shareholder or a sole trader, you share the financial risk between you, so that if something goes wrong, the impact is reduced.
6. Cost saving
Depending on the type of company you want to start, you could face significant start-up costs. Entrepreneurs often have to dip into their personal savings to get their businesses off the ground. However, starting a business with someone else allows you to split those expenses and increase your initial funding.
Potential problems
There are also some possible drawbacks to think about.
1. It can complicate your relationship
You’re likely thinking of starting a company with someone you already know, maybe a friend or relative. While going into business with a loved one can be exciting, it can also complicate your relationship if you’re not careful.
Let’s say you have a disagreement at work (we’ll be honest, this is likely). It’s difficult to draw a line under it at the office door and not let it affect your private lives.
Equally, a personal matter could interfere with business and distract you from acting in the company’s best interest. That’s why it’s incredibly important to set rules and boundaries at the very beginning.
2. They might not be a suitable candidate
Simply knowing, liking, or getting along with someone isn’t enough to start a company with them. They must possess the right skills and qualities to help prepare your business for success.
If they lack vital attributes, they might not necessarily be the best person to start a company with. However, your personal relationship could be clouding your judgement. So, how can you tell if they’re the right fit?
We’d say that effective communication is critical. Do you tend to argue a lot and struggle to reach a resolution? Do your disagreements get heated and out of control? If so, they’re probably not the right fit.
It’s also vital that you both know and trust each other no matter what. If either person has skeletons in the closet or lacks confidence in the other, starting a company together might not be the best idea.
3. Power struggle
If you struggle to relinquish control, you might find it challenging to start a company with someone else. A business partnership means that important decisions are joint, and you navigate your new business venture together.
However, if one person is particularly bossy and unable to compromise, you could find yourself in a power struggle, leading to more significant disputes.
4. Exit strategy complications
Every company need an exit plan. Of course, you hope for the best for your new company, but there’s always a risk that things might not work out.
Other people could complicate this, though. What if you’d prefer to sell the business while your partner favours liquidation? Agreeing on an exit strategy before starting a business with someone else is vital.
Thanks for reading
Remember to communicate with your business partner if you’re considering starting a company with someone else. Don’t make assumptions just because you know them – have clear and frequent discussions about business matters.
We also don’t recommend starting a business with someone simply because you’re friends or related. Evaluate each person’s suitability for their prospective role – including yours. And be sure to protect yourselves and your company by creating relevant contracts.
Thanks for reading. We hope you found this blog helpful in preparing to start a company with someone else. If you have any questions about the topics we discussed, post them below, and we’ll get back to you as soon as possible.
