Business Partnership with friends? You’ll need a shareholders agreement

If you are looking to set up a business in partnership with friends, then it's imperative to get professional advice and draw up a shareholders agreement, says Nigel Lander, specialist finance adviser at Business Link for London.

The friendship maybe strong and the business idea great, but you will likely save yourself a whole heap of trouble if you clarify things legally in the first instance when setting up your company, especially in areas such as how much money each of you will put in and what to do in the event of problems arising.

“You will need to go to a commercial lawyer and get a document drafted. It is important that you have all your agreements in place before you start, in order to avoid arguments later. In a situation, for example, where people have invested different amounts, the difficulty is that the one with more shares might gang up on those with minor ones,’ comments Lander.

A shareholders’ agreement outlines the relationship of the parties involved to the agreement, with details of their share of the company, how the business will be managed and what to do in the event of difficulties. It should also cover points such as the right to buy the shares of any other shareholder who wants to sell, the issue of further shares to other shareholders, the right to look at financial information and how much time management gives to the business.

“People may form a business and go in as equal directors, but each person will in effect have three different positions: shareholder, director and employee. Each position has its own rights and responsibilities. Often, tension can be created if one person is better in one area than another,&” believes Lander.

He adds that a shareholder agreement will not only be protecting your investment, but will also help decide areas like remuneration packages.

“Too many people set up businesses with their friends without having core agreements in place. Ensure you have your foundations built before you start – otherwise you may find yourself dealing with some uncomfortable issues from the very beginning,” counsels Lander.

See also: Shareholders’ agreements: What they are and why they are necessary

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Shareholders' agreement

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