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50/50? BEWARE – BE VERY AWARE

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So you’re starting a business? You’ve had a great idea, you’ve always wanted to do it, you’re fed up working for someone else, you want a lifestyle change, you’ve been sacked or the MD made an unrequited pass at you at the Christmas party. Great. Go for it – JDI as someone once said.

So what’s going to be the structure of your business? On your own, self employed? No big problem here. Get the usual advice from an accountant/solicitor/business mentor and get started. It’s not that difficult and in a few days or weeks hey presto, you’re launched into your new life and you don’t know if you will have enough money coming in after the first month to pay your mortgage. Welcome to business – well one part of it – other parts can be more fun.

Forming a partnership or limited company? Bigger decisions to be made here and take some time over this as the wrong decision now can come back to bite you in years to come. You may be working with your wife/husband/partner/son or other member of your family. This is a little more tricky because of the relationship you have with them and of course you don’t want to hurt anyone’s feelings – probably. You may have no doubts whatsoever that continuing good relations will subsist with your relations! But, you may come home one day and find your clothes on the front lawn and before you can say Jack Robinson you’ve lost your house, car, dog and a couple of your kids. But have you lost your business? A contract written up between you and the member/s of your family when you form the business can answer this question and hopefully you will be able to sort out this part of the failed relationship as amicably as you can in the circumstances. So, even with family members, take and heed legal advice before you start.

The same goes if you go into partnership with anyone else, especially if you are forming a limited company with someone. It’s so easy to do nowadays. You can get a limited company up and running in hours for very little cost – perhaps as low as £30. But you will need to appoint at least one director – you no doubt – and probably your ‘partner’. You will also need to issue shares and here’s where you need to pause, pour yourself a drink – and think. Are you going to be equal partners, is that what you have agreed? If so, then you need to issue at least one share each or 100 or 1,000 each. It matters not as long as they are equally divided. But remember, once shares have been issued you can’t force someone to sell or relinquish those shares unless you have a prior agreement in place. And that’s where the problem comes in. Without a shareholders agreement and/or the correct memorandum and articles of association in place you can find yourself in serious trouble in the future. Not all partnerships last that long – some do – but many collapse for one reason or the other. You may want to sell the business in a few years but your 50/50 partner doesn’t. Then you are stuck and we have knowledge of where that happened in one instance where one 50% partner had the business sold to potential suitors, which would have left both parties very wealthy and with a big retirement pot, but the other party didn’t want to sell and had unrealistic views of the value of the company. He dug his heels in and refused to sell. The relationship subsequently deteriorated so much that they split up and the intransigent partner ran the hitherto very successful business into the ground and bankruptcy shortly afterwards, leaving both partners short of the couple of £million they each would have had if they had sold.

So the advice is? Take advice – see a lawyer and make sure you put in place sensible agreements to cover any eventuality so you can sleep in peace – rather than Rest In Peace.

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