You spend more time with a business partner than you do with anyone else so it makes sense to team up with someone you like, trust and respect. Having said this, as great as a partnership with friends or family sounds, it can be fraught with obstacles. Much like a marriage, it’s a legal agreement between two individuals. So before you commit to the relationship you must be sure you can weather the storm, for better or for worse.

As exciting as it may seem to team up with a friend or family member and start a new company, you have to go into the relationship with open eyes.

You are going to be with this person through celebrations and failure, curveballs and monotony, thick and thin.

And you need to know that, if everything goes horribly wrong further down the line, you can protect yourself and the business from the fallout. So what’s the best way to do this?

First things first

You need to hash out exactly what you want from the business, where you see it going and who is doing what. This is not the time to beat around the bush. Sit down and draw up a strategy. Be sure you are both working from the same page. Talk about what happens when one of you has to stay home with a sick child, or if your friend wants to take a vacation. Cover as many concerns as possible and make a list of all types of contingencies.

Decide who owns what

Decide who owns what percentage of the business. You may decide to split the ownership 50/50, but there may be reasons for not doing this. Maybe one of you is going to be full-time and the other only part-time? Maybe one has more equity or capital to invest in the outset?

Put together a contract

Create a written agreement, describing who does what, how much of the business each person owns, and listing what happens if someone wants to leave the business or if there are problems. Then make this agreement legal using a solicitor.

You should also consider registering your business as a limited company through Companies House.

What is a limited company?

A limited company is a company in which the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company.

Limited companies may be limited by shares or by guarantee. By limiting your company, you will give it a separate legal identity, limit the owner’s liability, benefit from some tax advantages and give you options for raising new capital. It also adds credibility and prestige to the business and means nobody else can copy your company name.

Draw up a shareholder’s agreement

This is a vital part of protecting the business and your stake in it.

It also prevents arguments ensuing later down the line – something which becomes even more tricky when you have a close personal relationship with your business partner outside the office.

There is nothing worse than having to tackle awkward conversation around the family dining table or continue with a friendship which has been tarnished by workplace disagreement.

What is a shareholder’s agreement?

A shareholders’ agreement is the business version of a marital pre-nup.

It defines what happens if people want to go different ways. It is a safeguard offering a set of terms to prevent complications further down the line, protecting the enterprise itself as well as your own investment.

A shareholders agreement will:

• set out rights and obligations
• regulate the sale of shares in the company
• describe how the company is going to be run
• provide an element of protection for minority shareholders
• define how important decisions are to be made.

What should you include in your agreement?

The key provisions to include in a shareholders’ agreement relate to:

1. issuing and transferring shares, including provisions to prevent unwanted third parties acquiring shares and how a shareholder can sell shares
2. providing some protection to holders of less than 50 per cent of the shares – including requiring certain decisions to be agreed by all shareholders
3. running the company – including appointing, removing and paying directors, deciding on the company’s business, making large capital outlays, providing management information to shareholders, banking arrangements and financing the company
4. paying dividends
5. competition restrictions
6. dispute resolution procedures.

A final word of warning

Don’t end up in a complicated, distressing and costly legal battle down the line because you failed to get the basics right at the start.

Working with friends and family can be hugely rewarding but it pays to make sure you dot all the i’s and cross all the t’s before you start to trade.

Henry Catchpole is CEO of Inform Direct. 

Further reading on setting up a company

• Considering the personal cost of setting up a company