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Setting Up a Small Business Together? Get the Groundwork Right

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It is a frequently quoted statistic that 99 percent of businesses in Wales are SME's and it is pleasing to see so much entrepreneurship in this country.

Setting up a small business can be satisfying. However it is important to lay the correct groundwork when it comes to structuring your business, ensuring that the structure is legally sound. This is particularly important if you are going into partnership with someone or if you are creating a limited company and will have fellow shareholders in your business.

Unfortunately, many of my SME clients come to me once issues have already arisen within a partnership or limited company that hasn’t been formalised within a legal framework, and, as is invariably the case, dealing with thorny issues after the fact is more complex than putting safeguarding measures in place before you embark on your new venture.

If you are starting a business, even if it is with close friends or family members, it is likely that issues relating to the ownership structure of that business, or other disputes, will arise at some point in the future. This is the nature of working relationships, particularly with start-ups, since all parties will have an emotional attachment to this new venture, as well as a financial interest.

Such disputes do not necessarily have to put the business at risk, as long as you have the protection of a formal, legal agreement. It is always wise to consult a legal professional to help you draw up your agreement, since they will be well-versed in the common pitfalls to be avoided.

A Shareholders’ Agreement is a contract entered into between all, or some, shareholders in a company, to regulate the relationship between those shareholders and the management. This agreement will also detail the ownership of the shares, the protection of the shareholders, and how the company is run. A Shareholders Agreement should be prepared in conjunction with the Articles of Association. 

Shareholders’ Agreements can give shareholders some protection by detailing what should happen if things go wrong.

There are different types of Shareholders Agreements to suit different models of ownership, designed to safeguard majority and minority shareholders, or those holding equal shares, for example.

In broad terms, a Shareholder Agreement should include details about:

  • The company’s dividend policy;
  • What will happen if a shareholder wants to sell their shares;
  • Whether all the shareholders will enter into the Shareholder Agreement (or whether it will be restricted to the holders of a particular class of share);
  • Which company matters require shareholders consent;
  • Restrictive covenants designed to protect the business;
  • Provisions relating to the finance of the company; and
  • Provisions for how disputes between the shareholders should be resolved.

Without a detailed Shareholders Agreement the landscape of a limited company can be quite hazardous for individual shareholders who may find themselves ousted by a straightforward board resolution, or key business decisions being made against his or her wishes.

Pre-empting such issues by way of a formal agreement can provide the parties with certainty and help you avoid court action and acrimony if things go wrong.

For further advice, please contact our specialist Solicitors:

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