Becoming a business partner - legals

[Venisonpie]

I'm in the throws of joining an existing Ltd company taking a 20% share (I will have a 20% stake in terms of share capital, it has no meaningful assets).

The owner is currently the sole shareholder with 1 ordinary share. We are looking to legally structure the business to facilitate the new arrangement including a set of binding "what ifs" to provide instruction should we want to part ways, one of us dies etc.

I could do with some advice on how best to do this. We don't need individual representation as we've agreed terms (I will be getting the equity FOC as part of the onboard). There are Articles and a Memorandum of association but I've not read through these yet. Any advice or suggestions to action this in the most straight forward but appropriate way would be gratefully received.

[wattsm666]

Get a lawyer to draft a shareholders agreement.

[Miserablegit]

wattsm666 said:

Get a lawyer to draft a shareholders agreement.

+1 what you might “save” now by doing it yourself will cost you 10x as much in sorting it out later

[MaxFromage]

As above re legals.

Make sure the shares don't actually have any value (i.e. get the company accountant to confirm). Otherwise you could get a shock in the future.

[Dog Biscuit]

The worst ship to ever set sail was the partnership

Been there and done it - never again. Tears at bedtime

[Bob-iylho]

Dog Biscuit said:

The worst ship to ever set sail was the partnership

Been there and done it - never again. Tears at bedtime

25 years with the same business partner, absolutely wonderful. No agreement, a handshake only, we got lucky.

[Venisonpie]

Thanks all, shareholders agreement sounds good. What's the risk if the shares have a value?

And the natural follow on question, can anyone recommend a solicitor for this? TIA.

Edited by Venisonpie on Wednesday 26th March 07:40

[StevieBee]

Venisonpie said:

Thanks all, shareholders agreement sounds good. What's the risk if the shares have a value?

That's the primary reason for having a shareholders agreement.

It's all very easy and nice and lovely when there's no financial value involved, just an idea, ambition and positive vibes. The fun starts when value starts become significant as people's perceptions of things can (often but not always) diverge considerably from others. Having an agreement in place provides the means to prevent that divergence or at least the basis of remedy should it occur.

I've been involved in the formation of three such agreements and would say it is by orders of magnitude, the most unpleasant thing in business I've experienced (and I've been declared bankrupt once). You're sat with people you like and respect, with a shared ambition with whom you're looking forward to a bright and prosperous future..... yet in order to prepare a meaningful agreement you have to assume they will at some point try to rip you off. And they're doing the same with you. And then write down what will happen if that's the case.

But it is a critical necessity.

[TownIdiot]

If the company already has a value then if you are given shares then you will be liable for tax, unless it's all set up properly.

If the company has no value then they can just issues new shares to you both.

It's absolutely vital that you get a shareholder agreement drawn up. It's a world of pain when these things end in a way that isn't amicable but a properly drawn up agreement is at least a start.

[Venisonpie]

Thanks both, yes we've discussed the situation of "what if's" - we fall out, fraud, death etc although I'm sure there's a lot we've not thought of. It's super useful and we do appreciate the importance of this, we are good friends, and want to protect that. By having a robust legal agreement it ensures clarity and transparency from the off.

With regard to tax on shares, I don't believe the one share has a nominal value (but will check) however being an existing business there is obviously a value to it. As part of the negotiation for me becoming a partner we used a multiple of EBITDA to estimate the value of the company (surprisingly low) and then applied a percentage to it to represent my portion's worth (none of it tangible of course).

Edited by Venisonpie on Wednesday 26th March 08:04

[TownIdiot]

You definitely need to get proper advice then as if you simply get given new shares you will almost certainly be liable to tax at that point rather than when you cash them in.

There will be ways of doing what you want relatively easily but it needs to be done by someone who knows what they are doing.

[Venisonpie]

TownIdiot said:

You definitely need to get proper advice then as if you simply get given new shares you will almost certainly be liable to tax at that point rather than when you cash them in.

There will be ways of doing what you want relatively easily but it needs to be done by someone who knows what they are doing.

Cool, thanks.

[MustangGT]

TownIdiot said:

If the company already has a value then if you are given shares then you will be liable for tax, unless it's all set up properly.

If the company has no value then they can just issues new shares to you both.

It's absolutely vital that you get a shareholder agreement drawn up. It's a world of pain when these things end in a way that isn't amicable but a properly drawn up agreement is at least a start.

This.

Also point to note. If there is only 1 share, how does the shareholder propose to give you 20%?

You are already into paperwork to amend the share structure to achieve this, however, this also brings opportunity in terms of having different share classes that can be equal value in terms of voting rights or not, and equal value in dividend distribution, or not. Simplest would be same class, so 1 share for you, 4 for him (or her). This automatically means he has control with 80% of the voting rights, and also 80% of any dividend distribution. Would you be happy with that?

All this needs covering by a legal expert.

What is being proposed as the buy in price? The share nominal value can be anything from 1p upwards. Are you paying a premium over nominal? I would expect it. Whatever you pay for the share(s) is the figure for future capital gains tax calculations.

[Venisonpie]

MustangGT said:

This.

Also point to note. If there is only 1 share, how does the shareholder propose to give you 20%?

You are already into paperwork to amend the share structure to achieve this, however, this also brings opportunity in terms of having different share classes that can be equal value in terms of voting rights or not, and equal value in dividend distribution, or not. Simplest would be same class, so 1 share for you, 4 for him (or her). This automatically means he has control with 80% of the voting rights, and also 80% of any dividend distribution. Would you be happy with that?

All this needs covering by a legal expert.

What is being proposed as the buy in price? The share nominal value can be anything from 1p upwards. Are you paying a premium over nominal? I would expect it. Whatever you pay for the share(s) is the figure for future capital gains tax calculations.

Thanks, I imagine we will create 4 more shares with 1 for me and 3 for her creating the 80/20 split as you say.

We will agree between us how the voting rights work etc. I'm actually not buying in, I'm being given 20% but as you say this can't be reflected tangibly currently. What I hadn't considered is the tax implication of being given 20% of any shares and hoe this is calulated or paid.

[TownIdiot]

Venisonpie said:

Thanks, I imagine we will create 4 more shares with 1 for me and 3 for her creating the 80/20 split as you say.

We will agree between us how the voting rights work etc. I'm actually not buying in, I'm being given 20% but as you say this can't be reflected tangibly currently. What I hadn't considered is the tax implication of being given 20% of any shares and hoe this is calulated or paid.

Why can't it "be reflected tangibly"?

I know it's a bit boring and will incur expense but you really need to sit down with a professional.

A 20% share of a small business with no shareholder protection is more or less worthless.
The good news is that you won't pay any meaningful tax, the bad news is you won't have many protections should the major shareholder choose to do something that doesn't suit you.

It would be pretty straightforward to achieve what you want but you won't be able to do it yourselves if you don't know the correct procedures or how to create the correct documents.

[MaxFromage]

Venisonpie said:

Thanks, I imagine we will create 4 more shares with 1 for me and 3 for her creating the 80/20 split as you say.

We will agree between us how the voting rights work etc. I'm actually not buying in, I'm being given 20% but as you say this can't be reflected tangibly currently. What I hadn't considered is the tax implication of being given 20% of any shares and hoe this is calulated or paid.

This is where you will need a discussion with the company accountant. There are a few options available if the company has significant value such as growth shares. It really does depend on the value of those shares. HMRC have standard criteria for share valuations.

[Venisonpie]

TownIdiot said:

Venisonpie said:

Thanks, I imagine we will create 4 more shares with 1 for me and 3 for her creating the 80/20 split as you say.

We will agree between us how the voting rights work etc. I'm actually not buying in, I'm being given 20% but as you say this can't be reflected tangibly currently. What I hadn't considered is the tax implication of being given 20% of any shares and hoe this is calulated or paid.

Why can't it "be reflected tangibly"?

I know it's a bit boring and will incur expense but you really need to sit down with a professional.

A 20% share of a small business with no shareholder protection is more or less worthless.
The good news is that you won't pay any meaningful tax, the bad news is you won't have many protections should the major shareholder choose to do something that doesn't suit you.

It would be pretty straightforward to achieve what you want but you won't be able to do it yourselves if you don't know the correct procedures or how to create the correct documents.

Yes, completely agree - definitely will seek legal advice. I'm trying to get ourselves as informed as possible to allow those sessions to be meaningful. The advice this far has been really helpful - but if a learning curve for us.

[Venisonpie]

MaxFromage said:

This is where you will need a discussion with the company accountant. There are a few options available if the company has significant value such as growth shares. It really does depend on the value of those shares. HMRC have standard criteria for share valuations.

That's useful to know. The company is a small retail outlet that doesn't have much value. EBITda is circa £100k on a 700k turnover.

[MaxFromage]

Venisonpie said:

That's useful to know. The company is a small retail outlet that doesn't have much value. EBITda is circa £100k on a 700k turnover.

You certainly need to clear up what value the company would have then, because depending on what adjustments are needed to those figures, there could actually be some value for HMRC to argue over if they were ever inclined.

[LooneyTunes]

The advice to get a proper shareholders' agreement is sound but be aware that you're potentially opening up Pandora's Box.

Venisonpie said:

Thanks both, yes we've discussed the situation of "what if's" - we fall out, fraud, death etc although I'm sure there's a lot we've not thought of. It's super useful and we do appreciate the importance of this, we are good friends, and want to protect that. By having a robust legal agreement it ensures clarity and transparency from the off.

I know there are things that I would want in a SA that some people (like you and your prospective partner) don't appear, from what you've written, to have thought about. A solicitor is likely to raise various such things and it could force some difficult conversations especially given that the company already seems to have some value.

It's arguably better to get it all out in the open and done at the outset but be ready for it.

It is also worth thinking about who the solicitor is actually acting for. Some people would advocate ensuring taking separate legal advice to your partner but that's obviously something that would potentially set a different tone for the discussion.