The most suitable structure will depend on the circumstances of the business and it is worth seeking tax advice from a professional at this stage.
The most common choices are either a partnership or limited company. A partnership can be run with relative informality but, of course, you will not benefit from limited liability as you would if the business was run as a limited company. This means that you would be personally liable for the liabilities of the business.
Once you have decided on a structure that is best for your business, you will need to set out the rules that should be followed in the running of the business. If you are running a Partnership, the rules would be set out in a partnership agreement. If you are running a Limited Company the rules will be set out in the articles of association. These rules are crucial in not only setting out the day-to-day running of the business but also planning for the future. For example, it would be common for a company’s articles of association to, amongst other things, include pre-emption rights giving the remaining shareholders first right of refusal over the shares of a shareholder who wishes to sell up and leave the business. A mechanism for valuing the shares and agreeing a purchase price would also be included to minimise the risk of any disputes.
A company’s articles of association must be filed at Companies House and, as such, are public documents. You may also wish to enter into a shareholders’ agreement with your fellow shareholders setting out any further agreements between you that you wish to keep confidential, perhaps regarding business financing or long-term strategy.
The setting up of a new business is an exciting and extremely busy time. Adopting standard articles or proceeding without a written partnership agreement can seem attractive in saving time and cost in the short term. However, they are crucial documents that set out the company’s structure and rules which if agreed at the outset can avoid protracted and expensive arguments in the future and secure the stability of the business.
For further advice,contact our Corporate & Commercial team.