Very often people launch businesses with friends and family. The reason, typically, is that friends and family are trustworthy. But what happens when things go wrong, or when people disagree?
In the U.K., many small ecommerce businesses are set up as limited companies. The structure is the legal equivalent of U.S.-based C or S corporations and limited liability companies. Each is a distinct entity owned by shareholders. It is a good way of shielding owners from business liabilities and dividing up responsibility.
Business owners — i.e., shareholders — often forget that the company is a separate legal entity. The inventory, assets, and indeed the cash belong to the company. It can become contentious when one shareholder abuses this and takes stuff as if he owns it. The issue could be ignored when a business is profitable. But when times are hard, it can easily create conflicts.
Business owners … often forget that the company is a separate legal entity.
All too often when a company is created optimism abounds. After all, why set up a business? But that optimism can cause owners to overlook checks and balances. Who is in charge? If two shareholders each own 50 percent, what happens when they disagree? If one partner walks out or becomes incapacitated, can the other owners purchase his shares? Who sets the price of the shares? What happens if they cannot agree?
Not a pre-nuptial
All these issues and more should be addressed at the beginning, when everyone is cooperating. It is too late to address them during an argument. It may seem awkward in the beginning to plan for disagreements. But that’s business. It’s not pre-nuptial agreement. If you cannot consider and plan for every realistic outcome, don’t start the business.
One way to approach the subject is to call it an exit plan. You are not going to remain in business forever, after all. So suggest what should happen if one person had to leave. There are many reasons to exit a business. Not all are confrontational. Use them as examples. Emphasize with fellow owners that signed agreements covering these possibilities would be one less stressful thing to worry about.
Shareholders should also create a will. What happens to their assets upon their death? Shares in the company are assets. But they aren’t a normal asset such as a house, car, or money. A business can be hard to sell or value.
A shareholder could split her assets equally with her children. But this may be difficult or even impossible with shares in a corporation. For example, if you owned 60 percent of a company you are clearly in charge. However, if you left 30 percent to each of your two children, the dynamics change. The 40-percent owner could take over with the help of one of your children. The other could be ignored.
So, business owners should develop a plan. Involve other owners and family members in the discussion. Come to an equitable solution that preserves the business in a manner that meets your wishes.
There are many possibilities. Options include (a) different classes of shares with some being non-voting, (b) dividing the shares in an unequal proportion to give one person control, and (c) putting a controlling interest in trust or assigning to a third party with guidelines. It all depends on your circumstances. Figure it out now, so your fellow shareholders and your family will have one less worry.