Treat it like a marriage

Most people who marry for love can’t imagine a divorce at the outset, but you should plan for the worse case scenario when starting a business with other people, including family members. If you’ve not been in business with them before, you may find out too late that their attitude towards the business is very different to yours. And you might want a get out option. Trusting others implicitly is all very well, but you need a safeguard if they turn out not to be all you thought they were! The courts are littered with legal actions from people who didn’t have a plan before they went ahead.

1.Choose the legal entity with care

A legal entity is a particular type of business vehicle within which your business will act. You have to choose one.The most usual options when starting a business with other people are partnerships or limited companies. Be clear about what’s best for both/all of you and what would be useful in the years to come. Partnership tax is very different from the tax a limited company and its shareholders pays. Then of course the liability of partners is unlimited whereas the shareholders of a limited company are only liable to the value of their shares.

Setting up a limited company just to save tax is no good unless you anticipate making a net profit of at least £50,000. You’ll have higher accountancy fees if you incorporate and lots more rules to follow.

Speak to an accountant, and explain your business to them in detail so that you can make an informed decision. If you choose the wrong business vehicle you could pay extra accountancy fees to remedy the matter and will bitterly regret the time and effort it will take you personally to sort things out.

2.Set up a written agreement when starting a business with other people

Before you start up draw up a written agreement between the partners/shareholders to cover expectations of performance, how much you’ll take from the business, capital invested in the business, exit routes from the business and competition clauses for leavers. Go and see a commercial solicitor. This is going to be a really valuable insurance policy if you’re starting a business with other people, so don’t cut corners.

Agree in writing what constitutes misconduct. There are always some people who stretch the idea of expenses over the line into the personal area. And you want to stop other partners/directors misusing the business equipment/logo, or competing against the business.

Plan for the worse case scenario now and everyone will know what to expect.

3.Agree a business plan and an earnings plan

You do have a written business plan don’t you? You’ll need one to make sure you and your fellow partners/directors are clear what business you’re in and how you’re going to operate.

Agree early on, and in writing, when you’ll take earnings from the business. Different people have different cashflow needs. If you have an agreed business plan at the start showing how much income people can expect according to profit levels the business can grow steadily without being deluged with unreasonable requests that could jeopardise the business cashflow.

4.Set up the responsibilities early on

Give responsibility for the legal/accounting side to one partner/director, but make sure that at least one other partner/director has access to the bank account and bookkeeping system.

Get an accountant on board early on if you’re starting a business with other people. You’ll need advice on setting up, and other matters such as how to run your business in accordance with HMRC’s rules. You’ll need help to comply with the Companies Acts if you’re running a limited company. An accountant can advise on how to set up your accounts on a bookkeeping package. You’ll need good quality information from your accounts to help you run your business and keep the authorities happy.

And if you need more advice and guidance, give me a call on 01737 559211 or email me:

Frances Conn, Figureweave  Accountancy Ltd

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