Whether you have formed your company already and are thinking about bringing on a new business partner, or you are thinking of starting a new business with someone you already know, there are certain factors to consider before taking the next step.
In this guide, we’ll take you through everything you need to know about bringing on a business partner. We will discuss what the term “business partner” actually means, how to identify the right person, and how to decide what position they will take up within the company. Other key considerations to take into account are equity and control, the onboarding process of a business partner, and settling disputes and planning for exits. Let’s get started.
What is a business partner?
First, let’s establish what the term “business partner” actually means – or doesn’t mean. We’ll use affiliate marketing as an example of what a business partner is not. With affiliate marketing programmes, people advertise brands’ products and services with content and links which, when clicked on by customers and a purchase is made, generate an income for the affiliate. This is not what we mean by a business partnership, nor do we mean other companies that you might deal with regularly.
Another example is when people refer to their suppliers or third parties that they work with as “business partners”. For instance, if you run an online store, you might refer to your e-commerce platform as your business partner. Again, this is not the correct term.
A business partner is another significant person – or persons – that you are looking to join your company, most commonly to drive it forward and facilitate its growth. But a business partner isn’t simply a new employee; it is someone who is going to take up a significant position in the business.
Identifying the right business partner
It’s certainly not the case that ‘one size fits all’ when it comes to finding a suitable business partner. To identify the right person, you should consider some of the following questions:
- Why are you looking for a business partner?
- Is there a particular role, need, or requirement to bring a business partner in?
- What role are they going to play?
- What skillset does the prospective business partner need to have?
- Do those skills complement your own?
- Are they going to be working on something specific in the company, e.g. financial?
There isn’t a single type of person that constitutes a business partner. Instead, it’s important to understand why you need one, and use that as a foundation to identify the person who ticks all the right boxes.
It’s also worth considering a family member or close friend as a potential business partner. They are a common source of business partnerships all over the country and throughout history. However, if you are thinking of bringing in a friend or relative as a business partner, we advise considering their suitability carefully, as mixing a personal connection with a professional one could add a few complexities. As the two intertwine, your professional relationship could be affected and, therefore, your personal one too.
But remember that all relationships can go wrong, so generally, it’s best to be cautious when identifying the right business partner. For more guidance on this, take a look at our 5 essential tips on going into business with family or friends.
Assigning a role to your new business partner
When thinking about bringing in a new business partner, a fundamental question to answer is: what role are they going to play in the company? Will they be a shareholder that requires equity, are they going to be a director, or will they perhaps need to fill both positions? Let’s highlight exactly what these roles mean.
Directors run the business on a day-to-day basis. They are the company’s agents. A director holds a wide range of duties and powers, which are governed by the Companies Act 2006 and the articles of association.
The articles are your company’s principal constitutional document that dictates the rules and principles on which the company is going to be run, and directors operate within the confines of those rules. If you’re thinking of assigning a director’s role to your new business partner, they should be familiar with and understand the articles of association.
One of the biggest responsibilities that directors have within a limited company is the ability to bind the company into contracts. As agents of the company, they can sign on its behalf, as a general rule. An example of other expectations that come with being a director is hiring and firing employees – typical tasks that you’d expect.
But there’s also a huge amount of legal responsibility that is placed on the director, which they should be aware of. Some of those responsibilities include making sure that information is sent to Companies House on time, and ensuring that the company remains compliant with its obligations. So, it’s essential to make sure that a new director will be able to fulfil their daily requirements and keep the company compliant.
Adding new directors to the board
Remember, if you’re currently the sole director of your company, and you bring in a new business partner as an additional director, they will be joining ‘a board’, a collective term used to describe multiple directors. The board of directors acts as a general principle on a collective basis, meaning that when company decisions are made, the majority (more than 50%) of the directors need to approve it to be actioned.
As a general rule, every director has one vote. So, if you bring in a new director as your business partner and you are the only two board members, you’d both need to agree on a business decision for it to go through.
Is a new director right for your business?
As we’ve established, a director’s role covers a wide range of responsibilities. To understand if your new business partner should be a director, you should both think about your goals and intentions of making this move.
If you decide that you’re not 100% sure just yet, or you don’t want to give that much control away to a new partner, consider future objectives and how you can move forward in smaller steps. For instance, you could bring in a new business partner as a senior team member to start with and, if things go well, make them an official director in due course.
Another option is to give them the job title of director without making them a statutory director. While you test the waters of your new partnership, this allows you to assign a level of seniority without legally declaring them a director on Companies House.
A shareholder’s role is to own the business. They have a stake in the company by way of a portion of ownership. Unlike directors, shareholders don’t have many general responsibilities within a limited company.
The principal role of a shareholder is to provide financial backing. This is related to the liability that the shareholder incurs when they take on company shares. Generally speaking, taking on shares means that you agree to accept a certain level of liability, which is usually up to the nominal value of the shares.
Another role that shareholders have is to make important business decisions. While directors make decisions on the day-to-day running of the business, they are limited to the confines of the Companies Act 2006 and the articles, so beyond those is where shareholders step in. For example, approving a director’s loan above £10,000, changing the company name, or changing the foundation of the constitution of the company.
Depending on the decision that the shareholders are making, there are two types of resolutions that they have to pass: ordinary and special resolutions. An ordinary resolution requires a majority vote (more than 50%) in favour, while a special resolution has a higher threshold of more than 75% of votes in favour.
Is a new shareholder right for your business?
Other than their two key roles, shareholders enjoy certain rights. For instance, rights to participate in dividends or capital distribution. So, when considering bringing in a new business partner as a shareholder, keep in mind this perspective of incentivising them, as opposed to assigning extensive responsibilities.
Bringing in a new company director
If you decide that your new business partner should be a director, how exactly do you go about actioning that? For most small companies, the first step is to check your articles of association for any specific procedures you may have to follow when assigning a new director.
Let’s assume your company uses the Model articles. Here are the 3 general steps you need to take to bring in a new director:
1. Sign a letter of consent to act
This document states that your new partner wants to be a director and is willing to act as one. It also affirms that nothing is preventing them from taking on this position – e.g. they meet the minimum age requirement of 16 years old, they are not an undischarged bankrupt, and they are not prevented by the courts from acting as a director.
2. Approve/deny the letter of consent
Once signed by the prospective director, the letter is sent to the company to approve or deny it. At this stage, it’s normally the shareholders that have the power to do this via an ordinary resolution. Oftentimes, however, the existing director(s) can make this decision, as the articles provide them with a level of authority to do so.
3. Update your register of directors
Once the company approves the letter of consent, you must update your register of members and submit it to Companies House within 14 days of the new directorship appointment.
The above is the general process of assigning a new company director. It can vary between companies, and other considerations that may apply to you include a director’s service agreement or an employment contract, for instance.
Bringing in a new shareholder
Should you decide that your new business partner will be a shareholder, the first thing to consider is how many shares they will own. The number of shares you issue will directly correlate to the influence they have over the company.
There are plenty of factors to consider when determining how many shares to issue, such as:
- What both parties want/expect from the partnership
- The stage your company is at (have you completed the start-up phase? Have you secured any funding yourself? What is your growth trajectory?)
- How much control do you want to give away or retain?
- How the addition of a new shareholder will affect the existing ownership
From a procedural perspective, the number of shares you issue to a new shareholder is dependent on the percentage of your company that you want to give away. Let’s go back to shareholders’ resolutions – if you give someone 25% of shares (or more), you will not be able to pass a special resolution without their consent.
Once you’ve addressed these areas, there are 3 main ways to add a new shareholder to your company, the first one being to list them as a shareholder at incorporation. However, if you’ve already formed your company and want to bring a new shareholder in at a later stage, you can do this in the following ways:
- Issuance of shares: This is the creation of new shares and applying them directly to the new shareholder.
- Transfer of shares: When transferring shares, the company’s share capital remains the same, and you simply move across a proportion of it from one holder to another.
The method you choose is dependent on several things, such as whether the new shareholder will be buying shares straight away, and the tax implications when those shares are acquired. Every situation is different and you should seek professional advice.
Assigning share classes and rights
Another consideration to take into account when bringing in a new partner as a shareholder is the rights attached to their shares. This can be organised through different share classes, the most common one being alphabet shares. Alphabet shares are ordinary shares varied on dividend voting and capital distribution means. They are usually called “A” Ordinary, “B” Ordinary, “C” Ordinary shares, and so on.
Alphabet shares allow you to enhance voting rights when bringing in a new shareholder. For example, if you (the owner) have 70 “A” Ordinary shares and your new business partner has 30 “B” Ordinary shares, you may receive 3 votes per share as opposed to 1, which your new partner holds.
The effect of that is the new shareholder receives 30% of dividends that are declared (as you have equal dividend rights), but you retain 90% of the voting power versus that of the new shareholder.
Another example is variable dividend rights. In normal cases, every share has to be paid the same rate of dividends, but variable rights attached to alphabet shares allow you to issue additional rights if you wish. This means that your new business partner receives a higher rate of dividends, without increasing their ownership percentage.
Ultimately, alphabet shares give you the flexibility to adjust power and rights when bringing in a new business partner as a shareholder.
You may wish to bring in a new business partner as a shareholder and issue them growth shares as opposed to immediate rights. Growth shares essentially set a threshold (known as the hurdle) after which a shareholder can start to benefit from their shareholding.
So, the shareholder is entitled to their rights only once that hurdle is surpassed. For instance, if your company is valued at £900,000, the hurdle may be £1 million. The new shareholder only participates once the company grows beyond £1 million.
In the context of bringing in a new business partner as a shareholder, growth shares are becoming an increasingly popular way of incentivising senior company members, which can be a practical way of tailoring your new partnership.
Planning for exits when bringing in a new business partner
Now, let’s address the importance of planning for exits if your new partnership doesn’t go to plan. It is beneficial to think about the potential circumstances that could lead to a breakdown in your partnership for these key reasons:
- It gives your new business partner something to aim for, if the exit is based on certain conditions being met
- It gives both parties some transparency on what those exit conditions are
You may also want to plan for possible disputes (disagreements within the company). Disputes can be problematic, as they could lead to deadlock. If you and your new business partner are equal shareholders and simply cannot resolve a dispute, you can essentially face a state of paralysis, whereby the company is unable to make decisions and move forward, which can often be fatal.
Another possible repercussion of disputes between business partners concerns your company’s reputation. For example, the banks could freeze your account if they hear that you have unresolved internal disputes, which could affect your ability to deal with your business account.
While it may feel pessimistic, it’s useful to plan for possible disputes and exit strategies to avoid a state of paralysis that could stop your company from growing. Remember that it’s just not commercial decisions that should be considered, but also personal ones if your new business partner is a friend or relative, as we mentioned earlier.
A simple way to prevent deadlock is to carefully consider the equity that you give away to a new business partner. For instance, if you are equal shareholders with a 50/50 stake in the company, neither of you will be able to break a deadlock, so it might be wise to split that ownership in a way that, ultimately, gives someone the final say.
If there are only two shareholders, you could also achieve a similar goal by appointing a third shareholder, or another director with a single share with no other rights attached to it, simply to break a tie.
Should you find yourself in a deadlock, one way of unblocking it is through deadlock provisions, which are usually added to a shareholders’ agreement. The essence of such provisions is that one person is bought out of the company and it can then continue to function.
Exit strategies for shareholders
Generally speaking, there are two main ways a shareholder leaves a company. They are:
- They sell or transfer their shares to the remaining shareholder(s)
- They sell their shares back to the company (via the purchase of owned shares)
When selling shares back, the company itself usually pays the shareholder for their shares. Those shares are then given to the company, and it will then have the option to either hold them in treasury (holding the shares in itself until a future date) or simply cancel the shares so that the shares no longer form a part of the share capital.
You can plan for either of these exit strategies with a shareholders’ agreement, which is usually put in place before a new shareholder joins the company. This document may set the conditions through which that exit should take place. It could depend on certain timescales, for example, or performance (individual or company).
Another option is to use good and bad leaver provisions. These provisions are normally linked to employment in a company, and the conditions under which that person leaves the company will determine what is paid back for the shares. Shares are usually redeemed or taken back to the company.
So, if the person leaves on “good” terms, such as resignation or redundancy, the provisions might entitle them to twice the value of what they paid for their shares. However, if they leave on “bad” terms (e.g. if they are fired), then they may get back what they originally paid for their shares.
Exit strategies for directors
In the position of a director dispute, there are also some solutions and exit strategies to prepare for. Similar to shareholders, if you reach a deadlock, you may seek to remove a director from the board.
This is a fairly difficult process, but unless you have special provisions already in place, it is achievable through section 168 of the Companies Act 2006. This section dictates that if you want to remove a director, you must do so by ordinary resolution (more than a 50% majority vote in favour) and at a general meeting with ample notice. At the general meeting, the director whom you are seeking to remove has the opportunity to defend themselves.
In terms of preventing deadlock, you may want to add clauses to your articles of association that provide an easier route to remove a director from the company. If all else fails, you can go to court, which may decide that the best course of action is to wind up the company and distribute the assets fairly.
In summary, when we talk about business partners, we refer to a significant person who joins the company to contribute to its growth. The two key positions that we are concerned with here are directors and shareholders.
Directors and shareholders have very different roles within a limited company, and you should assign them to your new business partner depending on factors such as the company’s goals, the new partner’s skillset, and their eligibility criteria. Once you have made a decision, you should follow the appropriate onboarding process to add your new business partner to the company compliantly.
While new business partnerships are exciting and positive, it’s equally important to prepare for the eventuality that things don’t work out as planned. In the event of a dispute between yourself and your new business partner, you should consult your articles of association, any agreements that you may have in place, and the Companies Act 2006, for solutions and exit options if they are needed.
We hope that you found this guide useful in understanding what a business partner is, the roles they may take up in a limited company, how to onboard them, and how to anticipate and deal with conflict.
If you have any questions or comments, please post them below. If you need assistance with appointing a new director, take a look at our director appointment and resignation service.