Starting a business with a friend or family member

Starting a business with someone you already know can feel like an advantage from day one. You may already trust each other, understand how the other person works and share the same enthusiasm for the idea.

But a strong personal relationship is not a substitute for clear business arrangements. In fact, the closer the relationship, the easier it can be to avoid awkward conversations about money, ownership and responsibility because everyone assumes things will work themselves out.

That is exactly why those conversations should happen before the business becomes complicated. Agreeing the fundamentals early can protect both the company and the relationship behind it.

1. Decide who will own what

The first question is one many founders rush through: who actually owns the business?

If you are starting a limited company together, ownership is normally represented through shares. It can be tempting to default to a 50/50 split because it feels fair, but equal ownership is not automatically the right answer.

Think about what each person is contributing. Is one founder investing more cash? Is one bringing an existing customer base, intellectual property or equipment? Will both work full time in the business, or will one remain employed elsewhere?

The important thing is not to reward every contribution with a complicated formula. It is to have the discussion openly and agree an ownership structure you both understand.

When you register a company, details of its shares and shareholders form part of the incorporation process. GOV.UK also notes that people with significant control, such as someone holding more than 25% of the shares or voting rights, need to be identified. [1]

2. Agree who is responsible for what

Two founders can quickly become frustrated if both think the other person is handling the same task, or if one person quietly ends up doing most of the work.

Divide responsibilities while the business is still simple. One person might lead sales and customer relationships while the other takes responsibility for operations, finance or delivery.

That does not mean roles can never change. They almost certainly will as the company grows. But clear starting responsibilities reduce duplication and make accountability much easier.

If both founders become directors, remember that directorship comes with legal responsibilities. Directors are responsible for running the company and making sure its records, accounts and reports are dealt with properly, even if some day-to-day work is delegated to an accountant or another adviser. [2]

3. Decide how major decisions will be made

Day-to-day choices are usually straightforward. The difficult questions are the ones that change the direction of the business.

What happens if one person wants to borrow money and the other does not? Who decides whether to hire the first employee, take on premises, bring in an investor or spend a large amount on equipment?

Agree which decisions can be made individually and which require both founders to approve them.

This is especially important in an equal partnership. A 50/50 structure can work perfectly well while both people agree, but it can also create deadlock if there is no process for resolving a serious disagreement.

Some company decisions also require formal shareholder approval. GOV.UK notes that changes such as altering the articles of association or removing a director can require shareholder resolutions. [3]

4. Be clear about money from the beginning

Money is one of the quickest ways to turn a business disagreement into a personal one.

Before trading, agree how much each person is putting into the business and whether that money is an investment, a loan to the company or something else.

Then discuss how you expect to take money out. Will both founders initially draw the same amount? What happens if one works full time while the other contributes only a few hours each week? What if the business cannot afford to pay either of you for the first few months?

Do not assume that friendship or family ties will make these conversations easier later. They are usually easier before either person feels financially dependent on the business.

An accountant can help you understand the implications of salaries, dividends, directors’ loan accounts and other ways directors may receive money from a limited company.

5. Discuss what happens if one person wants to leave

Founders naturally spend more time discussing how the business will begin than how their working relationship might end.

But people’s circumstances change. Someone might receive another job offer, move abroad, become ill, need more family time or simply decide that running the company is not for them.

Agree in advance what should happen to that person’s shares or interest in the business. Can they sell to somebody outside the company? Does the other founder have the first opportunity to buy them? How would a price be decided?

You should also consider more difficult scenarios, including long-term incapacity or death. These are uncomfortable subjects, but dealing with them while everyone is getting along is far easier than trying to improvise during a crisis.

6. Protect the business if you disagree

A disagreement between friends or relatives can become more emotional than a disagreement between ordinary business partners because there is already a personal relationship at stake.

Plan for disagreement without assuming it will happen.

That might mean agreeing that certain disputes go to mediation, bringing in an independent adviser for specific decisions or setting out a process for breaking a deadlock.

If you are forming a limited company together, the articles of association provide rules for how the company is run. GOV.UK explains that companies can use standard model articles or create their own. [4]

Founders may also choose to put additional arrangements into a shareholders’ agreement. Because this can affect important legal and financial rights, professional legal advice is sensible when deciding what should be included.

7. Decide whose relationships, ideas and assets belong to the business

Many businesses begin with assets that already existed before the company did.

One founder may have designed the brand, built a website, created software, developed a product or brought in a valuable customer relationship. Another may contribute tools, equipment, stock or specialist knowledge.

Be clear about what remains personally owned and what is being transferred or licensed to the business.

The same principle applies to future work. If one founder creates intellectual property while working for the company, it should be clear whether that belongs to the individual or the business.

This may seem overly formal when the company consists of two people around a kitchen table, but uncertainty over ownership becomes much more important if the business later attracts investment, is sold or the founders separate.

8. Agree what success actually looks like

Two people can be equally committed to a business while wanting very different things from it.

One founder may want to build aggressively, reinvest profits and employ a team. The other may be happy with a smaller company that produces a comfortable income and offers more control over their time.

Neither ambition is wrong, but the difference matters.

Talk about the next three to five years. Do you want to stay hands-on or build a team? Would you consider outside investment? Do you want to sell the company eventually? How much financial risk are you each prepared to take?

You do not need identical answers to every question. You do need enough alignment that one person is not building towards rapid expansion while the other is quietly trying to preserve a lifestyle business.

Put the awkward conversations before the paperwork

Starting a business with a friend or family member can work extremely well. Existing trust, complementary skills and a shared history can give the company a strong foundation.

The mistake is assuming that trust means formal conversations are unnecessary.

Agree ownership, responsibilities, decision-making, money and exit arrangements while the relationship is good. Decide how disagreements will be handled and make sure both people understand what they want the business to become.

Then put the appropriate legal and financial structure around those decisions.

Clear arrangements do not make a partnership less personal. They reduce the number of situations in which either person has to guess what the other expected, which can be one of the best ways to protect both the business and the relationship behind it.