The growth of the digital economy, lower barriers to entry and changing attitudes to work have meant the number of SMEs in the UK has almost doubled from around 3.5m to 5.7m over the past 25 years.
As owning and operating a business becomes increasingly common, doing so with a long-term partner is also on the rise. Research suggests couples represent around 30 per cent of the 4.8 million family businesses in the UK, making them a significant part of the economy. However, blurred lines between personal and professional lives can create additional legal risks, particularly when either the business or the relationship runs into difficulty.
Harry Owen, solicitor in WHN’s Corporate and Commercial team, examines the risks and how couples can mitigate them in the first of a new WHN content series examining modern family and business life and the legal considerations that need to be taken into account.
Business structure
There are several potential structures for a couple’s business:
- Sole trader with an employed partner: this usually involves one partner registering as a sole business owner, while the other is an employee. While there are tax advantages to this business structure, this leaves one partner personally responsible for all business debts and liabilities.
- Partnership: This involves both partners being co-owners of the business. Each partner usually pays tax on their share of the profits and both partners may be personally liable for business debts so a written partnership agreement is strongly advised.
- Limited liability partnership: This combines partnership-style management with limited liability. It requires at least two members and needs to meet Companies House registration and reporting requirements.
- Limited company: This company structure separates the business from its owners, allowing partners to be either shareholders, directors or employees and have assigned voting rights. The structure includes additional reporting, accounting and Corporation Tax obligations.
Many established businesses run by couples are structured as limited companies, with both partners acting as shareholders and directors. It is common for couples incorporating a company together to opt for an equal 50:50 shareholding.
While this can appear fair, it can leave the business vulnerable to deadlock if the shareholders later disagree over key decisions or the future direction of the company.
Breaking the deadlock
Deadlock can arise at board or shareholder level where two individuals have equal voting power and cannot agree on a key decision, such as recruitment, the distribution of profits, borrowing or the future direction of the business.
A deadlock situation can be exacerbated, or occur more frequently in a business involving partners, as personal disagreements, family stress or even relationship breakdown can manifest in business decisions. When the company is unable to reach agreement on key decisions, it can affect relationships with employees, clients, suppliers and other partners.
A particular issue can arise where a company has adopted the Model Articles, the standard form articles of association commonly used by limited companies. While these provide a general framework for how a company is governed and decisions are made, they are not tailored to the circumstances of a company owned and managed equally by two people. Therefore, they may not provide an effective mechanism for resolving a 50:50 deadlock.
Couples should consider putting in place bespoke articles of association, tailored to the ownership and management structure of the company, alongside a shareholders’ agreement. The two documents can work together to establish clear decision-making processes and provide mechanisms for dealing with disagreements before they escalate into litigation.
Shareholders’ agreements
A shareholders’ agreement should sit alongside appropriately drafted articles of association, with both documents tailored to the company and designed to work together.
The agreement can cover:
- Roles, responsibilities and authority of each shareholder
- Decisions which require the agreement of both shareholders
- Salaries, dividends and other payments
- Processes for resolving disagreements: this can involve negotiation, mediation or independent advisers
- The valuation of shares and the rights of one or both parties to buy the other party’s shares
- Contingencies for issues such as serious illness or relationship breakdown
The agreement should also be reviewed as the company grows, ownership changes or the personal circumstances of the shareholders evolve.
Relationship breakdown
The end of a relationship does not automatically mean the end of a business. However, when a relationship breaks down, it can become increasingly difficult for former partners who are running a business to work effectively together.
Relationship breakdown can also create situations where one party believes another party is operating a business in a way which damages their interests.
Section 994 of the Companies Act 2006 allows shareholders to ask the court to intervene when the affairs of a company are conducted in a way that is unfairly prejudicial to their interests.
Many couples do not wish to discuss provisions for relationship breakdown, however a shareholders’ agreement which covers key issues can allow all parties to avoid costly litigation as well as unnecessary damage to a business.
The importance of advice
Every business run by a couple involves different professional, personal and financial circumstances and these circumstances can change over time.
Early legal advice from an experienced professional can help couples review whether standard Model Articles are appropriate for their company and put in place bespoke articles of association and a shareholders’ agreement which reflect their ownership, management and personal circumstances.
WHN Solicitors’ corporate and commercial team has five legal experts with a combined 70 years’ experience. They support all types of family business and can advise business leaders in establishing shareholder agreements, articles of association, as well as supporting companies through ownership or structural changes.
In addition, WHN’s business dispute resolution team can support business owners to resolve a wide array of disputes, such as those arising from relationship breakdown including shareholder disputes.
Contact Harry Owen on 0161 761 8086 or harry.owen@whnsolicitors.co.uk.
