Q. A college friend and I set up a small business about 10 years ago. It brought in a small but steady income for relatively little effort on both of our parts. We have a chance to substantially grow the business. My friend does the bulk of the day-to-day work, but I put in the hours when we need to. We are now thinking about making the business a bit more formal. To be fair, my friend is probably better placed to take the business over – it needs one person more or less full time and I cannot commit to be full time with my day job. We don’t know how to go about the details of my exiting the business. Can you advise the best way to proceed?
Dear Reader,
Unless you had formally incorporated as a limited liability company or similar in the past, you and your friend would now be legally classed as a partnership. It is highly advisable that any partnership have a formal partnership agreement, which would set out what your contributions to the business were to be, what responsibilities you have, your ownership shares, and what might happen if one or either of you want to leave the partnership or dies, etc.
Operating as a partnership means that you are both fully personally liable for any business expenses, loans, taxes, etc.
If matters are now becoming more formal, it may well be appropriate to now set up as a limited liability company – and you should give serious consideration to entering into a shareholders agreement. This would, much like a partnership agreement, set out the proportion in which you own the company, etc.
Given that your friend is going to be responsible day to day, presumably the bulk of the shareholding and day to day profit is going to mainly flowing to him.
Alternatively, you could agree a ‘round’ figure to buy out your share in the business, which he could then pay to you – potentially over time, if the new phase of the business needs some breathing time to get off the ground.
You should remain a shareholder until sums due to you are discharged. If you cannot come to final agreement on a figure, your solicitor can point you towards experts that value businesses for the purposes of sale – however the cost of such services can sometimes be prohibitive.
Again, any agreement to buy out your interest should be drafted by your solicitor and each of you should have the chance to take your own legal advice.
You could agree to do work for the business as needed, but it is important to note that different tax considerations would be brought to bear if you were a director/shareholder of the business versus ‘just’ doing some work for the business.
Operating as a limited liability company has certain cost overheads, you have to file annual accounts, have regular company meetings, etc. However, your liability is limited, i.e. you are generally only liable to lose your investment in the company.
Regardless of whatever format you choose for your business. you would be well advised to take all necessary advices from your solicitor as well as your accountant to ensure that matters are set up in a sensible and tax efficient manner.
