Starting a company with two (or more) people. What to watch out for?

Number of partners in an LLC.
or why less is sometimes more

How many partners should own the company? The answer is easy: an odd number, but three is too many. We say this with exaggeration, but practice also shows us that this well-known statement definitely has something to it.

We can't count on the fingers of all our employees the number of times we have set up a company with two or more owners and within a few months (often weeks) dealt with the transfer of shares between the partners, liquidation or sale of the company. And these are the better cases. Often, unfortunately, a situation arises from which there is no way out and the previously inseparable partners simply cannot agree on what to do with the company. Complications can be avoided.

What you need to know before you start a two-person business

Starting a business with more than one person is a little more complicated than owning it alone. What to think about and find out beforehand?

Trust and the same view of the business

Before drawing up a memorandum of association, visiting a notary and planning a bright business future, think carefully about whether you really want to go into business with other people.

Do you know how they behave in times of crisis and stress? Do you trust them? Do you agree on the company's vision, strategy or investments? Business relationships often fail on these points, so don't underestimate them. If you're clear on the basics, move on.

The difference between a managing director and a partner

It is important to understand what it means to be a partner and what the role of a managing director is in a company. In a nutshell, the difference is as follows:

• A partner holds a share in the company - he is the owner. He or she puts up the share capital and votes at the general meeting. He does not act for the company and does not guarantee its liabilities with his assets. When there is only one, he owns 100% of the shares of the company and therefore 100% of the voting rights. If there are more than one shareholder, they can divide the shares freely and then state the ownership structure in the articles of association.
• The managing director acts on behalf of the company - he manages it and makes decisions. He signs contracts, has access to bank accounts and accounting. He is also liable for debts with his own assets - if he does not act with due care and the company gets into trouble, he may be obliged to compensate the company for damages.

Both functions must be represented in the company. A company may have several partners and managing directors. It is also possible for one person to be both managing director and partner. If you want to know more details about their duties, rights and liabilities, read this article on the differences between a partner and a managing director.

Set the terms in the articles of association

You've made it clear that you trust the business partner, and you also know the difference between a partner and an executive. Now it's time to move on to the next step - drawing up a shareholders' agreement. When setting up a multi-person company, it's usually not worth using a generic template from the internet. Therefore, discuss your situation and set up the terms with an attorney who will draft a customized agreement for you.

And why go into detail at the beginning? Company formation is a relatively inexpensive affair, so many clients are unpleasantly surprised by the cost of subsequent amendments to the articles of association, liquidation of the company and other operations with it. Subsequent modifications can cost you tens of thousands.

We have some practical tips to help you eliminate the risk. Answer these questions:

Who will own the business?

All of you, or just one of you? Define your shares in the articles of association, deposit the share capital and vote at the general meeting. Remember that in the case of two shareholders, 50:50 is not always ideal. Tell yourself in advance who is right. For example, you can divide the shares according to the contribution of each of you.

Who will run the company?

It is the responsibility of the managing director to manage, act on behalf of the company and make decisions. When the company has only one, his powers are clear. If a company has more than one managing director, there are two possibilities:

• The managing directors represent the company jointly. This means that approval of contracts and other decisions must be made by all of them; they will not be valid without the signatures of the other managing directors.
• The managing directors represent the company separately. Each of you has the right to make decisions alone for the whole company. In the articles of association, you regulate whether this applies to all cases, or you specify the powers by, for example, setting limits (i.e. under what conditions you act alone and when all must decide).

What happens if one of you decides to sell his share?

It is advisable to include a so-called right of pre-emption in a shareholders' agreement between several owners. This means that if one shareholder wants to exit the business and sell their share, they must first offer it to the other shareholders. The price for the transfer of the LLC share is subject to agreement. The share can be sold for its nominal value, i.e. a proportion of the share capital, or for a larger amount based on the value of the company.

Resolution of problems between shareholders and managing directors

If the cooperation does not work as you would like in the future, you have several options for what to do. The important thing is whether you will be able to agree on a course of action. The longer a company has been in business, the more revenue, assets and liabilities it has - and then negotiations are usually more difficult.

Transfer of shares in an LLC and amendment of the articles of association

When there are difficulties between shareholders, there is often a division of shares. A shareholder transfers his share to another or to another person outside the company (but all existing shareholders must agree to this). At the same time, you can change the name of the LLC - for example, if it contained the name of the person leaving the company.

What about the managing directors? If there are complications, the partners can remove the managing director. If you yourself are the managing director and you no longer wish to be one, you can resign without the consent of the shareholders. The executive director's tenure in the company ends on the effective date of resignation (pursuant to Section 58 of Act No. 90/2012 Coll.), which is subsequently declared by the entry of the change in the Commercial Register.

Sale or liquidation of the company

After unsuccessful negotiations, the shareholders may come to the conclusion that they no longer wish to continue the business in any way. Then two options are usually possible:

• Sale of the Ltd. The company will continue to exist, but with a new shareholder. Offer the company directly to another entrepreneur or arrange the sale through a specialist ready-made company. Do you want to sell your LLC? Contact us to discuss what we can do for you.
• Liquidation of an LLC. This process isn't easy, you'll need a specialist at hand. The cost of liquidating a company starts at EUR 800 excluding VAT. Eventually your Ltd will be struck off the register of companies and the company will cease to exist altogether. If you have reached this stage, we will be happy to help you with the liquidation.

Do you need help with your business? Contact us

If you're unsure how to set the terms of your articles of association or if you've found yourself in a situation you can't resolve, contact us. We can help you with company formation and drawing up contracts, with amendments, with share transfers and with the sale or liquidation of the company. Our specialists will make sure that your business runs smoothly and without worries - whether it is just starting or ending.