Starting a company with two (or more) people. What to watch out for?
You know each other well, maybe you've been partners, siblings, classmates or best friends since kindergarten. You have a great business idea, so you decided to start a company together. What could go wrong, you think. Know that even the best personal relationships won't guarantee you a successful business partnership. What to look out for when you're setting up an LLC with two or more people? And what are the options if the business doesn't work out? Find out in this article.
NUMBER OF PARTNERS IN AN LLC – 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 some merit.
We can't count on the fingers of all our employees how many times we have set up a company with two or more owners - and within a few months (often weeks) we have dealt with the transfer of shares between the partners, liquidation or sale of the company. And those 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 even before the company is formed.
WHAT YOU NEED TO KNOW BEFORE SETTING UP A COMPANY WITH SOMEONE ELSE
Setting up a company in multiple people is a bit more complicated than when you own the company yourself. We will advise you on what to think about and find out beforehand.
TRUST AND THE SAME VIEW OF BUSINESS
Think carefully about whether you really want to go into business with other people before drawing up a partnership agreement and planning a bright business future. 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 SHAREHOLDER
It is important to understand what it means to be a partner and what the role of the managing director is in the company. In short, they differ as follows:
- A partner holds a share in the company - he is the owner. He or she deposits the share capital and votes at the general meeting. He does not act for the company and is not liable with his property. 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 - 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.
SET THE TERMS AND CONDITIONS IN
THE ARTICLES OF ASSOCIATION
You've made it clear that you trust your business partner, and you know the difference between a partner and an executive. Now it's time to move on to the next step - drafting a partnership agreement. When starting a multi-person company, it usually doesn't pay to use 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. These modifications can cost you tens of thousands. We have some practical tips to help you eliminate the risk. Answer the following questions:
WHO WILL BE THE OWNER OF THE COMPANY?
All of you, or just one of you? Accordingly, 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.
PRACTICAL EXAMPLE #1 - TWO COMPANY OWNERS
Two friends decided to start a company. Pavel has a business plan, know-how and contacts. Petr goes into business with him, puts in his finances and knowledge about the company's management, because Pavel lacks it. In the memorandum of association they set that Pavel will have 75% and Petr 25%.
WHO WILL RUN THE COMPANY?
Management, acting on behalf of the company and decision-making is the responsibility of the managing director. When a 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 the approval of contracts and other decisions must be made by all of them, without the signature of the other managing directors they will not be valid.
- Managing directors represent the company independently. Each of you has the right to make decisions on behalf of the entire company. In the articles of association, you can specify whether this applies in all cases, or you can specify the powers by setting limits (i.e. under what conditions you act alone and when all of you must decide).
PRACTICAL EXAMPLE #2 - TWO MANAGING DIRECTORS OF A COMPANY
Peter and Paul from the previous example are both executives deciding separately because it is more convenient for them. However, Peter wants to control the spending of higher amounts because of his financial input. Therefore, when they set up the company, they stipulated that contracts for services and purchases worth more than 50,000 CZK must be signed by both of them.
WHAT HAPPENS IF ONE OF YOU DECIDES TO SELL YOUR SHARE?
It is advisable to include a so-called pre-emption right in a shareholders' agreement between several owners. This means that if one shareholder wants to exit the business and sell his share, he 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.
SOLVING PROBLEMS BETWEEN PARTNERS AND EXECUTIVES
If future cooperation doesn't work to your liking, 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 OF S.R.O. AND AMENDMENT OF
THE ARTICLES OF ASSOCIATION
When there are difficulties between the partners, the shares are often divided. A shareholder transfers his share to another shareholder or to another person outside the company (however, 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 CEOs? In case of complications, the shareholders 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'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 partners may come to the conclusion that they do not want to continue the business in any way. Then two options are usually possible:
- Sale of s.r.o. The company will continue to exist, but with a new shareholder. You can offer the company directly to another entrepreneur or arrange the sale through a specialist company that deals with ready-made companies. Do you want to sell your LLC? Contact us to discuss what we can do for you.
- Liquidation s.r.o. This process is not easy, you will need a professional on hand. The price for the liquidation of the company starts at 20 000 CZK excluding VAT. Eventually, your Ltd. will be deleted from the commercial register and the company will cease to exist.
NEED HELP WITH YOUR BUSINESS? CONTACT US
If you are still hesitant about how to set the terms of your shareholders' agreement, or if you have found yourself in a situation you can't resolve, contact us. We can help you with company formation and drafting 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.