Starting up – your business and its shareholders

Are you launching a business or in need of a brief legal refresher? This is the first in a series of blogs dealing with key legal considerations for start-ups. The focus of this piece is on your start-up and its shareholders.

Starting up: incorporating your company

It’s relatively easy to set up a company. In fact, you can do so online by registering it at Companies House for just £12. You will need to choose a unique company name (and there are rules on what it can and can’t include) but assuming your name is accepted, your company will usually be registered within 24 hours. However, it should be noted that this form of online incorporation is restricted to the incorporation of a private company limited by shares which chooses to adopt standard (model) articles of association. The articles of association (or simply “articles”, as they are commonly known) are a set of written rules which dictate how the company is run.

Although you may wish to have model articles, bespoke articles can also be adopted which are tailored to suit your company’s specific needs. It is also worth noting that the approval of over 75% of your company’s shareholders is required to change the articles, so depending on the number of initial shareholders and the relationship between them, it may make sense to adopt bespoke articles at the time your company is set up.

What happens if the start-up has multiple shareholders?

A limited company can be incorporated with one shareholder or with several. Shareholders have a vested interest in the success of the company in that the value of their shares will increase if the company does well. Shares can take various forms but the most common are “ordinary shares”, which carry no special rights or restrictions. In other words, each ordinary share entitles a holder to one vote and to equal participation in a company’s dividends. If the company is wound up, the proceeds are shared equally (on a pro rata basis) amongst the holders of ordinary shares. You may have also come across other less common classes of shares, such as non-voting, redeemable or preference shares (amongst others) and these carry specific rights which are set out in the articles.

It’s easier to make decisions about a company’s share capital when setting it up than it is to change it at a later stage. Doing so after incorporation requires planning and a new set of articles which, as mentioned above, will need the approval of at least three quarters of the shareholders. This can take time (which will be in short supply) so it is a good idea to think about your share structure at the outset.

Shareholders’ Agreements

When setting up a business with fellow investors, you are likely to get on well and have shared ambitions for your start-up. Those investors (whether financial or otherwise) may want to be compensated for their investment with shares. The success of a start-up can hinge on the agreement between the shareholders and the mechanisms which are in place to ensure that the start-up can continue to be successful if one of the shareholders becomes withdrawn, disinterested or decides to leave.

With that in mind, it is always a good idea for the initial shareholders to enter into a Shareholders’ Agreement. This is a contract which deals with issues such as: the relationship between the shareholders, the transfer of shares, how many directors are appointed, who can appoint them and so on. It is sensible to check that the wording in the Shareholders’ Agreement matches the wording in the articles to ensure that there is consistency between the two. With many start-ups, the shareholders are also likely to be directors of the company and those individuals should be mindful of the conflict between these two positions. More information on this potential conflict is available here.

Without legal planning, the disruptive concept which might result in your business reaching new heights could collapse if the corporate foundations aren’t in place. It is therefore essential to think about the legal building blocks at the outset of your start-up project.

For more information on start-ups and the legal packages we offer, please visit the start-up hub.

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