New business set up

[melonfool]

Hi

I'm currently coming to the end of my full time permanent employment (having given my notice) but staying two days a week to end Sept. I already have my own 'side hustle' which is a consulting business in the same field (HR). One of my clients wants me to work 1-2 days a week for them so I'm going to do that from Sept.

I will also seek new clients for my consultancy and I already have some good leads here.

I was sort of ready to retire (and could, financially) but was hoping to just do a 'bit of consulting now and then', but I've now decided that as well as taking on the 1-2 days for my current client (I will do this employed) I want to start another business, because I have had an idea based on a gap in the market. It will be a training service, which is not currently offered by anyone but is needed.

I have a colleague (currently employed but considering his options) lined up who is a training specialist who will write the training with me - we both have different types of input which is required. I then have a friend who is a psychologist who will input to the training and help us design the unique toolkit we will be 'selling'.

The plan is to get sessions ready by Nov, then trial at my new employer ready for roll out in January. The longer plan is then to market and sell and I will do most of the training until my trainer colleague can make himself available to take some of that on. And we may expand to use other (associate) trainers. And later than that we plan to get the course accredited (so will be designing it in a way that is assessable for that) - this is what will keep us ahead of our competition.

My question is - how do I arrange the set up?

I'd like to have colleague as a partner in the business.
Friend I'd prefer to just pay for her time.

For colleague this means he may get nothing if it doesn't take off (nor will I). For friend - I will have to personally lend the business money to pay her, which could end up being a loss (which I'm fine about).

Will my friend later claim she was part of the set up and should be a partner - how do I prevent this? She won't be able to come out and do the training with me/us, as she has a 100% full time job in the NHS which she cannot really leave (she is younger and not ready to 'go it alone' unlike me and colleague - both of us have done consulting before). Her input isn't likely to be continuous, just into the original design and tweaks.

Also, with colleague, how much pf the business should he own, considering it's very much my idea, I'm taking most risk and likely to be providing any funding (we won't need very much, but I can certainly lend enough for some occasional office space, laptops, actors for the practical days etc).

Other question - is it better for me to provide any seed funding, or would it be better to get a business loan?

Any suggestions appreciated.

thank you

Mel

[Mike4]

My question is - how do I arrange the set up?

I'd like to have colleague as a partner in the business.
Friend I'd prefer to just pay for her time.

Mel, the first thing you need to decide is whether this business is to be a Ltd Co, a partnership or you as sole proprietor.

A partnership is the worst of all worlds. DAMHIK.

Now is a really good time to do your research and get up to speed on the different types of business format: Sole trader (sole proprietor), partnership, Ltd Co.

There is another possibility, a LLP. A "Limited Liability Partnership", about which I know nothing. Maybe CK will see this thread and have something to say...

[Moosehoosenew]

Agreed on partnerships Mike.

I would go Ltd company and never have less than 75.1 per cent of the company, in almost all circumstances you retain full control.

A shareholders agreement is normal and assume a standard one reasonably inexpensive, this covers things like a shareholder moving on and being able to buy them out at a sensible/reasonable cost.



Based on 30 years plus trading and the trials and tribulations of other small businesses where no one has full control.




I a not a lawyer though.

[bluedonkey]

Agreed re partnership.

You could pay both of your colleagues for their time and in that way keep 100% of the ownership and any eventual profits. Requires you to have deep pockets though and means taking all the risk.

Written agreement re intellectual property ownership would be a good idea too.

[melonfool]

Thank you - sorry, it will definitely be a Ltd co. That's why it might be better to take a loan - though there genuinely won't be many upfront costs, I'm thinking £10k maybe.

I don't really want to just pay colleague, I want to tie him in and ensure he feels committed because he will be pivotal (and, if he doesn't want to, I'd find someone else to fill that spot, but currently he does want to). This does mean he, like me, won't get paid until there is income.

Isn't anything over 50% enough for me to always have control?

I was thinking a 60/40 split feels fair, but you're suggesting I need 75.1 - please could you explain why?

I'll have a look at shareholder agreements. And really good call about IPR, I'll start drawing something up for that too.

Mel

[the0ni0nking]

I suspect the reason 75.1% was mentioned as that would give you sufficient votes to pass both ordinary resolutions (50%) and special resolutions (75%).

In that regard, you probably need to familiarise yourself with what resolutions the Companies Act define as special and whether you likely consider it necessary that you would ever want to "force" one of those through.

In the situation you describe, I doubt that there is likely to be conflict between the 2 shareholders on those special resolutions but you never know. Examples of special resolutions:

1. alter a shareholders’ agreement
2. change a company name
3. restructure a company
4. remove pre-emption rights of shareholders
5. reduce share capital
6. wind up a company

I would think ultimately it comes down to a discussion between yourself and the proposed other shareholder as to what you can agree is reasonable in terms of shareholding in terms of the risk each of you are taking and the effort each of you are likely to have to make in ensuring success.

You could also do something with difference classes of shares but your potentially overcomplicating things (also why I'd rule out LLPs etc) if going down that route. A pretty simply COTS business can be set-up for less than £20 IIRC and you can likely get free banking for a couple of years too.

Lastly, if you can afford not to, I likely wouldn't bother with a business loan to set it up. If you both have capital you could subscribe for shares in the ratio you agree to provide that start-up capital or simply end up with credit balances on the director loan account.

[Moosehoosenew]

Thank you - sorry, it will definitely be a Ltd co. That's why it might be better to take a loan - though there genuinely won't be many upfront costs, I'm thinking £10k maybe.

I don't really want to just pay colleague, I want to tie him in and ensure he feels committed because he will be pivotal (and, if he doesn't want to, I'd find someone else to fill that spot, but currently he does want to). This does mean he, like me, won't get paid until there is income.

Isn't anything over 50% enough for me to always have control?

I was thinking a 60/40 split feels fair, but you're suggesting I need 75.1 - please could you explain why?

I'll have a look at shareholder agreements. And really good call about IPR, I'll start drawing something up for that too.

Mel

Other poster has explained better than I could in terms of resolutions etc, unfortunately it is really hard to predict a future business relationship, without full control you are always open to a relationship bringing down the business.

[bluedonkey]

Whatever percentage ownership you give them, they have that FOREVER. Maybe keep 100% but offer some sort of profit share or bonus payment if it succeeds.

[gryffron]

Hi Mel,
Glad to see you're still here.

Banks won't lend to a Ltd company with no assets. They know it can disappear in an instant. The only way you will get a business loan in these circumstances is if you personally underwrite it, usually with your own assets. Given you will bear the loss personally anyway, it's likely to be much easier (and cheaper) to loan the money to the company yourself. Make sure you keep clear records of this. Accountants call it the "Director's loan account"

You can charge the company interest on the loan if you want, but then the tax situation gets complicated. OTOH if your (not) partner owns 30-40% you might want to take some of your payment as interest as this would not be split. OR you can just pay yourselves different amounts. Whilst dividends MUST be divided according to shareholding, salaries don't.
Might be a good idea if the shareholders agreement (mentioned earlier) also has some term about giving priority to repayment of your loan.

And I completely agree with kltrader. Regardless of whether your 3rd person is an employee or (self employed) contractor, she must sign a proper contract clearly identifying what she will be paid and that all Intellectual Property goes to the Company. Once the contract is signed, she has no further claim for a share of the company. Unless you choose to offer that in the contract. But as others have said, I wouldn't. Keep control and maybe offer her a bonus when sales exceed £whatever.

Gryff

[dealtn]

Your colleague can't be a "partner" in the business if it is a Ltd company. They will be an employee, or a director (or both). It will be difficult in practice not to pay them if the former. You will both need to be comfortable with the implications if the latter. Relationships, opinions, expectations etc are rarely problems at the outset of such ventures. Things change over time though so its best to consider the potential for those changes to both the individuals and the business.

That Limited company is a separate legal entity to you and the relationships of directors and employees is to "it" and not you.

Like with most things in life communication is important in how you go about this. That means both being happy with how it is set up, and its implications, If you colleague isn't happy they shouldn't and might not agree to working alongside you. Good luck.

[Twitterpane]

Congrats on starting your new business! That’s so exciting. I’d recommend making sure you’ve got solid accounting systems in place from the start.