Mark Daubney, Commercial Partner

Most limited companies are set up in a similar way; the directors run it, employees work for it, and the shareholders own it. Each of these roles comes with their rights and responsibilities, and sometimes a person can fit more than one description. We find that issues surrounding shareholders are often misunderstood or overlooked.

Increasingly we see investors, senior managers and long-serving employees being given shares in well established businesses; doing so can introduce working capital, incentivise staff, and save on tax & NI.

Thought should be given early-on as to how the company ownership will be structured and what will happen if things don’t work out as planned. This will help to avoid expensive and time-consuming problems in future.

So, what are the things you should think about?

Minority Shareholders

Incentivising staff with shares has become increasingly common practice, it can make valuable staff feel more invested in a business and give them motivation to go above-and-beyond to help it grow.

It is worth ensuring that you can get shares back at a price you are happy to pay if the need arises. It is important to make provisions for this in the company’s ‘Articles of Association’ (effectively the rules of the company) or in a separate shareholders’ agreement. Failure to do so can lead to expensive negotiations and/or a risk of the shareholder looking to sell their shares to a third party or even to a competitor.

Salaries vs Dividends

Paying staff by way of dividends instead of salary can be a good way of saving tax and national insurance. There are rules on when dividends can be paid, and these differ from those surrounding standard payroll. Unlawful dividends can be challenged, and liquidators can seek their repayment if they have not been properly declared (e.g. where the company did not have sufficient profits to do so).

All payments of dividends should be properly documented to help avoid problems in future.

Future sale of your business

Any buyer of your company will want to make sure that they are buying shares from the correct people so the company must have an up-to-date set of ‘statutory books’, recording the current shareholders and all past share transactions. Failure to record this information can lead to buyers using this as a way to reduce the share price or hold back until they are satisfied nothing will come out of the woodwork.

Deadlocked Companies

Any company that has two shareholders, each holding half of the company’s shares, is at risk should there be a falling out between those shareholders. Without an agreement behind the scenes covering off what will happen in this scenario, successful trading businesses can effectively be forced to cease trading.

All businesses are different, and there are many ways to deal with potential issues. If you would like any further information about shareholders then get in touch with the Commercial team at Bridge McFarland LLP.