Business · Founders and shareholders
Going into business together: the structure and the documents you need
Most growing businesses with more than one owner trade through a limited company, with tailored articles and a shareholders' agreement that says who decides what, and what happens if someone leaves, dies or wants out. Agreeing those terms at the start is quicker and cheaper than fighting about them later.
Written by Vanessa Challess, Solicitor, qualified 2003 · Last reviewed
Who this is for, and when to call
- You are starting a business with one or more co-founders
- Your company has more than one shareholder and no shareholders' agreement
- You are about to bring in an investor, a new partner or a key member of staff as a shareholder
- Your agreement was written years ago and no longer matches how the business runs
Call before money changes hands or shares are issued. Once the business is worth something, every term becomes harder to agree.
Sole trader, partnership, LLP or company?
Liability, tax, funding and control drive the answer.
Sole trader
You are the business. There is no separate legal person, so the business's debts are your debts. The least paperwork, but nothing to sell except the assets.
Partnership
Two or more people in business together without forming a company. Every partner is liable for the firm's debts (Partnership Act 1890, s.9). A written partnership agreement replaces the 1890 Act's default rules.
LLP
A separate legal person (Limited Liability Partnerships Act 2000, s.1(2)), so the members' liability is limited, with the flexibility of a partnership. Accounts are filed publicly at Companies House.
Limited company
A separate legal person, and shareholders' liability is limited to anything unpaid on their shares (Companies Act 2006, s.3). It suits most growing trading businesses and is the easiest structure for investors and staff shares.
Tax is often what decides it, and the treatment differs for each. Take your accountant's advice on tax; we work alongside them.
What co-founders need in writing
- Articles of association tailored to the business, not the standard model articles
- A shareholders' agreement, using the 20-clause checklist below
- Director service agreements for founders who work in the business
- An assignment of intellectual property to the company, covering work done before it was formed
- A vesting or leaver structure, if founders' shares should be earned over time
- A cross-option agreement and life cover, if the others should be able to buy a founder's shares on death
Is your shareholders' agreement ready?
Ten questions. Nothing you enter leaves this page.
1. Is there a written shareholders' agreement signed by every current shareholder?
2. Does it list the decisions that need everyone's consent, or a set majority?
3. Does it say what happens if you are split 50/50 or simply cannot agree?
4. If a founder left tomorrow, does it say what happens to their shares and at what price?
5. If a shareholder died, would the others know who can buy the shares and how it would be paid for?
6. Do the other shareholders get first refusal before shares are sold to an outsider?
7. If a buyer wanted the whole company, could an agreed majority make the rest sell, and could a minority join a sale on the same terms?
8. Are new shares offered to existing shareholders first, and is it clear who funds the business if it needs more money?
9. Does the company own, in writing, everything the founders created, including work done before it was formed?
10. Are founders prevented from competing or poaching clients for a set period after they leave?
0 of 10 answered.
A guide only, not legal advice. It covers companies in England and Wales.
Shareholders' agreement checklist: 20 clauses every founder needs
Not every business needs every clause, but you should decide each one deliberately. Download it as a PDF.
01The agreement and the articles work together
The articles are public and bind the company and every member (s.33). The agreement is private and binds only those who sign it. Key rights belong in both, with a clause saying which wins if they conflict. Changing the articles needs a special resolution (s.21).
03Who sits on the board
Which shareholders can appoint or remove a director, and what happens to that right if they sell down or leave.
04Reserved matters
A list of decisions that need everyone's consent, or a set majority: issuing shares, borrowing over a limit, selling the business, changing what it does, large contracts, and paying family members.
05How the board decides
Board meetings, notice, quorum, written resolutions, and whether the chair has a casting vote.
06Deadlock
What happens when you cannot agree: escalation, then mediation, then a route out such as a buy-sell clause or a sale of the company.
07Information rights
Management accounts, budgets and access to records for every shareholder, not only the directors.
08Funding
Whether anyone has to lend or invest more, on what terms, and what happens if one shareholder cannot or will not.
10Selling shares
No sale to an outsider without offering the shares to the others first, with any permitted transfers (for example to a family trust) spelled out.
11Drag-along
If an agreed majority accept an offer for the whole company, the rest must sell on the same terms, so a minority cannot block a sale.
12Tag-along
If a majority sells, the minority can sell on the same terms, so they are not left behind with a new owner.
13Leavers
What happens to a founder's shares when they stop working in the business, and the price for a good leaver and a bad leaver.
14Vesting
Shares earned over time, so a founder who leaves early does not keep a full stake.
15Valuation
How the price is fixed when shares change hands: fair value or market value, who values them, and whether a minority discount applies.
16Death and incapacity
Who can buy the shares, at what price, and how it is paid for. Life cover and a cross-option agreement usually sit alongside.
17Restrictive covenants
No competing or poaching clients and staff for a set period after leaving. Covenants wider than needed to protect a legitimate business interest are unlikely to be enforced.
18Confidentiality
Company information, and the agreement's own terms, kept confidential during and after ownership.
19IP belongs to the company
Everything the founders created, including the name, code, designs and content, assigned to the company in writing, including work done before it was formed.
20Dividend policy
How profits are paid out or kept in the business, so salary and dividend decisions do not become a source of resentment.
Section numbers are to the Companies Act 2006.
What we do, stage by stage
Short call
Before you commit
We find out who the founders or shareholders are, what each brings, and what you want to happen if things change. Then we quote a fixed fee in writing.
Heads of terms
Agreed between you
A short summary of the key terms, using the checklist below, so the difficult conversations happen before anything is drafted.
Drafting
Articles and agreement together
We draft the articles and the shareholders' agreement side by side so they do not contradict each other, with any service agreements and IP assignment.
Review and agree
One set of comments from you
We explain each clause in plain English, take your comments and, where we have agreed to, deal with the other side's solicitors.
Sign and file
Within 15 days of the change
Signing, the special resolution to adopt new articles (s.21), and sending the amended articles to Companies House within 15 days (s.26).
How we charge
- Each document is a fixed fee, quoted in writing after a short call and before you commit. Fees are plus VAT
- The quote lists what is included, for example the heads of terms, drafting the articles and agreement together, an explanation of each clause and a round of amendments
- It also lists what is not included, such as tax advice, share valuations and negotiation with another party's solicitors beyond what we have quoted for
- Any disbursements are set out in the quote before you commit
Who will do the work
Vanessa Challess, Solicitor, qualified 2003, and Director of Bonsai Law. She has spent more than two decades on company and commercial work and the shareholder disputes that follow when the documents are missing, and handles your matter herself.
Where the rules come from
- Companies Act 2006, section 33: the articles bind the company and its members as if each had covenanted to observe them.
- Companies Act 2006, sections 21 and 26: articles are changed by special resolution, and the amended articles must reach Companies House within 15 days.
- Companies Act 2006, sections 561 and 567: existing shareholders' right of first refusal on new shares, and a private company's power to exclude it in its articles.
- Companies Act 2006, section 168: removing a director by ordinary resolution.
- Companies Act 2006, section 3: limited companies, and members' liability limited to anything unpaid on their shares.
- Partnership Act 1890, section 9: every partner is liable jointly with the others for the firm's debts.
- Limited Liability Partnerships Act 2000, section 1: an LLP is a body corporate with legal personality separate from its members.
Business structuring: common questions
Liability, tax, funding and control drive the answer. A sole trader or partner is personally liable for the business's debts. An LLP or a limited company is a separate legal person, so the owners' liability is limited. A limited company suits most growing trading businesses, especially if you want investors or to give staff shares. Tax treatment differs between them, so we pair our advice with your accountant's.
Articles of association tailored to the business, a shareholders' agreement, director service agreements, an assignment of intellectual property to the company and, if relevant, a vesting or leaver structure. If the founders want the others to be able to buy their shares on death, a cross-option agreement and life cover usually sit alongside.
The articles are the company's rulebook. They are public at Companies House and bind the company and every member (section 33 of the Companies Act 2006). A shareholders' agreement is a private contract that binds only those who sign it, so it is where commercially sensitive terms usually go. The two should be drafted together so they do not contradict each other.
Yes, if the share classes, reserved matters and information rights are drafted carefully. Who holds 50% and 75% of the votes decides who can pass ordinary and special resolutions, so model the numbers before you agree a valuation. Early structure choices are hard to unwind.
A way to incentivise staff or advisers with the right to acquire shares later. Some schemes, such as Enterprise Management Incentives, have tax advantages if the conditions are met, and others do not. Legal and tax advice should work together, so we bring your accountant in from the start.
Shareholders can always remove a director by ordinary resolution under section 168 of the Companies Act 2006, whatever any agreement with the director says, and the articles cannot take that power away. The articles can still change how the votes count: weighted voting rights on a resolution to remove a particular director are lawful, as the House of Lords held in Bushell v Faith [1970] AC 1099, and can in practice protect a founder from removal. The shareholders' agreement can add a promise from the other shareholders about how they will vote.
Often it does, but with care. A company cannot contract out of its statutory powers (in that case, its power to increase its share capital), although the shareholders can bind themselves personally as to how they will vote (Russell v Northern Bank Development Corporation [1992] 1 WLR 588). A well-drafted agreement keeps the company's own obligations to the points it can lawfully give.
It depends on the number of shareholders and how much is agreed in advance. A clear set of heads of terms, agreed between you before drafting starts, speeds things up considerably and keeps the cost down.
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General information about the law in England and Wales, last reviewed 24 October 2026. It is not legal advice or tax advice and should not be relied on for any particular business. Bonsai Law Ltd is incorporated in England (company number 13926937) and authorised and regulated by the Solicitors Regulation Authority (SRA No 8000734). Registered office: The Business Terrace, Maidstone House, King Street, Maidstone, Kent ME15 6JQ. Complaints