Starting or taking over a business is an exciting venture, but it also brings with it a set of legal and practical challenges. UnderStarting or taking over a business is an exciting venture, but it also brings with it a set of legal and practical challenges. Understanding the relevant areas of law is crucial to ensure compliance and avoid future issues.
Many new owners focus on the “big picture” – growth, customers, and finance – but overlook that governance structure and day-to-day foundations can lead to problems later. Here are some key considerations to take into consideration.
1. Shareholders and Directors – Know the Difference
One of the most important distinctions to understand is between shareholders and directors:
- Shareholders are the owners of the company. They invest capital, hold shares, and have rights such as receiving dividends (if declared), voting at general meetings, and, in some cases, approving major decisions like amending the articles of association or selling the business. Their powers are usually limited to high-level or strategic matters.
- Directors are responsible for running the company on a day-to-day basis. They make operational decisions, manage staff, enter into contracts, and must comply with duties under the Companies Act 2006, including acting in the best interests of the company.
In small businesses, the same person may be both a shareholder and a director, but the roles should not be confused. Each carries different rights, responsibilities and liabilities.
2. Why a Shareholders’ Agreement Matters
If your company has more than one shareholder, a shareholders’ agreement can be invaluable. Unlike the company’s articles of association (which are public), a shareholders’ agreement is a private contract that:
- Sets clear rules for decision-making – avoiding disputes about who has the final say.
- Protects minority shareholders – ensuring they retain influence over key issues.
- Provides exit strategies – including what happens if someone wants to sell their shares or if shareholders are deadlocked.
- Safeguards continuity – by reducing uncertainty and providing a roadmap for difficult situations.
The agreement should also address what happens if a shareholder fails to fulfil their obligations under the contract.
For many companies, this can make the difference between a smooth-running business and costly shareholder disputes.
3. Understanding the Purchase Agreement and Warranties
When acquiring a business, the purchase agreement (whether a share purchase agreement or an asset purchase agreement) is one of the most important documents you will sign. It sets out the terms of the deal and your rights as a buyer. Key points to look for include:
- Warranties: These are statements made by the seller about the company or business (e.g. that it owns the assets being sold, has complied with laws, or has no undisclosed debts). If a warranty later proves untrue, you may be able to claim compensation.
- Indemnities: These give direct financial protection if specific risks arise (for example, an ongoing tax dispute).
- Conditions precedent: Some obligations may need to be satisfied before completion – such as third-party consents or regulatory approvals.
It is important to read these terms carefully. Warranties and indemnities will have been heavily negotiated by your solicitor during the course of the transaction. Make sure you are aware of your rights in the event that any issues arise post completion.
4. Don’t Sign Blindly – Read Every Contract
New business owners often inherit or enter into contracts without fully understanding them. Take time to review:
- Supplier and customer contracts – Are there hidden liabilities, automatic renewals, or termination risks? Pay special attention to contracts with suppliers, as disputes can have significant legal and financial implications.
- Property leases – What are your obligations for repairs, rent increases, or service charges?
- Loan and finance agreements – Are there restrictive covenants or personal guarantees?
- Employment contracts – Do they properly reflect current roles and responsibilities?
Contracts are the backbone of your business – knowing what you have agreed to avoid unpleasant surprises.
5. Understand and Value Your Employees
Employees are often the greatest asset of a business. As a new owner, invest time in:
- Getting to know your team – understand their roles, skills, and how each team member contributes to building a stronger company.
- Clarifying responsibilities – ensuring contracts, job descriptions, and reporting lines are clear.
- Balancing employee and shareholder roles – where staff also hold shares, be aware of potential conflicts and ensure both their employment and ownership rights are properly documented.
Motivated, well-managed employees will support your long-term success.
6. Understanding Business Structure
Choosing the right business structure is one of the first and most important decisions you’ll make when starting or running a business. The structure you select will affect everything from your legal responsibilities and tax obligations to how you protect your personal assets and manage profits. In England and Wales, the most common options are sole trader, partnership, and limited company—each with its own set of rules and implications.
A sole trader structure is simple to set up and gives you complete control, but it also means you are personally liable for any business debts or legal issues. Partnerships allow two or more people to share responsibilities and profits, but partners are usually jointly responsible for any liabilities. A limited company, on the other hand, is a separate legal entity, which means your personal assets are generally protected if the company faces financial difficulties or court action.
It’s also important to note that each business structure comes with its own set of ongoing responsibilities, such as filing annual returns, keeping accurate records, and complying with data protection and employment law. Failing to meet these requirements can lead to disputes or financial penalties, so make sure you understand what’s expected from the start.
7. Seek Professional Advice Early
Navigating the different roles of shareholders and directors, preparing a shareholders’ agreement, and reviewing inherited contracts can be complex. Early legal advice can:
- Prevent future disputes,
- Protect your investment, and
- Give you confidence that your business is built on solid foundations.
Legal professionals can advise on a wide range of legal issues and assist with specific business problems. You can access legal support through various methods, including online resources, phone consultations, or in-person meetings, making it easier to get the help you need when you need it.
Conclusion
For new business owners, success is not only about sales and growth, it is also about building a legally secure and well-managed company. By understanding the distinction between shareholders and directors, putting a strong shareholders’ agreement in place, carefully reviewing the purchase agreement and warranties, reading the fine print of every contract, and engaging with employees, you can set the business on the right path from day one. At Howells Solicitors our team of expert corporate and commerical solicitors can help with any new business legal advice you may need.
