Starting a business with friends or family? Learn how to protect relationships and your venture with clear agreements, ownership terms, and legal structures.

Starting a Business with Friends or Family: How to Protect Relationships and Your Venture

Jonathan Lea October 22, 2025

Starting a business with friends or family can be a hugely rewarding experience. Shared trust, enthusiasm and values often make for a strong foundation. However, personal relationships also bring unique risks — especially when money, ownership and decision-making are involved. Without the right agreements and structures in place, misunderstandings can easily arise and cause lasting damage to both the business and the relationships themselves.

This article explains how to protect your venture and maintain harmony by setting out clear expectations from the outset and putting in place the right legal and governance framework.

Why a Shareholders’ Agreement Is Essential

A shareholders’ agreement is one of the most important documents to have in place when setting up a company with friends or family. It sets out how the company will be run, how decisions are made, and what happens if one of the shareholders wishes to leave, falls out with the others, or stops contributing.

While the company’s Articles of Association provide a broad legal framework, they rarely cover the specific commercial and relational issues that arise between closely connected shareholders. A tailored shareholders’ agreement provides clarity, reduces the scope for conflict, and helps preserve relationships by making difficult situations easier to manage.

Typical provisions include:

Decision-Making and Control: The agreement should set out how major business decisions are made — which matters require unanimous consent (such as issuing new shares or changing business direction), and which can be decided by a majority vote. This ensures that all shareholders understand the limits of their authority and prevents one person from making unilateral decisions that could affect everyone.
Transfers and Exits: It’s important to agree in advance how shares can be sold, transferred or bought back by the company. Pre-emption rights can ensure existing shareholders have the first opportunity to buy any shares offered for sale, while compulsory transfer or buy-back clauses can protect the business if a shareholder becomes inactive, uncooperative or leaves on bad terms.
Dispute Resolution: Even close friends and family can disagree on strategy or operations. Having a clear process, such as mediation or a buy-sell (“Russian roulette” or “Texas shoot-out”) mechanism, helps resolve disputes quickly and avoids the need for expensive litigation.
Good Faith and Confidentiality Obligations: These provisions ensure that all shareholders act honestly, share information transparently, and avoid using company information or contacts for personal gain.

Defining Roles, Responsibilities and Time Commitments

Clarity of roles and expectations is critical when friends or family work together. One person may assume they are responsible for marketing, while another believes they’ll lead strategy — or one expects full-time involvement while another plans to contribute on evenings and weekends.

A detailed written agreement on each shareholder’s role, duties and time commitment helps prevent resentment and misunderstandings. This can be set out in the shareholders’ agreement and supplemented by formal directors’ service contracts for those actively working in the business.

It should be clear what is expected in terms of contribution, accountability and performance, and what happens if someone does not deliver. This clarity allows both the company and the individuals to manage changes in circumstances without jeopardising the business or relationships.

The Importance of Directors’ Service Contracts

Where shareholders are also company directors, a directors’ service contract should be put in place to govern their professional relationship with the company. This contract outlines remuneration, working hours, notice periods, confidentiality obligations and termination rights.

Having a clear contractual relationship between the director and the company provides a framework for performance management and helps avoid ambiguity around employment status and duties. It also ensures that any departure or reduction in commitment can be managed within a defined legal structure, rather than being left to informal or personal negotiation.

Managing Inactive or Defaulting Shareholder-Directors

Problems often arise when one shareholder-director stops contributing but continues to hold shares and benefit from dividends or decision-making power.

To prevent this, the shareholders’ agreement should include buy-back or compulsory transfer provisions allowing the company or remaining shareholders to acquire the shares of an inactive or defaulting shareholder. This ensures that control and ownership remain aligned with those still actively involved in the business.

These provisions should be supported by a power of attorney in favour of the board, allowing directors to execute share transfers on behalf of an uncooperative shareholder. This avoids situations where a disengaged or hostile shareholder refuses to sign share transfer forms, delaying or obstructing the buy-out process.

Such clauses are not about mistrust, they are a sensible form of protection that ensures fairness and continuity in difficult circumstances.

Using Different Share Classes to Reflect Ownership and Control

In some cases, founders may wish to allocate shares differently to reflect varying roles, commitments or expectations among family members or friends. UK company law allows great flexibility in how shares can be structured, and it’s often beneficial to create different classes of shares with distinct rights.

For example:

Non-Voting Shares: These can be useful where a shareholder is providing capital but will not be involved in management decisions. Non-voting shares allow investment without diluting control, ensuring that those running the business retain decision-making authority.
Dividend-Only or Preferential Shares: Different share classes can be designed to receive dividends in a way that isn’t strictly pro rata to ownership. This enables the company to reward active shareholders more heavily, or provide returns to passive investors without altering voting power.
Growth or Hurdle Shares: These are sometimes used to incentivise individuals to increase the company’s value before benefiting from future gains.

Structuring share classes properly from the outset can help prevent disputes later and allows flexibility in aligning ownership with each person’s role and contribution. It’s essential to have the company’s Articles of Association updated to reflect the rights attached to each class and to ensure these align with the terms of the shareholders’ agreement.

Clear Policies and Professional Standards

Even when the business is owned by close friends or relatives, it’s vital to maintain professionalism. Having consistent policies helps ensure that decisions are made objectively and that the workplace operates fairly and responsibly.

Key policies might include:

Code of Conduct and Ethics: setting out standards for integrity, honesty and respect.
Conflict of Interest Policy: ensuring personal relationships don’t influence company decisions.
Equal Opportunities and Anti-Harassment Policies: promoting fairness and respect in the workplace.
Grievance and Disciplinary Procedures: creating transparent mechanisms for addressing issues before they escalate.

By embedding these policies early, you can foster a professional culture that supports business growth and prevents personal tensions from spilling over into the workplace.

Conclusion

Starting a business with friends or family brings enormous potential — but also personal risk if not managed properly. Putting in place a shareholders’ agreement, directors’ service contracts, and well-drafted Articles of Association with appropriate share class rights can protect everyone involved. Coupled with clear internal policies and defined roles, these documents provide the foundation for both commercial success and lasting relationships.

The Jonathan Lea Network regularly advises founders, family businesses and co-owned ventures on how to structure ownership, draft shareholders’ agreements, and manage the balance between personal and professional relationships. If you’re planning to start a business with friends or relatives, our experienced team can help ensure your company is set up for long-term success — with both your business and your relationships protected.

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.