Starting a Business with Friends or Family: Essential Legal Protections to Prevent Disputes and Safeguard Relationships
Starting a business with people you know and trust can be hugely rewarding. Many of the UK’s most successful companies began as partnerships between close friends, spouses, siblings or long-standing colleagues. Shared values, complementary skills and the trust built over years can give a new venture considerable momentum from day one.
However, mixing personal and business relationships carries inherent risks. Founders often skip important legal steps, only to find themselves dealing with disputes, uncertainty or even a breakdown of the personal relationship later on. The best time to put proper protections in place is before money is invested, decisions are taken and responsibilities begin to overlap.
Establish Clear Expectations and Record Early Understandings
Before any formal documentation is prepared, prospective founders should engage in a structured conversation about their respective expectations. Misaligned assumptions, rather than complex legal issues, are one of the most common causes of disputes between friends or relatives in business.
These early discussions should address what each founder expects to contribute, how decisions will be made, what level of commitment is anticipated, how profits will be shared and what process will apply if someone wishes to leave the business. Even if captured only in outline form, recording these understandings provides a useful reference point and a solid foundation for the legal agreements that will follow.
Choose the Right Legal Structure
Choosing an appropriate business structure at the outset is essential, as it determines liability, tax treatment, ownership arrangements and decision-making processes. For most start-ups, a private limited company is the preferred option because liability is limited to the amount invested, ownership is clearly defined through shareholdings, and the structure is generally favoured by investors and lenders. A comprehensive shareholder agreement can then regulate the internal relationship between founders.
In some cases, a general partnership or a limited liability partnership (LLP) may be more suitable, particularly for professional services or small family ventures. However, these structures can expose participants to wider personal liability if not carefully drafted. Making the right choice early on helps avoid the need for costly restructuring as the business grows.
Put a Shareholder Agreement or Partnership Agreement in Place
A well-drafted shareholder agreement or partnership agreement is the single most important document for protecting the relationship between founders who are also friends or relatives. It sets out the rights, responsibilities and obligations of each party, clarifies how decisions are to be made, regulates what happens if a founder leaves or becomes unable to participate, and establishes rules for resolving disputes or transferring ownership.
Without this agreement, disputes default to statutory company or partnership law, which rarely reflects what the parties actually intended. A bespoke agreement offers clarity, certainty and protection at moments when relationships might otherwise come under pressure.
Decide How Equity Will Be Allocated
While an equal split of shares can feel instinctively fair, it is not always commercially sensible. The allocation of equity should reflect financial contributions, operational involvement, strategic input and long-term commitment. In some cases, mechanisms such as vesting schedules, growth shares or different share classes may be appropriate to ensure that incentives remain aligned and that founders who contribute more over time are properly recognised. This prevents resentment developing if one founder becomes less involved than initially expected.
Protect Intellectual Property (IP)
Most modern businesses rely heavily on intellectual property, whether branding, software, designs, trade secrets, written content or processes. Difficulties often arise when founders assume that IP created informally or on a personal basis automatically belongs to the company. To prevent disputes, all founders should formally assign any IP they create to the company, and contractors or freelancers involved in development work should sign agreements ensuring that the business, not the individual, owns the resulting rights. Domain names, trademarks and social media accounts should also be registered in the company’s name to avoid complications later.
Agree on How Money Will Flow
Friends and family often adopt informal approaches to finances, but the law requires far greater clarity. Any funds provided to the business should be clearly documented as either loans or share capital, with agreed repayment terms, interest (if any), and an understanding of how further investment will be handled. Clarity at the outset prevents misunderstandings and reduces the risk of tension as the business grows and financial needs evolve.
Put Employment or Consultancy Agreements in Writing
Where founders will be working in the business, whether full-time, part-time or on a consultancy basis, it is advisable for them to have written contracts. These agreements should set out duties, hours, pay, confidentiality obligations, notice periods and any restrictive covenants designed to protect the business if someone leaves. Clear contractual arrangements help maintain professional boundaries and prevent disagreements over the scope of each founder’s role.
Plan for Exit
Even the strongest personal relationships can be tested by commercial pressures. It is therefore important to agree in advance what will happen if a founder wishes to exit, if performance becomes an issue, if the business reaches a deadlock on key decisions, or if a founder dies or becomes incapacitated. Mechanisms such as drag-along and tag-along rights, buy-back provisions and pre-emption rights offer structured, predictable routes for dealing with these situations and preventing disputes from escalating.
Keep Personal and Business Finances Separate
Blurring personal and business finances, such as using private bank accounts for business transactions or casually mixing expenses, creates confusion and increases the likelihood of disagreement. Proper separation of finances is essential not only for avoiding disputes but also for presenting the business professionally to investors, lenders and HMRC.
Obtain Independent Legal Advice
Finally, each founder should have the opportunity to obtain independent legal advice. This ensures that everyone fully understands their rights and obligations, that no one feels pressured into signing documents, and that the agreements reached are transparent and fair. Addressing these issues early is far easier and far less emotionally charged than attempting to resolve problems after conflict has arisen.
Contact Us
Starting a business with friends or family can be highly successful, but even the strongest relationships benefit from clear legal protection. By choosing the right structure, documenting key expectations and putting robust agreements in place, founders can protect both their commercial interests and the personal relationships underpinning the venture.
At The Jonathan Lea Network, we regularly advise start-ups, family businesses and long-standing partners on how best to structure their ventures to ensure clarity, fairness and long-term success. If you require guidance on shareholder agreements, partnership structures, investment terms or dispute prevention, our team would be pleased to assist.
We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT depending on the complexity of the issues and seniority of the fee earner).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.