Splitting a business apart

[CarlVC]

Hello,

I started a small business with a (then) colleague in 2010. At the time the business was part time for both of us and we sold the products at framers markets etc. It was a hobby business.

In Jan 2012 I took a huge gamble, left my job, and took the business on full-time. At that time the business was worth £10,000. I bought 40% of my partners equity, resulting in me having 90% and him 10% of the shares. He was supposed to continue on a part-time basis, earning his 10%, but has been unable to do so due to work commitments.

I have grown the business quite a bit since January, particularly one part of it, which deals with private label products. This has taken a huge amount of effort and I am worried that my (silent) partner will effectively become a 10% tax burden for me. He has not contributed to this growth, but is set to receive 10% of the dividends. My question is this...

"Can I simply create a new business that does Private Label products, which I would own, and continue making the branded products with the existing business, with shared ownership?"

I believe that my partner will be in a position to help grow the branded part of the business at some point and I would not want to cut him out of that part of the business. My issue is that he has never contributed to the private label part of the business, which I have built up from nothing and I am not willing to work this hard to give 10% away for free.

Any advice would be warmly welcome.

 

[moduslegal]

Since no-one else has answered, I will have a go.

Assuming you are correct in saying that it is a limited company, there is nothing harder to get rid of than a shareholder who doesn't want to be got rid of. You could pull tricks like a share issue, but that would involve putting more money into the company and would only work if he didn't want to invest further. There is also an issue with whether he is a director.

There is nothing to stop you stopping the private line products in the old company and starting up a new company, except that in doing so you will effectively have 'stolen' part of the business of the old company. That is obviously going to leave you open to all sorts of potential actions, such as recovery of the value of the business from the new company by the old company, breach of fiduciary duty by you personally and so on. From a practical point of view, those kind of legal actions are expensive and even if old company did recover the value of the lost business you would be entitled to 90% of it. So is your fellow shareholder really going to bother.

I think the questions you need to answer are: a) do I feel comfortable with this from a moral point of view b) is my fellow shareholder going to go ape when he finds out and c) is that going to lead to endless bad feeling and expensive and time consuming legal disputes.

In other words, yes, you are going to be on the wrong side of the law, but whether it works out for you is more likely to be a practical question involving your relationship with the other shareholder.

Hope that helps. James

 

[CarlVC]

Thank you James,

Given that I do all (100%) of the work in this business and the other shareholder (who is a director) does nothing, surely I can decide not to make private label products for this company anymore?. I am the only full-time employee and do absolutely everything; i.e. we have no staff, so it would be me and my wife making them anyway.

Whilst he may not be entirely happy, I think his only legitimate objection may be if I were to 'steal' existing private label customers from this business (not that he knows who they are anyway). There are no regular customers as such and all work is done on an enquiry/ project basis. We get repeat custom, but it is not contracted and is very as-and-when.

I suspect I need to do this before I grow this part of the company any further, as it will only become more difficult if the company becomes valuable. He will still have a 10% stake in the branded part of the business, which continues to grow and which he can potentially contribute to (as and when work allows).

I have no moral objection to doing this, as I am basically a one-man business at the moment and have worked extremely hard to build the private label part up. I just wanted to understand any legal pitfalls before taking the next step.

Thanks again.