Before allocating shares, agree what each of you will contribute, who will make decisions, how you will be paid and what happens if someone leaves. A 50/50 split can work well, but friendship alone does not make it the right arrangement.
For a UK private company limited by shares, ownership percentages are only part of the picture. The rights attached to those shares and the agreements supporting them matter just as much. Settle these points before incorporation, while you can discuss them without an immediate dispute or financial pressure.
1. Agree What Each Person Is Contributing
Start with a written breakdown of what each founder brings and what they promise to deliver.
Consider:
- Cash invested and any personal financial commitments.
- Time committed, including when each person will start.
- Responsibility for sales, operations and delivery.
- Existing equipment, intellectual property or business assets.
- Skills that would otherwise cost the company money.
Separate contributions already made from future promises. Someone bringing established business assets is making a different contribution from someone expecting to introduce customers later.
Be specific about working commitments. “Helping with marketing” could mean an occasional social post or managing customer acquisition every day. Record responsibilities and expected availability so neither person allocates shares based on a different understanding.
2. Decide Whether Extra Cash Buys Shares or Creates a Loan
If one friend contributes £20,000 and the other contributes £5,000, that does not automatically require an 80/20 ownership split.
You might agree that the additional money buys more equity. Alternatively, some funding could be documented as a loan to the company, with agreed repayment terms, while ownership reflects your wider contributions.
These arrangements have different consequences. A shareholder takes the risks attached to ownership. A lender has a repayment claim under the loan terms, although repayment still depends on the company’s circumstances.
Record how much is share capital, how much is a loan and whether interest applies. Also decide what happens if more funding is needed: must both founders contribute, can either refuse, and could additional investment change ownership?
3. Understand What Your Ownership Split Means for Control
A 50/50 split can reflect equal commitment, but it also creates the possibility of deadlock.
For shareholder decisions, ordinary resolutions generally require more than 50% approval, while special resolutions require at least 75%. The calculation depends on the voting procedure: written resolutions use eligible voting rights, while meeting votes follow the relevant meeting rules.
With equal voting shares, a 51/49 split can give one founder control over ordinary written resolutions. It does not give that person unrestricted authority over every company decision.
Directors’ decisions follow separate rules. If you both become directors, check board voting, meeting requirements and any chair’s casting vote.
Agree which significant matters need both founders’ consent, such as:
- Taking substantial borrowing.
- Issuing more shares.
- Selling important business assets.
- Changing either founder’s remuneration.
These protections should be properly documented rather than assumed.
4. Separate Ownership from Payment for Work
Equal shareholders do not have to receive equal salaries. One founder might work full time while the other contributes a few hours each week.
Agree how work will be rewarded through salary or other properly approved remuneration. Set a realistic starting amount and decide when it will be reviewed.
Dividends follow share rights and require sufficient distributable profits. They are not a substitute for paying someone according to their hours. Where both founders hold identical ordinary shares, dividends will normally be paid proportionately.
For example, equal owners could receive different salaries for different workloads while sharing dividends equally.
Interface Accountants’ payroll services can support salary administration once you have agreed how each founder will be paid.
5. Plan for Someone Leaving or Stopping Work
Ask an uncomfortable but useful question: what happens if one founder leaves after six months?
Without suitable provisions, someone may stop working while retaining their shares. Resigning as a director does not automatically end share ownership.
Discuss whether a departing founder must offer their shares for sale, who can buy them and how the price will be calculated. Consider illness, death, voluntary departure and serious misconduct separately.
You may also consider vesting arrangements, where the right to retain some shares depends on continued service over an agreed period. These need careful legal and tax drafting.
Avoid vague promises to “agree a fair price later”. Specify the valuation process, whether an independent valuer will be used and how payment will be funded.
6. Agree How Disputes and Future Investment Will Be Handled
A disagreement procedure should give you a practical route forward before the business becomes stuck.
You could agree a formal discussion period, followed by mediation and, if necessary, a defined exit process. Be cautious with arrangements allowing one founder to name a purchase price that the other must accept or match. Unequal access to money can make that process unfair.
Discuss future investors too. If two founders hold 50 shares each and the company issues 25 equivalent shares to an investor, each founder’s ownership falls to 40%.
Agree how new share issues will be approved and whether existing owners should have the opportunity to participate. Ask your adviser to check statutory and contractual pre-emption rights rather than assuming either founder can issue shares freely.
7. Choose Share Rights and Check the Tax Position
Agree the number of shares, their nominal value, the subscription price and the rights attached to them.
For example, 100 ordinary shares can make a 60/40 allocation straightforward. However, choosing £1 nominal shares does not establish that the whole business is worth £100.
Different share classes can carry different voting, dividend or capital rights. Use them only where they serve a clear purpose and the consequences are understood.
Shares acquired because someone is a director or employee can fall within employment-related securities rules. Being friends does not automatically remove those rules.
Where restricted shares are involved, ask whether a section 431 election is appropriate. If needed, it must generally be made jointly by employer and employee within 14 days of acquisition. Check valuation and reporting requirements before issuing shares.
8. Put the Agreement into the Right Documents
The articles of association and shareholders’ agreement should work together. Standard articles may not reflect your agreed departure rules, decision protections or dispute process.
Have a solicitor document the legal arrangements and an accountant review the financial and tax implications.
Confirm that the incorporation details accurately record the shareholders, share rights and capital. Identify people with significant control too: holding more than 25% of shares or voting rights normally meets a reporting condition, although other conditions also apply.
Interface Accountants’ company formation service can help with registration once the ownership arrangements have been settled.
Frequently Asked Questions
Should friends always split shares equally?
No. Equal ownership suits some businesses, but the split should reflect agreed contributions, commitments and decision rights.
Can we change the share split later?
Yes, through properly arranged transfers or new share issues. However, approvals, valuations, tax consequences and company records may need attention.
Does owning shares automatically make someone a director?
No. Share ownership and directorship are separate. Someone can hold shares without managing the company as a director.
Can I take back my friend’s shares if they stop working?
Not automatically. Any compulsory transfer must have a valid legal basis and follow the applicable documents and procedures.
Is a shareholders’ agreement compulsory?
Generally, no. However, it can record important protections and expectations that standard incorporation documents do not address.
Agree the Relationship Before the Percentage
A sound share allocation explains more than who owns what. It connects ownership with contributions, decision making, remuneration and a workable exit process.
Agree those terms before allocating shares, then document them consistently. As the business grows, review the arrangements before bringing in investors or changing responsibilities. Clear agreements give both the company and the friendship a better chance of lasting.