Starting a business is a bold move. Doing it with someone else adds a layer of excitement – and complexity. Whether you’re bringing on a co-founder, a trusted colleague, or someone who’s simply keen to help, the legal and practical implications of going into business with another person are worth thinking through carefully.

This article explores the main ways to structure that relationship, with a focus on limited companies, which are by far the most common setup for modern UK businesses.

You don’t have to do it alone – but document everything

At the heart of many small business ventures is the simple idea of collaboration. One person may have started the business solo but later wants help from someone who brings complementary skills or experience. That might be someone helping shape the strategy, winning clients, or building systems – but it raises a key question: what’s in it for them?

If they’re not being paid up front, they’ll likely want reassurance that they’ll share in the upside later. And that’s where structure matters.

There are several options available, each with their own pros, cons and tax considerations.

Option 1: Shareholder – the sweat equity route

If you’re trading through a limited company, bringing someone on as a shareholder is one of the cleanest ways to formalise their involvement. That doesn’t mean giving away half the company straight away.

Instead, you can issue them a small number of shares and use a shareholders’ agreement to define exactly what those shares entitle them to.

Shares typically carry three core rights:

1. Profit – a right to receive dividends

2. Control – a right to vote on decisions

3. Capital – a right to share in any proceeds if the company is sold

What many people don’t realise is that those rights can be separated and manipulated. For example:

• You could issue 10% of the shares, but allow only 5% of the profit, no voting rights, and no capital if the business is sold.

• You could make dividends discretionary – so only paid if and when the main founder chooses to declare them.

• You could give full economic rights but restrict votes, preserving decision-making control.

This setup is often referred to as “sweat equity” – where someone works for free or at low pay in return for equity, with the expectation that it will pay off down the line.

✅ Pros:

• Tax efficient (dividends are usually taxed lower than income)

• Strong incentive for buy-in

• Protects both parties when documented properly

⚠️ Cons:

• Needs careful drafting to protect the original founder’s control

• May require company filings and formal share issue processes

• More visible relationship, which may need to be disclosed to third parties (including current employers)

Option 2: Consultant – keep it contract-based

Another option is to keep things simple and have the collaborator operate as an external consultant. This can be done in their personal capacity (as a sole trader), or through their own limited company.

The arrangement would then be governed by a services agreement – usually stating the scope of work, expected contribution, and most importantly, how any profit-sharing would work.

For example, it could say: “You’ll help grow the business, and if it makes money, you’ll get 20% of the net profit on clients you introduce.”

From a tax point of view, this gets more complicated.

If the person is not paid up front and is only remunerated later, HMRC might view that as “disguised employment” or “disguised remuneration” – meaning they could come knocking for unpaid tax and national insurance.

If the person uses their own limited company to invoice you, that risk is reduced, and the payments can be treated more clearly as B2B services.

✅ Pros:

• Preserves full ownership

• Flexible and easier to end if needed

• Lower legal setup costs

⚠️ Cons:

• Tax risk if structured poorly

• Weaker commitment from the consultant

• Less enforceable restrictions on competition or confidentiality

Option 3: Share options – promise now, equity later

For those who want to defer giving away shares but still incentivise someone, a third route is a share option arrangement.

Here, you grant a right – often conditional on hitting certain milestones – for someone to acquire shares in the future. For instance:

“Once the business hits £100k turnover, you’ll have the option to acquire 10% of the company.”

It delays dilution and provides certainty, but is more expensive and complex to set up, and usually only worth considering in higher-growth or longer-term startups.

✅ Pros:

• Aligns incentives with future success

• No upfront equity transfer

• Can be combined with tax-efficient schemes (like EMI)

⚠️ Cons:

• Needs formal documents and potentially valuations

• May feel too theoretical or distant for the collaborator

• Higher legal and accounting costs

Option 4: Employment – but not ideal for equals

While technically an option, most co-founders or collaborators don’t want to be employees. Employees are subject to PAYE, carry full employment law rights, and usually don’t feel truly “invested” in the business.

Worse, it’s harder to unwind the relationship without potential claims.

That said, sometimes an employment arrangement might suit a junior hire or someone whose role is tightly defined – but not someone you want as a co-pilot.

✅ Pros:

• Clear expectations and boundaries

• Suitable for someone with a fixed role and hours

⚠️ Cons:

• Full employment law obligations

• PAYE, minimum wage, auto-enrolment etc.

• Low sense of ownership

Option 5: A simple partnership – no company, no shares

Not all businesses start with a company number and Companies House filings. A simpler – though riskier – route is to form a general partnership.

This is the traditional way many professionals (accountants, lawyers, consultants) have operated for years. You don’t need to register a limited company. Instead, the business is simply you and your partner working together under an agreement – even if it’s only verbal.

Under the Partnership Act 1890, if two or more people carry on a business in common with a view to profit, it’s automatically treated as a partnership in law.

That means:

• Each partner is personally liable for the debts of the business.

• Any partner can bind the others (e.g. signing a contract).

• Profits and losses are normally shared equally, unless agreed otherwise.

✅ Pros:

• Very easy to set up – no incorporation required.

• Total flexibility in how you split profits and duties.

• Can be suitable for small, informal businesses or side projects.

⚠️ Cons:

• Unlimited personal liability – if the business gets sued or takes on debt, each partner can be held personally responsible.

• No legal separation between the business and the people running it.

• Can be harder to scale or raise investment in the future.

To reduce the risks, you should always put a partnership agreement in place, covering:

• Who does what

• How profits (and losses) are split

• What happens if one partner wants to leave

• How disputes are resolved

A properly drafted agreement will save you a world of pain later if things go wrong – and in many partnerships, disagreements do crop up eventually.

Document it – whatever you do

Regardless of the route you choose, one thing is certain: get it in writing.

Whether it’s a shareholders’ agreement, services agreement, consultancy contract or option plan, having something clear and binding helps protect your business, your relationship, and your future.

The agreement should cover:

• What happens if either of you wants to walk away

• How profit is shared and who decides when it’s distributed

• Intellectual property – who owns what you build together

• Confidentiality and non-compete terms

• What happens in the event of a dispute

Failing to document it leaves the business open to risk – and unfortunately, even the best intentions can sour if money, time or effort become unbalanced.

Summary

Going into business with someone is like a marriage – exciting, full of potential, but not something to jump into without talking about the details.

The right structure depends on your priorities: do you want full control, long-term collaboration, tax efficiency, or ease of exit?

A well-drafted agreement – whether through equity, consultancy or otherwise – helps ensure you both know where you stand.

And if things go well? You’ll be glad you took the time to do it properly.

If you’re at that crossroads now, the next step is to have an open conversation with your collaborator and then get advice to put the right structure in place. It doesn’t need to be over-complicated – but it does need to be right.

If you’re unsure on your options, or perhaps you know what you want, give me a call to discuss.