I am considering starting a new business and setting up a company with a colleague I know. What are some things I need to think about?
Jo: The most common business vehicle is a limited liability company. The two key roles in a company are shareholder (i.e. owner) and director (i.e. decision-maker).  
When you are setting up a new business you may have both roles with each of these ‘hats’ on. However, at law, each ‘hat’ must be considered separately.     
You will need to consider from the outset how the shareholding will be divided up, and the implications of that on decision-making. The company itself has a ‘legal personality’ separate from the individual who may own the business through his or her shareholding.

How important is value alignment in your relationship?
Jo: Value alignment is one of the most important things to think about. To establish alignment, put your potential business partner through a type of recruitment process and test out your compatibility on some of the tricky issues. Consider:
• What style of communication do you expect in the workplace and in business?   
• What level of competence would you expect around financial matters?
• How would you share duties and responsibilities within the business?  
There are a number of facets to running a business which include financial, marketing, people management and so on. While someone may be technically competent in their area of expertise, it may not necessarily translate into the skills required for business success.   

We both intend working in the business but bring different strengths.
Jo: It is common for shareholders and directors of a company to also be ‘employees’ doing work for the business and paid as such. However, where the employee’s role and duties have not been clearly defined, problems may crop up.   
Consider how you will reward/remunerate each person for the contribution that they are making to the business, particularly if their skills, and what they bring to the business, are different.  

Will employment law apply when I am also the ‘boss’?
Jo: Employment agreements are required for anyone working for salary or wages. This includes shareholder and/or directors, if the individual is also working as an ‘employee’ doing work for reward. Employment obligations such as paying the agreed salary each month must be met, along with keeping proper holiday records.     
There can be a tendency to blur the lines where a shareholder might support the business by not being paid as an employee, during times of trouble. This is a risky thing to happen from an employment perspective where legal obligations cannot simply be ignored or sidestepped. Any special arrangements must be clearly agreed and properly documented.    

What planning should we do for future shocks to the business?
Jo: As recently seen, external factors can significantly impact on business. A common understanding around risk, capital required to withstand possible shocks, and insurance is always a good idea.   
If individuals carry different ‘hats’ in the business, and there is a need to make cutbacks, you will need to consider how you will deal with director/shareholder/employees. For example, if an individual’s employment agreement ends, is there a mechanism for share transfer? How will the value of the shares be determined?   
If the business is struggling, there may be no value. In fact, liabilities may arise. Consider whether expectations are clear around exit arrangements.

I am considering bringing a staff member along as a shareholder as an incentive? What do I need to consider?
Jo: The decision to bring on employees as shareholders may seem like a good option, however it does require careful planning and a carefully drafted agreement. If there is an intention to motivate staff by getting some ‘skin in the game’ there may be other ways to achieve this without the legal complexity of a shareholder arrangement. This could be through simple bonus arrangements or other non-monetary incentives or rewards.
New Zealand is a nation of small business operators. The level of legal compliance and complexity they face can undermine time and energy that they could be spending on building the business. Therefore it is important they get upfront advice about their legal structure which will set them up for the future and help avoid hurdles turning into major roadblocks.  

This article is written for the purposes of providing general information only and is not intended to be legal advice.