Business with Friends or Family: Why a Shareholders Agreement Matters

Forming a business with close friends or family can feel straightforward due to trust and shared values, often making formal legal documentation seem unnecessary. However, even strong personal relationships can face challenges in business. Disagreements over strategy, finances, or profits can arise and escalate without a clear legal framework.

This article explains the purpose and benefits of a shareholders’ agreement, key clauses to include, common issues it can prevent, when to implement it, and why legal advice is essential—especially for owner-managed, relationship-based businesses.

What is a shareholder’s agreement and why is it important?

A shareholders’ agreement is a binding legal contract that sets out how your company will be owned, managed, and governed. It includes:

• Roles and responsibilities of each shareholder
• How key decisions will be made
• What happens if someone wants to leave, sell their shares, or a dispute arises

It’s not just for large companies – start-ups and small businesses, especially those involving friends or family, often need this structure even more.

Key clauses to include in a shareholders’ agreement

• Clarify decision-making powers and voting rights
• Plan for shareholders’ exit and business continuity
• Set rules for dispute resolution and deadlock issues
• Protect the business from unexpected events like death, disability or divorce proceedings
• Protect the minority shareholders so they have a say in significant decisions impacting the company in the long term
• Good leaver/other leaver provisions
• Tag and drag along provisions

Typical challenges faced without a shareholders’ agreement

Without a clear agreement, issues can quickly turn into serious disputes. Common scenarios include:

• A third party offers to buy one shareholder’s stake—do others have the right to approve or match the offer?
• A shareholder retires—what is the exit process, and are there non-compete obligations?
• A key decision needs approval but a minority shareholder disagrees—how is that handled?
• A disagreement over the company’s direction—who has the final say?

In all these cases, an agreement could provide clarity and prevent business disruption.

How a shareholders’ agreement protects both the business and the relationship

An agreement helps:

• Avoid misunderstandings
• Align expectations early on
• Provide accountability
• Preserve personal relationships during business challenges

Having these conversations upfront often strengthens the working relationship and brings everyone onto the same page.

When is the best time to create a shareholders’ agreement?

The best time to create a shareholders’ agreement is before you start trading, make financial commitments, or bring on other partners. But if your business is already up and running and you don’t have one yet—don’t panic. It’s never too late to get things formalised.

The key is to act before a disagreement arises. Once tensions exist, even small issues can become difficult to resolve without clear terms in writing.

Do you need help drafting a shareholders’ agreement?

Get in touch with our Business Services team in London

It might be tempting to use an online template, but they will not account for your specific needs, or risks.

Our London-based Business Services team specialises in drafting clear, practical shareholders’ agreements tailored to your needs. Whether you are in the process of launching or need to formalise an existing setup, we can help protect both your business and your relationships.

Contact our London office today to arrange a consultation and get expert advice that supports your long-term success.