Bringing in a Business Partner: Accounting, Tax and Structure Questions to Consider

An employee wants to buy into the business. A family member is ready to take an ownership role. An investor offers capital to support expansion.

The conversation may quickly turn to a percentage. Before agreeing on one, establish what each person is contributing, what they will own and how the relationship will work.

Here, “business partner” means someone joining you in ownership. It does not assume that you will operate through a legal partnership.

Start with the contribution and the role

Money, assets, industry knowledge and future work are different contributions. Be clear about what is being offered, when it will be provided and what the business expects in return.

An investor who provides funds but takes no operational role presents a different proposal from an employee who will gradually take on management responsibilities.

Separate four questions:

• Ownership: What interest will the person acquire?
• Payment for work: How will their work be recognised and paid?
• Profit distributions: What rights and expectations will apply?
• Decision making: Which decisions will they influence or control?

Do not use one ownership percentage as the answer to all four.

If shares are proposed as a reward for employment or future services, raise that specifically with your accountant. Employee share scheme rules may need consideration. It is not simply another way of paying a purchase price.

Establish where the money will go

An investment into the business is different from a payment to an existing owner.

For example, money paid to a company for new shares provides funds to the company. Money paid to an existing shareholder for their shares goes to that shareholder. An arrangement can involve both.

This distinction matters commercially. If the purpose is to fund expansion, establish how much money will actually remain available for business operations after the transaction.

It also matters for accounting and tax. A sale of existing shares can have capital gains tax consequences for the seller. Funding received by the business needs to be understood and recorded according to what it represents.

Ask your accountant to assess the proposed payments and ownership changes together, rather than treating the total amount as a single unexplained contribution.

Check what the existing structure can accommodate

The proposed interest needs to be described more precisely than “a share of the business”.

Would the incoming owner participate in the whole operation or only one activity? Would property or other investments sit outside the arrangement? Who would legally hold the interest?

For a company, the rights attached to shares and the existing governing documents matter. For a trust or partnership, the relevant deed or agreement needs examination.

A business structure review should test whether the current arrangement can accommodate the intended relationship. It should not start with an assumption that admitting another owner requires a restructure.

Ask your solicitor to assess the legal position alongside your accountant’s review of the financial and tax implications.

Give the valuation a sound foundation

Before negotiating a price, clarify what is being valued and the date the valuation relates to.

The business as an operating concern, a particular ownership interest and an owner’s loan balance are not the same thing. Ask how each is being treated in the proposal.

Credible financial information helps both parties understand the starting position. This includes recent results, significant assets, debts and the cash needed to keep operating.

Discuss unusual income or expenses, the work currently performed by the owner and any expected changes after the new person joins. These are useful matters to put before whoever assesses the value.

Clear business records also help identify amounts owed to or by existing owners. If an owner expects repayment of a loan as part of the transaction, that should be explicit rather than discovered after a price has been discussed.

Agree on an appropriate valuation process, including whether an independent valuation is warranted. Do not assume that an agreed commercial price resolves every valuation question for tax purposes.

Discuss future funding and difficult decisions now

The entry discussion should also cover how the relationship will operate after completion.

Questions worth addressing include:

• How would further funding needs be met?
• What happens if one owner cannot contribute more money?
• Which decisions need agreement, and how would a disagreement be handled?
• What happens if someone stops working in the business but remains an owner?
• How would an eventual exit be valued and funded?

These are matters to resolve commercially and have documented by a solicitor, with accounting and tax input where appropriate. The parties may also need separate advice about their own interests.

The purpose is not to predict every disagreement. It is to avoid entering ownership with materially different expectations.

What to bring to an initial discussion

Bring the current structure and ownership details, relevant deeds and agreements, recent financial statements and current management reports.

Also include details of debts and owner balances, the proposed contributions, the incoming owner’s intended role and any draft terms or valuation material.

Identify what has already been discussed and whether anyone has made a commitment.

Before agreeing on a percentage or signing terms, speak with Jaha about the accounting and tax questions. A useful first discussion should clarify the proposed arrangement, identify missing information and establish which matters need coordinated legal advice.