How to Start a Business With a Co-Founder in Singapore
With the increasing interest in entrepreneurial ventures and “unicorns” that enjoyed tremendous success despite their humble beginnings, it may be tempting to take the plunge with a friend or relative to pursue a business idea you believe in. Before you do so, however, there are important legal considerations you and your co-founders should take note of.
Taking the relevant prudent measures throughout the process will help in ensuring that your business is built upon a strong foundation to support its long-term viability in Singapore.
This article will explain:
Who are Founders and Co-Founders?
How is a founder different from a co-founder?
When you wake up one day with a brilliant idea that might transform the world and set up a business to develop the idea into a profitable venture, you are a founder of that business. However, you may not have all the skills required to bring the idea to fruition alone.
In this case, you may want to bring onboard a friend or professional with these particular skillsets to launch the business together. This friend or professional who joins you from the very beginning is referred to as the co-founder. This is different from someone, such as a business partner, whose principal role is to manage the business beyond its formation.
How do founders or co-founders compare with CEOs, directors, shareholders and employees?
How are founders different from CEOs and directors?
The term “Chief Executive Officer” (CEO) can sometimes be used to describe someone who is a founder. This is because under Singapore’s Companies’ Act (CA), CEO is a title given to any person, either employed by or acting for the company, who is principally responsible for managing or conducting either the whole or part of the company’s business.
Thus, it is common for founders of companies to concurrently hold the position of CEO, especially in the beginning of the business’ life. However, unlike “founder”, CEO is not a permanent title and the founder’s position in the organisational hierarchy can change. Indeed, even a non-founding individual can become a CEO.
Likewise, a founder can take on the position of either an executive or a non-executive director. Directors handle business management and make business decisions. To facilitate such roles, they are vested with the relevant powers. Such powers in turn come with corresponding legal duties. In contrast, a founder will be bound by the directorial obligations to act in the company’s best interests only if he also happens to be a director, and only in such capacity.
How are founders and co-founders different from shareholders?
Shareholders refer to those who own shares in publicly listed companies or in a private company. By virtue of such ownership, shareholders are entitled to the rights attached to the shares.
On the other hand, the title given to founders merely represents their historical relation to the company. Thus, while founders and co-founders of a business can enjoy shareholder rights, this does not follow by virtue of their position as co-founders. Instead, they will enjoy share ownership in the business they have founded only if they decide to take up shares in the company.
However, co-founders of businesses do have powers over matters concerning the shares of their company and, in turn, over the control of their business. Co-founders often stipulate the company’s shareholding structure in a document called the shareholders’ agreement, including the types and number of shares to be issued. Thus, the co-founders can choose the allocation of shares between themselves, if any. This initial split in share ownership can affect the company’s decision-making and management in the future.
Can founders and co-founders also be the CEO, director, shareholder and/or employee?
Once you set up a business with your co-founders and the company grows, the positions occupied by individuals within the company can change. However, the fact that you are the founder or co-founder of a business will not change. Indeed, a founder remains a founder even upon his or her exit from the company. Thus, a founder can choose to be involved in the company’s business as a CEO, director, shareholder, employee, or not at all without affecting their historical relationship with the business.
In this regard, it is important to note the distinction between a founding member and a founder or co-founder. While all three descriptions refer to members of a company’s founding team, a founding team member is merely part of the team in his or her capacity as an employee.
How to Start a Business With a Co-Founder in Singapore
Deciding on business plans and business structure
When deciding to start a business with your co-founders, it is important to structure a detailed business plan to ensure its continued success. While the format can vary, its substance should describe your business and address the primary goals of your business, industry background, market analysis, marketing and operations plans, competitive analysis and financial requirements.
It is also important to consider your business’ legal structure as this will affect many aspects of conducting your business. In Singapore, there are 4 main business structures:
- Sole-proprietorship or partnership;
- Limited partnership;
- Limited liability partnership; and
When choosing the appropriate business structure to adopt for your business, you should consider each type in relation to features unique to your business idea.
Drafting a founders’ agreement
As you and your co-founders embark on plans to operationalise your business idea, there are a number of preparations to be made. There are many challenges to starting a business and many are impossible to predict. Given such uncertainties, it is important to clearly set out the agreed understanding between each co-founder in a founders’ agreement.
A founders’ agreement is essentially a contract that legally binds the co-founders of a company. It clearly sets out important aspects of running a business, including:
- Division of roles and responsibilities;
- Business structure;
- Company shares;
- Management of day-to-day operations;
- Decision-making; and
- Dispute resolution mechanisms.
Registering the business
Under Singapore law, all types of businesses must be registered with the Accounting and Corporate Regulatory Authority (ACRA). This is unless you intend to conduct business under the full names of you and/or your co-founders. In this case, you are exempted from registration.
Registration can be done online at the BizFile+ website by ACRA. If your business has foreign branch offices, these can also be registered online in the same manner.
You can refer to our separate article where we detail further information on registering your business in Singapore.
Forming a team of employees
Once you have registered your business, you can begin hiring a team of employees to assist in conducting your day-to-day operations. You can source for the manpower you need through online recruitment portals and headhunting agencies.
What to Do in the Event of Disputes or Clashes Between Co-Founders
Even if you and your co-founders have signed a founders’ agreement, disputes can and do arise in the course of running a business. Where the founders’ agreement includes a clause on dispute resolution, each co-founder is bound to resort to the procedure stipulated. Such a procedure may stipulate an internal resolution through votes, or an external resolution that involves engaging in alternative dispute resolution methods such as mediation.
However, there may be instances where the founders’ agreement did not include a dispute resolution clause, or the clause is conflicting or otherwise defective. For example, the clause may be conflicting where the founders’ agreement provides one possible mechanism to pursue, but a separate agreement states a different mechanism. In such a case, no dispute resolution mechanism can be applied, and this may cause undue delay in resolution if the parties are not willing to cooperate to resolve the issue.
Where relations deteriorate further, and a peaceful resolution does not seem feasible, you may wish to consider resolution through the court. Nevertheless, even where parties choose to litigate, they may be able to reach a settlement out of court. This may be possible before any legal proceedings are commenced or even during the course of a trial before the judgment has been delivered.
While it may be tempting to engage in informal arrangements, especially when starting a business with trusted friends or relatives, it is important to observe the prudent practices explained in this article. This is because clearly setting out the details of your business can help you and your co-founders to achieve both its short and long-term goals, while reducing the possibility of conflict along the way, and foster business success.
Thus, to ensure the long-term viability of your business with your co-founders, it is important to implement reliable internal systems through drafting a proper founders’ agreement. In drafting the agreement, it is recommended that you engage a corporate lawyer who will be able to offer independent legal advice tailored to legal issues that may arise while you set up a business with a co-founder in Singapore.
Should the co-founders appoint a single lawyer to advise the group as a whole, you may additionally want to consider consulting another independent lawyer. It may be prudent for each co-founder to seek separate legal advice to ensure that everyone’s interests are properly looked after.
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