Founding a company: alone or with a partner?

Establishing a company is one of the first steps towards successfully launching a business. However, this decision requires not only the development of ideas and strategic planning, but also a well-founded assessment of whether to establish the company alone or with a partner, and in what proportions to divide the capital shares among partners. The consequences of this choice will affect not only the daily management of the Company, but also the contract structure, distribution of responsibility, dispute resolution, and ultimately – the Company’s viability.

Further in the article, we will focus on the most popular form of entrepreneurship in Latvia – a limited liability company (the Company).

Single-member company – independent and fast decision-making

When establishing a Company alone, the main advantage is independence and simplicity in decision-making. The sole member can also be the sole board member, thereby simplifying the Company’s internal governance. This approach is particularly suitable for entrepreneurs who want to make quick, independent decisions – for example, individual service providers, creative industry professionals, etc. A Company established alone allows for long-term retention of full profit control and sole influence over the Company’s development direction. This can be crucial in cases where the founder has a strong and clear strategic vision that requires uncompromising execution. However, it should be remembered that the responsibility for decisions made is also individual, and there may be some caution from investors during the Company’s establishment, given the concentration of all management and strategic decisions in the hands of one person, which can affect the Company’s sustainability.

Establishing a company with a partner – the need to find a compromise every time

Partnership can offer greater opportunities and resources; the Company can benefit from each partner’s knowledge and experience. Partnership often allows for faster realization of ambitious projects and shared responsibility for the Company’s management. However, partnership requires careful management of mutual relations – it demands coordinated decision-making and the ability to find compromises. As soon as there are several members in the Company, decision-making takes place collegially and is regulated accordingly. Depending on the type of decision, the requirements stipulated in the Commercial Law or the Company’s articles of association may require a simple majority of votes, or in some cases even a two-thirds majority for decision-making (for example, for decisions on changes in share capital according to Article 196, Paragraph Two of the Commercial Law). Partners themselves can set stricter rules for certain decisions than provided by law, thereby ensuring the necessity of reaching a compromise before each decision is made.

When planning the Company’s operations with a partner, a 50/50 split of capital shares may seem fair and promote mutual trust, but in practice, such a structure is highly likely to create irresolvable disputes and lead to so-called deadlock situations. A deadlock situation arises when members cannot reach an agreement on significant issues, thereby paralyzing the Company’s operations, which is particularly relevant when both partners have an equal number of votes and neither has decisive influence in the Company. The risk of deadlock situations should be identified in advance, by providing for dispute resolution mechanisms such as third-party mediation, assigning a casting vote on certain issues (e.g., according to each partner’s specialty), or buy-out mechanisms.

Shareholders’ Agreement – the key to sustainability in partnership

If a partnership model is chosen, it is crucial to agree on the division of duties among partners in a timely manner. Not only professional and financial aspects, but also long-term management stability must be considered. It should be considered – what will be the course of action in case of disputes if the members cannot reach an agreement? Is an exit procedure or a buy-out mechanism foreseen? Such issues must be resolved at the initial stage of cooperation. Clearly defined distribution of responsibility, management procedures, and exit mechanisms are essential elements for long-term business stability.

In addition to the information to be included in the Company’s articles of association, partners may wish to agree on matters without making them public. In such cases, the members conclude a shareholders’ agreement. A shareholders’ agreement is a non-public but legally binding instrument that allows for detailed specification of each member’s contribution, duties, and areas of responsibility, as well as providing for mechanisms of action in cases of disputes or termination of cooperation. Although a shareholders’ agreement is not a mandatory legal instrument, its existence provides a basis for members’ cooperation and defines partners’ actions in moments of potential disagreement. A shareholders’ agreement between partners regulates matters such as – each partner’s contribution (money, time, skills); decision-making procedures and voting rights; division of work and responsibility among partners; rights to appoint board members; profit and loss distribution procedures; partnership termination mechanisms and procedures, including share buy-out rights, tag-along rights, and drag-along obligations clauses. Furthermore, a Company’s shareholders’ agreement usually provides for conflict resolution mechanisms, including mutual share buy-out options, pricing procedures, involvement of a third party, mediation mechanisms, etc. It may also include confidentiality clauses, non-compete restrictions, and other essential information that is not disclosed within the articles of association. The existence of the agreement helps reduce the risk of ambiguity and ensures more effective conflict resolution if disagreements arise between members or cooperation conditions change.

A professional and cohesive partnership has the potential to effectively achieve the Company’s goals and successfully launch its operations, but first, it is advisable to ensure a high-quality foundation for regulating mutual relations.

Not every good specialist is a partner

When choosing a potential cooperation partner, significant attention should also be paid to distinguishing between the functions of members and board members. It should be evaluated whether the potential partner should be admitted as a partner or member. If a person is well-versed in the planned business area or the Company’s operations, it may be more appropriate, at least for the initial stage, to offer a board member position rather than a partnership in the status of a Company member.

In such cases, to ensure long-term cooperation, it is possible to grant rights to employee stock options or employee shares. Employee stock options are rights to acquire employee shares of the Company, ensuring employee loyalty over a certain period or fulfilling specified conditions in business development. Acquiring employee shares provides additional motivation for employees to contribute to the Company’s development, granting rights to receive dividends and other benefits, while not providing direct influence (voting rights) in the Company’s strategic management.

How to choose the right option?

The choice between establishing a Company alone or with a partner is not just a matter of legal form or profit sharing. It is a decision about work style, values, ambitions, and risk tolerance. The choice of the right approach also depends on the business sector and the planned scale of operations. If the company’s operations are based on the skills, knowledge, and autonomous decision-making of a single professional, and the company founder possesses extensive professional experience and the ability to effectively manage the company – being the sole founder of the Company will be a logical and effective choice. The partnership model requires the implementation of broader regulation, as well as the ability to foresee possible situations, but can provide a more dynamic path for the Company’s growth. If the Company’s strength lies in teamwork and a reliable, professional cooperation partner has been found – this approach has many advantages.

Whichever path is chosen, it is crucial not only to start but to build a legally sound, clearly structured, and sustainability-oriented business model from the very beginning.