A private limited company is often seen as an ideal investment vehicle for those looking to invest in property. The use of a company as the registered owner not only offers the security of limited liability but, if used correctly, can also provide a tax efficient means of managing a portfolio.
For a single investor acting as both sole shareholder and director there are relatively few additional burdens in utilising this method of ownership. The company owns the property and in turn the investor owns the company and is the only person exercising day to day control as a director.
Far more complex is the situation where multiple investors undertake a joint venture using a property investment company as the vehicle.
Often difficulties arise between multiple shareholders who fail to formalise the manner in which their relationship is to be structured. This is a particular problem in a private limited company because share ownership in and of itself does not give a direct right to control the affairs of the company. The danger for the unwary investor is that they may find their investment is placed in the hands of the company’s directors without any safeguards to ensure they have a say in how their capital is to be applied.
It is therefore advisable for such investors to think carefully about the benefits of entering into a shareholder agreement to help safeguard their investment. Such an agreement is beneficial in a number of ways and can make provision for:
- each shareholder’s right to appoint a director;
- the role and salary provision for individual directors;
- capital contributions in the form of director’s loans;
- dividend policy;
- pre-emption rights which ensure that any proposed sale of shares is first offered to the other investors;
- restrictions on competing with the business, the poaching of staff and solicitation of the company’s customers;
- dispute resolution to help avoid costly litigation in the event of a break down in relations.