Congratulations! You’ve decided to go in to business with your long-time associate. You trust one another implicitly and feel confident that nothing will ever go wrong with your business relationship. After all, you’ve known one another for years. You even introduced him to his wife. So when he presents you with the idea of establishing a 50/50 partnership in your new venture together, you think it sounds great. Even Stevens. Everybody wins…or do they?
Here’s the thing. In a straight 50/50 partnership, the profit and losses are divided evenly but so are the voting rights. When an issue arises in which partners in a 50/50 partnership disagree, it’s hard to move forward. You say yes; he says no. Who wins when you both get an equal vote?
No one wins. Without certain provisions in an operating agreement (if the company is an LLC) or By-Laws (if the company is a corporation), a straight 50/50 partnership could cause more problems than it solves. This is because deadlocks on important matters can occur when you and your partner disagree. This leaves the company helpless, unable to continue to function effectively. As an Atlanta business attorney representing small businesses and business owners throughout Georgia in business dispute matters, I constantly see costly legal battles that could have been avoided with the proper forethought in the beginning.
When it comes to the problem of straight 50/50 partnerships, luckily there are several solutions to the problem that can keep the partners on relatively equal footing financially but allow for resolution of voting issues on important issues facing the operation of the company:
- The easiest solution would be to create a 51/49 split or other split where one of the partners owns a slightly larger piece of the pie. Along with the one percent extra for one partner comes a one percent greater contribution of capital etc. Keep in mind whoever is getting the 51% majority is in essence controlling the vote under a partnership with a majority vote rules system.
- Create a 49/49/2 partnership in which a third party enters the equation. All decisions in this scenario are the result of a common vote of two of the three partners in a majority vote rules system. In order for this system to work effectively, you are going to want to select a very good 2% partner. One who knows the business very well, has a great business background and one both partners trust. This is because the 2% partner, while not sharing much in the profit and loses of the company, is the swing vote on important issues. Think Justice Kennedy on the Supreme Court. If you don’t select a wise business advisor for this role, the vote ends up being a proxy for one or the other partners.
- A straight 50/50 partnership with a well-crafted operating agreement or set of By-Laws that outlines how you will handle stalemate situations in which you and your partner disagree on the appropriate course of action. A business attorney can advise you on appropriate provisions to include. For example, if a stalemate occurs, the partners agree to bring in a third party advisor to break the tie.
If you are already in a straight 50/50 partnership that is in a deadlock over an important company decision, the only solution to this problem is to compromise and agree on how to move forward in the best interest of the company and your partner or properly dissolve the company and start over.
The problem with voting stalemates in partnerships and other business arrangements is just one of many potential pitfalls unsuspecting partners can find themselves in if the proper thought is not put into the creation of structure and rules the company will live by that solve a number of different situations that could arise in the future. Receiving advice from a knowledgeable business attorney is always worth the up front cost.