Imagine that you and a friend have come up with a great new business idea. You’ve decided to start a company together and work to launch your new product. When drafting up the original organizational documents for your company, you’ll need to decide how to structure your partnership and who should get what.
The natural inclination is to decide on a 50/50 partnership. You both contributed to the original idea behind the business and feel that you should get equal recognition for your efforts. While this seems like the fairest approach and one least likely to lead to discord between partners at the beginning of the business, it can actually be the worst approach down the road.
Avoiding Deadlock in Puyallup
The biggest reason that 50/50 partnerships become a problem in operating a business is that they easily lead to deadlock. In a business, disagreements about how to proceed will always arise. Partners may disagree on whether to capitalize on a new opportunity, whether to hire a new CFO, and when is the right time to sell the business.
In a 50/50 partnership without a majority partner or a managing partner, all decisions must be made by consensus. This is because no one partner has the majority rights to overrule the other. When the two partners are not on the same page, the business can quickly become deadlocked and unable to move forward in any sort of productive fashion.
For example, say that your business has been given the opportunity to sell to an interested buyer. One partner believes that the sale is in the best interest of the business and wants to move forward. The other partner would like to see the company continue to grow and doesn’t want to sell. In a 50/50 scenario, the sale will be impossible because both partners cannot agree. But if there is no sale, the partner who wanted the sale may also refuse to assist in moving the company forward in its original form, creating a deadlocked situation.
Avoiding deadlock does not mean that one partner has to have a much higher level of investment or interest in the company than the other. A simple 51/49 partnership allows the partners to work together. But in the event that they are at a stalemate, the majority partner can make the call on a certain decision that allows the company to move forward.
Alternatively, if you’re not comfortable giving one partner a majority interest when both are contributing equally to the company’s development, another alternative is to set up the partnership as a manager-managed LLC. This is where both partners are equal partners in the LLC, but one of the partners has been given the authority to take leadership on certain issues by being the manager of the company.
Getting Rid of a Partner Who Is Hurting the Company
A 50/50 partnership can also make it virtually impossible to remove a partner or member who is acting in a way that is detrimental to the company. If one partner does not have the authority (through a majority interest or a designation as manager) to remove the other and there are no provisions for removal in the operating agreement, it can be virtually impossible to change the ownership of the company.
If the partner who needs to be removed is taking actions that may be illegal or a violation of his duties as a member, it may be possible to pursue legal action to remove the partner. But this is a costly and timely approach that is likely to leave all those involved with a bad taste in their mouth.
The much easier course of action is to structure the partnership to give one of the partners the authority to make these types of decisions. Another option is to set forth a specific procedure within the rules and operating agreements of the company to allow for removal of a partner to occur.
When a company reaches an impasse and decisions cannot be made, individuals cannot be removed, and the company cannot move forward, one of the only options that remains is to seek a judicial dissolution of the company. In a 50/50 partnership scenario, this is essentially a request that the court take control of the situation and order the parties to dissolve the company because they cannot move forward.
In a normal company context, the partners with majority control over the company could initiate the dissolution process themselves and do so in a manner that is much less costly and much quicker than a judicial dissolution. However, because a 50/50 partnership does not allow one particular partner to take such action, a judicial dissolution will normally be required.
As one can imagine, judicial dissolutions are lengthy and expensive affairs. They require both partners to relinquish some degree of control to the court, giving up the ability to fully orchestrate how the company will be shut down and requiring the court’s involvement in the distribution of assets upon dissolution. While this may be necessary in a business partnership that has truly reached the point of no return, it is rarely the preferred approach for partners who have invested their time and sweat equity in building up a company.
Washington Attorneys Helping You Structure Your Business for Continued Success
Starting a business involves all types of small decisions that can have immense consequences down the road. When you have never been involved in a business venture, it can be difficult to fully evaluate the impacts of the decisions you make or consider the full range of possible options before you. These limitations can prevent you from structuring your company in a way that would work best for you.