I see this issue very frequently on both ends of the spectrum, both before there is a problem and after. Two friends enter into a business agreement and decide to share ownership and decision making 50/50 and here in lies the foundation of a problem.

 Most of the time, the potential pitfalls of such a decision are not even considered, it is just believed that 50-50 is the fair way to go without seeing the trap this creates for the unwary.Further, even if there are internal feelings regarding who should have more, its easier as it seems fairer to resolve these issues with little or no confrontation by settling on an even split.

Who can say it is not fair, we all think, and this decision avoids difficult discussions.

No two partners can ever agree on everything especially important issues. I urge you to therefore design a more sophisticated organizational format which will satisfy every-ones needs and allow for reasonable problem solving and decision making when the time comes.

First of all this issue should only occur regarding material decisions, the sell, buy, borrow, merge, close, issues. Issues that truly effect the value and mission of the business. The real important matters, those that should be resolved at the highest level, the Board of Directors level. All operational matters which should be broken up into departments and decided at that level and should not be included in this discussion.This issue is regarding the make or break issues which cause law suits or liquidation. Thus it may be easier to resolve this matter if each partner recognized he is responsible for and thus in control of his department area on an operational basis. This is typically an adequate allocation of power to reduce the larger issue to an easy agreement.

I understand the respect demonstrated and ease of entering into a 50/50 ownership and decision making relationship. It seems like the right thing to do, mutual hard work and respect, doing it together, sharing the good the bad and the ugly equally. Its a great concept but its the stuff movies are made of. It seldom works well as it is unrealistic to expect that every important business decision will be agreed on.

Marriages are 50/50 and look how difficult it is to keep one going.  Partnerships share this same quality, certainly there are different issues involved but there is something to be learned through observation, that a business needs  to have a clear decision making procedure, there needs to be a tie breaker concept and a final word when disagreement exists, or nothing will ever get done, especially large important decisions that really matter.

Frequently there is a disproportionate investment of time, capital, credit, assets or skill by the partners into the business. No relationship is ever exactly 50/50. Most often its the cash that is respected the most and the one that brings the most cash into the business is typically given the control of the final decision making the 51% with the remaining partner enjoying the 49% share.

Thus when push come to shove regarding important material decisions, decisions that both partners should have input into, one partner, the money partner can vote his extra 2%, the controlling factor presumably affording him an opportunity to protect his investment and the issue is resolved. This path respects the importance of the cash investment, which without no business entity would ever be launched.I understand the value and power of sweat equity, but in the end in today’s business environment, cash is king.

Thus point one, 50-50 business ownership relationships should be avoided, as they result in disaster. Someone must have the ultimate final word, control…tie breaker status.

In fact the law has terms and procedures for resolving this situation as follows: In a 50/50 relationship of ownership interests, when the partners disagree on material issues, if the business is incapable of moving forward because of this material disagreement, its considered trapped in a bottle neck and is therefore at an impasse and in such situations, the court decision will be an orderly liquidation of the assets for the benefit of the share holders. 

This is always a disaster for everyone, the worse possible conclusion and to be avoided at all costs, but this can become inevitable if there is a 50-50 shared power and authority and no agreement to important matters, as the business can no longer be effectively run. Now there is a disaster for certain.What about fairness and equity I hear?

One of the advantages of organizing under the laws and operating agreement of an LLC is that profit and loss as well as capital gains can be shared differently then decision making. You could have a 50-50 profit split but a 51-49 decision making split. Or you could have an even profit split but one partner can hold two thirds of the decision making authority, it an be done in may different ways but the effect and result is that one person has final control and gets to say there will be no impasse,  there will be no deadlocks as there will always be a tie breaker. While not a complete answer for the frequently implemented 50-50 deal, sharing profit equally and decision making unequally is the best compromise one can make.Is it to late to change if your in such a plan? No, but its far more difficult now.

 If logic is to prevail, it should be resolved privately previous to a judge ordering a sale of assets. 

(see “more about structuring a 50/50 partnership” successfully, a more recent blog entry )