Why We Never Recommend a 50/50 Partnership

Why We Never Recommend a 50/50 Partnership

When companies are started by two people, they often want to own the company as equal partners – 50/50. People will often say, “We are true partners. We are 50/50 in everything we do, so that's the way we want it to be reflected in the operating agreement. We feel like we are equal partners on this.”

However, a 50/50 partnership is never a good idea, even if (and often especially if) you are a married couple. 

Here’s why…if there is a serious disagreement between the partners and each partner has equal say, one of two things will happen.  Either there will be an unbreakable deadlock (and the only resolution is judicial dissolution, which is litigation) or both partners have the authority to do whatever they want, regardless of whether it’s against the other partner’s agreement.  

Here’s an example.  I once represented an LLC with two members who each owned 50% of the company.  The Operating Agreement stated that the members had the authority to incur debt on behalf of the company (without requiring unanimous consent of the Members). One member began incurring debt on behalf of the company on a monthly basis, against the wishes of the other member. That member called me asking what he could do to prevent his partner from continuing to incur these debts (which he was responsible for as an owner of the company).  Unfortunately, my answer was nothing.  Because the Operating Agreement allowed the members to incur debt, and neither member was a majority owner, both members had the authority to unilaterally incur debt.  There was little that my client could do to prevent this besides threaten litigation, which we did. 

Multiple lawyers got involved and the whole thing was a mess.  This could have been avoided by making one member a 51% owner (or at a minimum, one member the managing member).  Then, the operating agreement could have been structured so that the 51% owner had the authority to control the everyday business decisions (or delegate them as necessary) and the larger business decisions could have been reserved for unanimous consent of both members.  So, the member with the controlling interest would have the authority to incur debt on behalf the company without the consent of the other member (perhaps with some limitations).  Or, the operating agreement could have been written so that incurring debt required unanimous consent.  Either way, it would have been clear what was required in order to incur the debt. 

 So, how do you figure out who gets to own the 51%?

There’s no fixed answer to that question – it depends on the situation.  However, the key questions to consider are:  Who is going to be running the business?  Is one owner going to be more involved in the business with the other acting as more of a passive investor?  Does one owner have more experience running a business? Has one owner put more money into the business?  Has one owner dedicated more time to the business? 

Keep in mind, the decision-making authority for LLCs can vary in any number of ways, depending on what the owners want.  If the owners want to have more equal authority to make decisions, the operating agreement can be structured to require unanimous consent for more things. However, partners must keep in mind that the goal is to avoid a deadlock.  Ultimately, the only way to avoid a deadlock is simply for one person to have more control. 

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