50-50 partnership can be a very bad idea

partners photo

A business with equal 50/50 partners is a unique relationship. While the profits and losses are divided evenly in a straight 50/50 partnership, so are the voting rights. Thus, neither partner can do anything without the approval of the other (unless the company’s operating agreement, partnership agreement or bylaws provide otherwise).

So, if something major happens and a decision needs to be made regarding your company, but the two partners cannot agree, then no decision will be made. Some of these decisions could be life or death for a company.

Another common problem that results from a 50/50 partnership is the question of who is in charge. Historically, a business model has always included a boss — who is clearly the person ultimately accountable and who has control of everyday decisions. From there, the boss will delegate duties to subordinates.

But what if there are two bosses? In the event the arrangement is with two individuals who refuse to ever be second-in-command then a power struggle is inevitable. On the other hand, two long-time colleagues or friends who know each other well and aren’t worried about working through issues together might be able to handle a 50/50 partnership. But that’s a big uncertainty.

Other options to consider

Other options? One is for the partners to split 51/49, with the higher percentage member receiving a greater vote. However, one popular route is to invite somebody to hold 2% and a vote, while the other two partners get 49% each and a vote each. In the event there is a tie when a decision needs to be made, the third person with 2% will be the deciding factor.

A straight 50/50 partnership could work if you have a well-crafted operating agreement (LLC), partnership agreement, or bylaws (corporation) depending on the entity type of your business. This agreement would outline steps to take if you and your partner were at a stalemate. A mutual buyout agreement could be utilized in a 50/50 partnership as well. This part of the partnership agreement allows either partner to make an offer at fair value (for which we defined a process and method as well) to buy out the other partner.

Regardless whether you have two or three partners, it’s imperative to have an operating agreement or partnership agreement. It’s very common for founders to rush to get started working, neglecting spending time and money on an attorney to create a custom agreement beforehand. Then, when things go awry the parties have no plan of action on how to deal with things.

If your business is currently without a strong operating agreement or partnership agreement and things are going well, take the time to make one now. Things can always turn for the worse when it comes to business and it’s smart to plan that way.

 

About the Author

Jon Hood
Jon Hood is a New York City lawyer who specializes in start-up businesses. After cutting his teeth as the General Counsel of a New York City startup, Jon started the Law Offices of Jonathan L. Hood with the goal of providing growing companies with quality legal representation at affordable rates.