Four Considerations When Entering Into a 50/50 Business Relationship

Unlike businesses with a single controlling owner or several owners, a 50/50 business by its very nature is ripe for disagreement between its owners. Owners of a 50/50 business will need to proactively consider how to handle disagreements when setting up their business venture and drafting their operating agreement, shareholders agreement, or partnership agreement.

Those with ownership stakes in privately held businesses, partnerships, or family offices need to closely collaborate with and trust others. When disagreements and disputes over rights and responsibilities arise, individual emotions and personalities can complicate matters. This ongoing series will help owners anticipate potential problems when structuring their businesses and find solutions to issues that commonly arise among owners of privately held businesses, both before and during litigation.

This first post explains common areas of disagreement between 50/50 owners. (Our next post will explore deadlocks between 50/50 owners and explain how to resolve them.)

When forming a 50/50 owned business, owners should consider negotiating and drafting the company’s governing documents to anticipate these four common areas of disagreement between 50/50 owners.

1. Business objectives and operations. Agreeing on the general direction and goals of the business at the outset is critical to avoiding potential disputes in the future. The owners need to be aligned early on the business plan, including management of the business, decisions requiring unanimous consent, employment and salaries for the owners, customer and vendor agreements, and access to books and records.
2. Financial matters. Another potential source of dispute is how to disburse and use the funds of the business, including anticipated capital outlays, criteria for distributing any earnings, financing, and capitalization.
3. Transfer of equity interests. Owners should discuss under what scenarios each owner is willing to admit new owners or transfer their equity.
4. Deciding whether or not to sell the business or dissolve. Owners should also discuss under what scenarios each owner would be willing to sell the business or sell their interest, and whether one owner can force the other owner to sell the business.

In discussing these common areas of dispute, business owners should also consider whether the governing documents delegate authority for some of these matters to either owner, or instead require unanimity. Having these discussions early in the process of setting up a business may help the owners avoid future disputes.

As circumstances inevitably change, the owners may disagree on what is in the best interests of the business, and deadlocks may arise. A 50/50 business is more likely to encounter a deadlock between its owners than a business that has a majority owner. This can lead to a messy and inefficient standoff between the owners if not planned for in advance. We encourage owners to look out for upcoming posts on how to resolve deadlocks, dispute resolution provisions, and steps for exiting a business.