We are pleased to introduce our QMP Insights readers to our guest blogger, Mr. James Hillas, P.C., Attorney at Law. The material he offers in this brief and extremely valuable post, is something business start-ups, consultants and even current partnerships can benefit from thinking about. Much appreciation to Jim, for giving us permission to republish his piece.
Many two-owner businesses start out as equal partners to avoid potential conflict. After all, what could be more fair than a 50-50 split? It avoids a potentially awkward discussion about whose contributions are more important, and allows each partner to equally share in the risk and reward.
Unfortunately, what looks like the easy way out can turn into a nightmare. No matter how compatible or easygoing two people may be, they will not agree on everything. And if one of those disagreements involves a major decision, an equal partnership can mean a permanent deadlock leading to a shutdown of the business.
Working out a solution ahead of time can mean the difference between success and failure. One option is to value each partner’s contributions and decide on an unequal ownership split, for example, 51-49.
If the business is structured as an LLC, it is possible to draft the governing documents to permit partners to share profits and losses equally, but have unequal voting power on key decisions.
Yet another option is to add a third owner with a small percentage of ownership—say two percent—to act as the swing vote. This prevents either majority owner from taking action without the consent of at least one other owner.
If two partners are still determined to be 50-50 owners, they should at least have a buy-sell agreement that provides a process for allowing one partner to buy out the other’s interest if there is a permanent deadlock. For example, a simple buy-sell agreement provision for a 50-50 partnership might allow Partner 1 to set the terms of an offer to buy out Partner 2. Partner 2 has two options: accept the offer and sell, or reject the offer and buy out Partner 1 on the same terms. The “shotgun” choice is similar to one sibling cutting the cake in two and letting the other sibling choose which piece to take.
If you are starting a business with another partner or are currently in a 50-50 partnership, consider setting things up or changing them to avoid potential gridlock.
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Jim Hillas can be reached at 503-407-6074, through eMail to Jim@Hillaslaw.com. His website is www.HillasLaw.com .