When a partnership is starting it just seems natural that everything should be equal…a 50-50 partnership. You both share in the ideas and have different strengths and together make a wonderful team. So why wouldn’t you want to set up the business partnership as being equal? While this might seem like the right thing to do in the beginning, often it isn’t the best solution down the road, especially when it comes time to sell.
Or take another view of this where a father/mother own the business and are giving it to two of their children to split…equally. They don’t want to favor anyone, so they give it in their estate plan equally, 50-50 between their two kids. This too sounds like a great idea on the surface but can be riddled with issues and problems down the road.
Case in Point…
There was a landmark case of Jarvis v. Jarvis where this exact situation happened. Allow me to give you a few of the highlights so you can see how this can result in a decision that immobilizes the business. If you would like to read the entire description and more details of the case, you can access it HERE.
This was the case where the two sons, James and Todd Jarvis, were given equal partnership in the business upon their father’s death…completely equal partnership. Sounded like a good idea to their father at the time but after his passing things changed. One of the sons wanted to sell some real estate out of the partnership and the other one didn’t. Since each had 50-50 ownership, no one had the overriding vote as to what should be done.
Lawyers got involved and there was quite a bit of time and legal expenses involved in trying to sort out the situation. This resulted in a “deadlock” between the sons and their attorneys in trying to figure out an answer that would work for both sons. There was even an attempt to insert an outside person as the deciding partner over the general partnership. This too ran into issues within the courts. If you want to nitty-gritty details of the entire case, I encourage you to read the entire write-up. For the sake of us trying to help you, the business owner, let’s move to some “lessons learned” or lessons that should be learned from this crazy situation.
Lessons Learned
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Competent Business Lawyer
First, it is imperative to find a competent business lawyer in advance of setting up any partnership agreement. Things always change over time and a business lawyer can help you think through things today, tomorrow, and when the business is sold or dissolved. It will save you thousands of dollars down the road to do your thinking (and deciding) up front and a competent lawyer who deals with businesses can help you through this process.
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Never do a 50-50 agreement
Second, never structure a truly equal decision-making agreement…this is dangerous territory. When you have equal decision making you are automatically asking for a deadlock on critical decisions. And as was the case with Jarvis v. Jarvis, this can be very time consuming and costly in lawyer’s fees alone. This just doesn’t end well and there are enough examples out there that you should do your homework before putting an agreement like this together. Again, a competent business lawyer should counsel you against such an agreement.
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Build in a “Tie-Breaker”
Third, you can make a 50-50 agreement work, as long as there are ways to break the tie. For example, having the value of the business split 50-50 works fine as long as there is a different percentage used for voting rights. Having a 51-49 voting structure in place allows the assets to be shared but allows someone to always make sure there isn’t a tie. There are ways to accomplish what most business owners want, equal equity without making it impossible to execute. Think through different possibilities that can help you get what you want but not cause undue hardship on the business or future owners.
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Start with “end in mind”
Fourth, look at other ways to accomplish what you want. The key is to start with the end in mind, deciding what it is you want in the end. Once the end goal is decided, there may be other ways to structure an agreement between owners outside of the traditional partnership agreement of everything being equally distributed. For example, maybe one partner would like a little less ownership for more control over the business. Or perhaps less ownership for less time invested in the business so they have more time for family or other ventures. Get creative…an equal partnership may not be the best solution to get everyone what they want and need.
What to do next…
As you have probably figured out by now, the key behind all of this is to start with a competent and knowledgeable business lawyer who can help you and the others involved have some productive (and hard) discussions before anything is put in writing. Then after everyone has seen the situation for what it is today and what it could be tomorrow, the lawyer can create the necessary documents to execute everyone’s wishes. Starting here will save thousands of dollars in lawyer fees (and other expenses), incredible amounts of time, and much less stress.
This scenario is one of the many reasons why we created Your Concierge CounselSM. We created it to help organizations think through situations just like this and to have legal counsel immediately available before, during, and after any decisions are made. When you have a lawyer at your disposal when you need them, things can happen much more efficiently and much faster. If you would like to learn more how this works, please visit Your Concierge CounselSM to learn more or give us a call and we’ll be happy to meet and walk you through how all this works to minimize this issue.
Also, if you just want to better understand how you can minimize and lower your risks (which every business owner wants) then please read some more about risk management and how you can help determine your own risk. I’d also be happy to meet with you (complimentary of course) to discuss your own personal situation further and give you some insights about how you might want to proceed.
I hope you have found this helpful and given you a different way to look at your business. If it has, please share this with others inside your company and your colleagues who are running or leading other businesses. Our primary mission at Generations Law Group, LLP is to help everyone find productive ways to lower their business AND personal risk. This is just one way you can start to do this…but it will tell you a lot about you and what has happened over the past few years with regard to your business risk. Let’s make sure your risk is as low as it can be while you continue to grow.
