Your 50/50 Partnership Is a Ticking Time Bomb Without These Provisions

Your 50/50 Partnership Is a Ticking Time Bomb Without These Provisions

Disclaimer: This post is for general educational purposes and is not legal or financial advice. Business and partnership laws vary by state and individual circumstances. Speak with a qualified attorney about your specific situation.

Starting a business with an equal partner can seem like the fairest arrangement possible.

Two friends, colleagues, or family members decide to build a company together. Neither wants to have more control than the other, so they divide ownership right down the middle:

50% for one owner and 50% for the other.

Equal ownership. Equal voting power. Equal say.

When the relationship is good, the arrangement can work beautifully. If someone asks what

happens when the partners disagree, the answer may be something along the lines of,

“We've always been able to work things out.”

But what happens five, ten, or twenty years later when the business—and the owners' lives—look very different?

For Texas business owners, failing to answer that question in advance can create serious problems.

Why Successful Businesses Can Be Especially Vulnerable

Partnership disputes aren't necessarily a sign that someone did something wrong.

In fact, disagreements can become more consequential when a company becomes successful because there is suddenly much more at stake.

Imagine two equal partners who started a company together years ago.

One wants to reinvest profits and open another location. The other wants larger distributions because children are heading to college.

One partner is still working 60 or 70 hours a week. The other gradually reduces his or her involvement while continuing to receive the same compensation.

Or perhaps one owner's personal circumstances change.

There is a divorce.

A serious illness or disability occurs.

One partner wants to retire.

One partner dies.

Suddenly, the surviving owner may discover that the person sitting across the table isn't the business partner he or she chose. It could be a spouse, heir, estate representative, or another person who has little knowledge of the company's operations.

None of these situations necessarily involve a bad actor.

They involve people whose interests and circumstances have changed.

The problem isn't simply disagreement. The problem is having a 50/50 ownership structure with no predetermined mechanism for resolving that disagreement.

What Does a 50/50 Business Deadlock Actually Look Like?

People often imagine a partnership dispute as an explosive argument in a conference room.

The reality can be much quieter—and potentially much more damaging.

A deadlock can mean that important decisions simply stop being made.

The bank requires both owners' signatures, but one refuses to sign.

A valuable employee requests a raise, and each owner gives a different answer.

The company's lease needs to be renewed, but the partners can't agree on the terms.

One owner wants to hire additional employees while the other wants to reduce expenses.

One wants to borrow money. The other refuses.

One wants to sell the company. The other wants to keep operating indefinitely.

Employees begin taking sides. Vendors don't know which owner has authority. Opportunities disappear because the company can't make decisions quickly enough.

Eventually, one of the partners contacts an attorney.

That's when a business disagreement can turn into a full-fledged partnership dispute.

Texas Law May Not Give You the Exit You Expect

Business owners shouldn't assume that a Texas court will simply step in and create a fair solution whenever equal owners reach an impasse.

Depending on the circumstances, Texas law provides remedies that can include the appointment of a receiver or, in serious situations, judicial winding up of a business.

Those remedies can be drastic.

Imagine building a profitable company for years only to have its value damaged because the owners can no longer operate it together.

Legal fees accumulate.

Employees leave.

Customers become nervous.

Business opportunities disappear.

Assets may ultimately need to be sold.

Texas business owners should also understand an important principle established by the Texas Supreme Court.

In its 2014 decision in Ritchie v. Rupe, the court rejected a broad common-law shareholder-oppression cause of action and the court-ordered buyout remedy associated with it.

The practical lesson for business owners is significant:

Do not assume a judge will simply order your business partner to buy you out because the relationship has become unfair or unworkable.

Your contractual rights matter enormously.

The exit strategy you negotiate while everyone is getting along may become one of the most

important provisions in your entire company agreement.

The Buy-Sell Agreement: A Prenup for Your Business

One of the most important tools for protecting business partners is a properly drafted buy-sell agreement.

Think of it as a prenuptial agreement for business owners.

Nobody starts a company expecting the relationship to fall apart. But good planning establishes what will happen if circumstances change.

A buy-sell agreement can address questions such as:

• What happens if one owner dies?

• What happens if an owner becomes permanently disabled?

• Can an owner voluntarily leave the business?

• What happens if an owner gets divorced?

• Can an owner sell his or her interest to an outsider?

• What happens if one owner wants to retire?

• What constitutes misconduct that could trigger a buyout?

• What happens if the owners reach a permanent deadlock?

• How will the business or ownership interest be valued?

• How quickly must a buyout occur?

• Can the purchase price be paid over time?

Answering these questions before a dispute arises can dramatically reduce uncertainty later.

Don't Forget How the Buyout Will Be Funded

Creating a contractual obligation to purchase an owner's interest is only part of the equation.

The business or remaining owner must also have a realistic way to pay for it.

This becomes particularly important when one owner dies unexpectedly.

Depending on the company's structure and circumstances, life insurance may be used as part of a properly designed buy-sell arrangement to provide funds for the purchase of a deceased owner's interest.

Otherwise, the surviving owner could theoretically have an obligation to purchase a valuable ownership interest without having enough cash to complete the transaction.

That can create another dispute precisely when the deceased owner's family and the surviving business owner are already dealing with a difficult situation.

Build a Deadlock Procedure Into Your Company Agreement

A strong company agreement shouldn't simply explain who owns what percentage of the business.

It should explain what happens when the owners cannot agree.

For some companies, that may involve a dispute-resolution process that escalates gradually.

The partners may first be required to meet formally and attempt to resolve the issue.

If that fails, mediation may be required.

Depending on the agreement and the owners' preferences, arbitration may be another step.

Some 50/50 partnerships also divide decision-making authority by area.

For example, one partner might have final authority over day-to-day operations while another has defined authority over financial matters.

The appropriate arrangement depends heavily on the particular business and the owners involved.

The goal is to prevent every disagreement from becoming an immovable 50/50 vote.

Could a Shotgun Clause Break the Tie?

Another potential deadlock mechanism is sometimes referred to as a shotgun clause.

The basic concept is straightforward.

One partner names a price for the business or ownership interest. The other partner must then choose whether to buy at that price or sell at that price.

The mechanism creates a powerful incentive to propose a reasonable valuation.

Set the price artificially low, and you may be forced to sell your own interest for that amount.

Set it unrealistically high, and you may be required to purchase your partner's interest at that price.

Shotgun provisions aren't appropriate for every company, particularly when there is a significant financial imbalance between owners. But in the right circumstances, a carefully drafted buy-sell mechanism can provide a predetermined way to break an otherwise permanent deadlock.

Your Business Agreement and Estate Plan Need to Work Together

Business succession planning shouldn't happen separately from estate planning.

Suppose an owner's will states that the owner's business interest passes to a spouse or children.

At the same time, the company's governing documents give the surviving business partner the right or obligation to purchase that interest following the owner's death.

Those documents need to work together.

Otherwise, the surviving family and business partner could end up fighting over competing expectations during an already difficult period.

Business owners should coordinate their:

Company agreement + buy-sell agreement + estate plan + insurance planning.

The goal is for all of them to tell the same story about what happens to the business when an owner's circumstances change.

Already Have a 50/50 Partnership? It's Not Too Late to Plan

Many Texas LLCs and partnerships operate for years with surprisingly little written planning.

The owners may have filed the necessary formation documents but never created a comprehensive company agreement addressing death, disability, retirement, deadlock, ownership transfers, or voluntary exits.

If that describes your company, you don't necessarily have to wait for a problem before addressing it.

In fact, the best time to negotiate these provisions is usually before anyone wants to use them.

Two business partners who trust each other can have a productive conversation about what would constitute a fair exit.

Two business partners who are already threatening litigation may have a much harder time reaching the same agreement.

Protect Your Texas Business Before a Partnership Dispute Begins

A 50/50 partnership isn't inherently a bad structure.

The danger comes from assuming that equal owners will always agree.

Businesses change. Families change. Financial needs change. People retire, become ill, get divorced, or die. Even two reasonable business owners can eventually want completely different things from the company they built together.

Your governing documents should anticipate those possibilities.

At The Alford Law Firm, PLLC, our Dallas business attorney assists new and existing business owners with company agreements, buy-sell agreements, business succession planning, and coordination with owners' estate plans. We also represent business owners when partnership disputes and business divorces have already begun.

If you own a Texas business with a 50/50 partner—or you're considering forming one—now is the time to determine what happens if someday you can't agree.

Call The Alford Law Firm, PLLC at 214-228-0161 to schedule a free consultation: https://www.brucealfordlaw.com/dallas-business-law-firm-near-me