When two folks decide to do business together, they commonly agree that they are 50-50 partners, whether a partnership; a corporation or an LLC. That means they both must agree on decisions. That arrangement is fine so long as they agree on everything. It is a recipe for disaster if they don’t.
A 50-50 partnership requires 100% agreement. If partners don’t agree, the business is paralyzed and commonly the relationship is destroyed. The parties are left with some third party – a judge, an arbiter, effectively running the business, because the decision authority now rests with that third party, a party who can easily and unintentionally make bad decisions which can damage, if not destroy the business.
There are two solutions to this dilemma. First, give one-person decision-making authority. That is easily done by allocating ownership at lease 51-49. The hardest part of this approach is getting one of the people to accept the minority role.
A second approach is to provide a mediation/arbitration provision that either party can invoke. It does involve a third party, but the mediator has no authority and simply tries to get the parties to agree. The arbitrator is different, as he/she decides and their decision is generally final. The benefit of the mediation/arbitration approach is the parties get to select the Mediator/Arbitrator. There are procedures set out in the American Arbitration Association (AAA) rules for mediation and arbitration that are commonly followed.
One of the benefits of the mediation/arbitration process is that it has a great tendency to force the parties to reach agreements amongst themselves. The parties don’t want to effectively turn their business over to a stranger, who knows nothing about it.
A third option, we call the “nuclear option” is a “put or call” agreement, whereby one party offers to buy out the other party or sell to the other party, for a fixed priced. The other party must buy or sell for the fixed price.
So, the lesson from this: don’t enter a 50-50 agreement or create a structure to resolve disputes. Otherwise, you have turned your company over to some unknown party.
