Should You Enter Into a 51/49 Operating Agreement?
When you are starting a business with someone, you may want to enter into a 50/50 operating agreement, in which both partners have equal weight in the company. On the other hand, you may have been told that an equal partnership is a terrible idea that will destroy the business over time. This is a confusing topic and it’s also incredibly important for people starting a business, so we’re looking at whether you should choose a 50/50 or a 51/49 operating agreement for your business.
Pros and Cons of 50/50 Operating Agreements
First, let’s look at the good and bad aspects of having a 50/50 business partnership where both parties are equal and have equal stakes in the company.
The benefit of an equal partnership is that both parties have a completely equal say in decisions regarding how the business works as well as shared profits.
Both parties have an equal say in decisions as well as shared profits.
Yes, an equal say can be good or it can be disastrous. A 50/50 partnership means that neither can take an action or make a decision without the approval of the other party unless there are rules regarding this in a business contract.
When the founders of the company can’t come to an agreement on an issue, the business can deadlock or lead to the business splintering. Additionally, sharing profits may not be equal depending on how the work is divided.
What Is a 51-49 Operating Agreement?
A 51/49 operating agreement names one person as the majority owner in the company and the other as the minority owner. This means that the majority owner has the final say in decisions related to the company, including issues like:
- Prices for products or services
- Vendors the company partners with
- Payment and benefits to employees
- Selling the company and the selling price
- Demoting or firing the minority owner
The majority owner has a great deal of power in the business partnership and can run the business however they wish, so why would anyone choose this option?
Why Choose a 51-49 Operating Agreement?
The main reason people choose a majority-minority operating agreement is that it reduces the risk of a deadlock which can destroy the business. Also, this may be beneficial in partnerships in which one partner provides the financial capital and would keep the 51 percent ownership while the partner who is putting in the labor and overseeing day-to-day operations would own 49 percent. In these types of partnerships, often the majority owner will stay out of day-to-day operating decisions but will take a more active interest in financial matters.
Ensuring Fairness in Your Business Partnership
There are two key ways to ensure a 51-49 partnership is fair to both parties.
Shareholder Oppression Suit
In extreme cases in which the majority shareholder is actively harming the company, the minority shareholder can bring forth a shareholder oppression case and stop some of the detrimental action in court. However, this legal action is rare and often, the majority shareholder can do damage to the business, even though their actions don’t fall under the umbrella of shareholder oppression.
Create a Business Partnership Contract
The most important thing any business needs, whether it’s a 50/50 or 51/49 agreement is a written, legally binding contract that limits the power of either party. Clauses can include:
- Creating a pay or profit-sharing arrangement
- No owner can be fired or demoted without good cause
- Outlining the responsibilities of both parties
- The majority can’t sell the business unless it’s to the minority shareholder
By having a contract in place, both parties are protected and their rights are assured.
Schedule a Consultation with a Business Law Attorney in Raleigh
If you are starting a business with one or more people, it’s important to protect your interests and the interests of your business. Schedule a consultation with a member of our team to explain your options, negotiate a contract on your behalf, or draft a business agreement. Call our Raleigh office at (919) 615-2473, our Wendell office at (919) 365-6000, or fill out the form below to get started.
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