Whether it’s a corporation, limited liability company, or a partnership, 50/50 ownership of a business typically causes more problems than it solves.*
The False Lure Of Fairness
When a new venture is formed, there’s a sense of excitement and positivity that translates equal ownership as being “fair.”
How?
At inception, the company’s founders often mistakenly believe each is bringing something of equal value to the table. These contributions can include one or more of the following — money, labor, technical skills, marketing savvy, intellectual property, etc.
However, over time reality sets in that not all contributions are equal in value to a company.
For example, if one owner entirely funds the startup, if the other owner only contributes unskilled labor that can be easily replaced with a minimum wage employee, it rarely makes sense to give away half of the equity to the unskilled laborer for services.
Related Article: Sweat Equity – How To Trade Your Services For Business Ownership
Alternative To 50/50 Ownership Of A Business
If you bring the most valuable assets to the table at the formation of the venture (e.g. the financing, a patent on an important new technology, etc.), you may want to demand more than half of the equity in exchange for your contribution to the company.
Whether it’s a 60/40, 70/30, or other split, you want the lion’s share of the equity both from a potential return on investment perspective and to give you control when there’s an important business decision to be made.
When It Might Make Sense To Have A 50/50 Split
If you and the company’s co-owner truly believe you’re contributing equally to the company in time and money, a 50/50 equity is a possible solution.
However, if you decide to go that route, someone still needs to be able to make the final decision if you disagree so that the business doesn’t wither on the vine in a stalemate of perpetual disagreement.
The authority to make the final decision in case of a tie can be structured in a variety of ways depending upon the type business entity you have. For example, it could be a proxy to vote a certain percentage of corporate shares given to the shareholder who will be the ultimate decision maker. Similarly, a LLC’s operating agreement could specify which member gets the final say in case of a tie.
Related Article: LLC Operating Agreement – Why It’s Important To Have One
The Buy-Sell Agreement To Reduce Ownership Problems
To protect the viability of your business venture from ownership problems, one of the business contracts you may wish to have in place between the owners is a buy-sell agreement that identifies certain events that forces an owner to sell his equity to the other owner or to the company itself.
In addition to an owner’s death or bankruptcy being common triggers for a sale under this type of contract, the buy-sell agreement can be used when one owner so fundamentally disagrees with the decision(s) made by the other owner that it’s in the best interest of the company for one of them to sell their interest.
An experienced business lawyer can help you structure your entity’s equity ownership and decision-making powers in a way that increases the chances your company will survive and thrive over the long-term.
Whatever you do, don’t operate on a false assumption that 50/50 ownership of a company is always the best way to go.
* For purposes of this article, the term “50/50 ownership” refers to equal ownership interests in a business venture. The principles apply if there are more than two owners with equal equity (e.g. four owners each with 25% equity).
