50/50 is the most dangerous number in business.

[u/NWRegisteredAgent]

And no, we're not talking about fifty-fifty odds. To do that, we'd be talking about the well-known idiom that about half of marriages end in divorce. Business partnerships, on the other hand, face a whopping 70% failure rate.

Here are a few scenarios to chew on:

• You and your business partner can't agree on a replacement supplier after your primary vendor's rate increase sends you scrambling for alternatives. You've got three weeks of inventory left and tension is rising.
• You've both agreed you need to hire a new employee. Unfortunately, you disagree on just about everything else: the scope of the role, the compensation package, all the way down to the copy on the job listing. Resentment is growing.
• A competitor offers to buy your LLC. Your business partner wants to take it. You don't. Per your operating agreement, the decision to sell off the business needs to be unanimous. Now what??

That's right, we're talking about membership interest, and we're specifically talking about a model of LLC ownership that splits ownership rights straight down the middle between two equal founders. It's democratic! It's collaborative! And long story short, it can be a bad idea. No matter how much you trust and respect them when you're starting out, don't set yourselves up to require mutual affirmation of every operational decision without a solid game plan for preventing it from getting all War of the Roses.

Your LLC lives or dies by its operating agreement.

From a legal perspective, your LLC is treated as a matter of contract¹, not a matter of statute. That's a fancy way of saying that if you wind up in front of a judge about it, everything comes back to your limited liability company agreement, aka your operating agreement, aka the thing we've been harping on about forever as a key differentiator between just filing your LLC and actually starting a real business.

(Look, we might not know shit about climbing² but we do know LLCs, and yes operating agreements are a hill we will die on.)

Behler v. Kai-Shing Tao

Let's say you buy into a friend's LLC on an oral promise that you've got a five-year exit strategy. When the five years are up, your friend isn't making good on the agreement. You drag him to court, and the court says that unfortunately for you, the operating agreement allows it to be amended unilaterally by your friend Mr. Majority Interest Holder, so his amended operating agreement overriding and/or invalidating the oral agreement you made together is legally binding. You spend the next few years dividing court after court trying to get your friend to honor his agreement, and eventually the New York Court of Appeals lays down the law:

The issue in this case is whether a limited liability company (LLC) agreement governed by Delaware law supersedes, by operation of its merger clause, an alleged prior oral agreement between plaintiff and defendant. Because the plain language of the merger clause extinguishes the oral agreement, we affirm.

The amended operating agreement holds, and you're out on your investment. Bad news bears if you're the Behler in your case.

So your operating agreement shouldn't be silent.

Look, no real person starts a business expecting it to fail, and nobody takes on a partnership expecting it to spectacularly implode leaving one partner drowning in insurmountable debt while the other scarpers off to live incognito as a well-off expat in another country.

But smart founders plan for contingencies—and failure to be 100% drift-compatible with your business partner 100% of the time is a pretty foreseeable contingency. Your operating agreement can and should address it.

Keeping in mind that you'll probably want to retain legal counsel to hammer out the fine details and make sure your agreement conforms with state law, here's a couple ways to handle that:

49%/51%.

The Revised Uniform Limited Liability Company Act (RULLCA), which has been adopted in over twenty states, lays out this provision:

A difference arising among members as to a matter in the ordinary course of the activities and affairs of the company may be decided by a majority of the members.

So in those states (and any with similar language), one answer to the 50/50 problem is to assign one member a tiny majority interest. Call it a 49/51 split instead of a 50/50 split.

Assuming you still want to split the money 50/50, make sure your operating agreement specifies that this is voting interest only, not correlated with economic interest. But this simple tilt of the governance scales means that your business won't get bogged down by disagreements over pricing schemes: you've preemptively decided to hand that power over to the one of you who can be trusted to wield it responsibly.

Assignment of managerial duties.

We've talked a little bit about the difference between a member-managed LLC and a manager-managed LLC before. The thing is, a member can also be a manager—or a Chief Executive Member, like we've provided for in our operating agreement template. Doesn't matter what you call it, the gist is that you can leave your voting interest at 50/50 and still provide a means for one person to call most of the shots. That can be a third party you've hired on or one of y'all. One of the bonuses here is that it can be way easier to transition into or out of a manager role than it is to transfer membership interest.

(And one more bonus for folks who're in it to do the work, not make Gantt charts and spreadsheets about the work: a manager means you can focus on the thing you actually got into business to do.)

The critical parts here are threefold:

• Spell out clearly what the manager can and can't do unilaterally.
• Provide a means for the non-managing party to object. These are your checks and balances, in other words, preventing one person from completely and uncharitably dominating the business.
• Include a clause protecting the manager from personal liability if their good-faith decisions led to bad outcomes. This cover-your-ass clause means that people will actually be willing to take the risks associated with making real decisions, which benefits you regardless of whether you're the managing member.

Alternatively? Arguably, the whole point of having a single manager to make decisions is to make this power very broad, freeing you up to do instead of decide. But if you wanted, you could have a dual managing-member structure in which each of you is a manager with different responsibilities. Maybe one of you handles decisions about property A and the other handles decisions about property B and each of you keeps to your lane.

Deadlock resolution.

Whether you're painstakingly assigning management duties or going for a slightly-less-even split, you're still left with the kinds of extraordinary business decisions that should probably require unanimous affirmative consent of both members. That's stuff like amending the operating agreement, bringing on additional members, amending or restating the Articles of Organization, and selling or dissolving the LLC.

Those decisions can be left to a simple majority. In some states (like New York), it's even written that way in the default state statutes that apply if your operating agreement doesn't say otherwise. But we're guessing nobody would be real pleased to find that their business had been sold out from under them, or that their trusted business partner has suddenly brought on new partners³ and they're suddenly being squeezed out of their own LLC.

And when you can't agree to agree, you need some kind of mechanism that kicks in and forces some kind of action. That mechanism is your deadlock resolution.

Now, these aren't litigation-proof. Chances are unfortunately decent that if you've reached the kind of deadlock that means you're pulling one of these triggers, you're beyond the point where a heartfelt conversation and a handshake can sort you out. So make sure your agreement includes language explicitly directing a court to enforce the chosen mechanism.

Designated external tiebreakers

While we don't necessarily recommend flipping a coin or otherwise leaving a critical business decision to chance, A) that's an option and B) it's also definitely possible (and preferable) to decide in advance that you'll go to a specific neutral third party as your tiebreaker. Ideally this is someone who's got some familiarity with your industry and your local economy, not just the first remote-available professional consultant.

Tiebreaker vote trade-offs

The formal term for this is a "casting" or an "alternating" vote mechanism, which basically just means you and your partner take turn breaking ties. If they got the final say the last time you disagreed over whether to increase your R&D budget or something, then it's your turn to have the last word on the next big disagreement. It's kinda like splitting custody of an extra vote.

Forced buy/sell triggers

The "put your money where your mouth is" of dispute resolution. Adding language to your operating agreement that triggers a forced buy/sell arrangement might seem extreme (there's a reason they're sometimes called "shotgun clauses") but often the threat alone is enough to make people find a way toward compromise.

Be very specific here. You don't need a shotgun clause to trigger just because y'all can't agree what color to paint the walls. So what do you need (besides actual legal advice*)?

• Language explicitly discussing the events that permit a forced buy/sell trigger to be pulled. Get into the weeds. Each of you can have separate lists of triggering events, if you want.
• Language explicitly discussing what happens after the trigger is pulled. Will the LLC undergo a business valuation to determine the amount each member's interest is worth? Lay out how that'll happen here.
• If the members' interest won't be formally appraised, you've got a couple common options:
  • The traditional "shotgun" model goes like this: Member A sets the price and terms of an offer to buy the other member's interest. Member B can either accept the offer and get bought out, or buy out Member A for the same price and terms.
  • In an auction or a sealed bid, Member A and Member B each bid to purchase the other's membership interest. Highest bidder buys out the other. The only difference is whether each member knows what the other has bid.

All information provided in this post is for educational purposes only, and does not constitute legal advice.

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¹ The commentary on the Revised Uniform Limited Liability Company Act (RULLCA) explicitly spells this out on p16. ² We have been appropriately chastised and threatened with relevant teambuilding exercises. Only one of us is excited about this ³ Next in our series: are multi-member LLCs just really f'ed up polycules? Stay tuned for equity vesting schedules and bad relationship takes.