How you structure 50/50 partnership

Question

Jon Pitcher · Answer

@Andrew Acuna

Most likely an LLC is the appropriate structure for you.  Your Operating Agreement (in Texas it's called a Company Agreement) is where you lay out all the terms of your "partnership."  These provisions are among the most critical:

1.  Elect a manager (or two managers) to run the company on a day-to-day basis.  Typically the manager has the power to sign contracts on behalf of the company.

2.  Determine which decisions will require member consent. Big decisions should require a majority  member vote or written consent (unanimous in the case of a 2-member LLC).  Examples would be decisions to purchase a property, borrow money against a property, sell a property, etc.

3. Determine how and to whom a member is allowed to sell his/her membership interest. Does it trigger a right of first refusal in the other members?  You don't want to allow the members to sell their interests without approval.

4.  Provisions to determine what happens when a member wants out of the deal. You should have some kind of forced buy/sell mechanism so that you don't have to resort to litigation to split up the business.  You also need to plan for a member's death, or divorce.  You don't want to end up with the other member's heirs or ex-wife as your business partner.

I always recommend using an attorney for multi-member LLCs.  I have seen more than one lawsuit that could have been avoided by hiring an attorney to spend a few hours drafting a solid operating agreement.

Ronald Rohde · Answer

All good advice in this thread. I would also add that the LLC Agreement is crucial to defining rights and obligations. 50/50 isn't good for a lot of reasons, but I can explain more

Joseph Salegna · Answer

@Andrew Acuna. I looked into this with a few friends of mine. It's probably best to go through an attorney that can help with the various  clauses that @Christopher Smith mentioned. In case you don't have an attorney, I stumbled across a website called upcounsel where you can specify what you are looking for and place it out for bid from various attorneys. You'll have to consider the partnership agreement, articles of incorporation, process service, etc. Prices ranged for me from around $1,000 - $1,500 although i ended up not forming the partnership. Hope this helps.

Account Closed · Answer

@Ronald Rohde is right. @Andrew Acuna We do only 51% 49% Ownership and split the profits 50% 50% That solves a lot of problems.

Chris K. · Answer

@Andrew Acuna

As @Jon Pitcher, @Ronald Rohde, and others have suggested, hire an attorney to give you advice on this. I've seen some horrendous structures over the years. Note that this is an area where even attorneys can mess up from time to time. That's especially true when the entity has a 50-50 structure. You may also want to consider talking to a CPA to deal with the tax issues.

But with the above in mind, I do think it is very helpful for the attorneys and CPAs if you and your partner have some basic understanding of the issues that can arise in a 50-50 structures. So I would encourage you to do more readings and research on the topic.

Some advice I would add:

1. You and your partner should ask if you really need to form a partnership or an entity. Sometimes you don't need to.

2. Do some business planning as well. I often see that many investors jump into entity formation without having a clear plan. Having an unclear plan makes it difficult for the attorney to draft an agreement that serves your needs. And making it difficult for the attorney often leads to: (1) higher legal fees; and/or (2) an agreement that doesn't serve your needs.

3. I'm personally not a big fan of "uneven" structures (e.g. 51 - 49 arrangements and variations). In most cases, there are too many ways for the majority owner to screw over the minority owner.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.

Ronald Rohde · Answer

Glad you guys are discussing it, who decides what route is more 'cautious'? It invites more debate and parsing vs. a 51% owner gets to determine the final say on all matters. You can also structure to 70-30 or 60-40 as well.

Ronald Rohde · Answer

Disputes can cause gridlock and while defining specific events that require 1/2 partner consent is possible, it is time consuming and subject to disagreement. If you always require both partners to agree, what will you do when each has vehement ideas about selling property, performing major upgrades, etc.?

Christopher Smith · Answer

When I drafted my general partnership agreement I went online and went through various prototypes and actual agreements that happened to be available. From those documents I synthesized my operating agreement clause by clause.

Of course I knew all of the other partners intimately and I was to be the managing general partner for the partnership. I had also worked with legal agreements for many years, although I am not an attorney.

If you don't feel you have that level of confidence handling the drafting you might be well advised to have an attorney with some meaningful background in drafting business operating agreements assist you. He could also likely confirm if a straight partnership is truly appropriate or some other vehicle such as an multi member LLC might be preferable for various reasons.

Likely such involvement won't come cheap, but if you are really serious about getting into this business a defective operating agreement is a really bad way to kick things off.

Brent Coombs · Answer

If you can come up with a marriage contract that successfully addresses the same subject - kudos!

How you structure 50/50 partnership

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