Are you considering starting a business with a friend or family member? If operating as a limited liability company (LLC), a well-drafted LLC operating agreement will be crucial to memorialize your economic agreement, organizational structure, and key terms, and should include provisions designed to prevent deadlock if a disagreement later arises about important business decisions.
A disagreement about a major decision could impede the ability of a business to move forward, placing the future of the business itself in jeopardy. Even if the deadlock concerns a less important decision, the resulting frustration can be damaging to the owners’ relationship and thus harmful to the business. A deadlock could even lead to an expensive and lengthy litigation or to the dissolution of the partnership or LLC.
Business owners can avoid this situation by entering a well-drafted partnership or operating agreement containing provisions designed to prevent a deadlock from ever happening. There are a variety of potential solutions, and the following are among the most common.
- Provisions Addressing Decision-Making Authority – Sometimes (typically more appropriate for co-owners already having a solid relationship), the LLC’s operating agreement could provide for a 50-50 split in profits, but a 51/49 split in control over decision making. Where there is more potential for disagreement, the operating agreement could name a trusted and impartial individual familiar with the business having a two percent ownership interest who could act as the tiebreaker in a deadlock situation, but allowing the two LLC members to retain equal ownership and control with a 49-49 split.
- Buy-Sell Provisions – A buy-sell provision spells out a means by which one co-owner will buy out the other’s ownership interest if a deadlock occurs (and in any other circumstances specified). A buy-sell provision both encourages deadlocked business owners to find a solution to avoid triggering these provisions and provides a predetermined way for one LLC member to exit the business if the co-owners cannot iron out their differences.
These potential solutions have advantages and disadvantages: For example, when co-owners have enjoyed a positive long-term relationship, having a 51/49 split in decision-making authority may seem like the perfect solution. However, there is no guarantee the relationship will continue to be problem free. Likewise, a buy-sell provision is meaningless unless each LLC member has the financial ability to exercise it. Consider which solution or combination of solutions is best suited for your particular circumstances.
In most states, an LLC member may seek judicial dissolution where there is a deadlock in the management of the LLC that the co-owners cannot break and irreparable damage to the business is threatened or has occurred. For most business owners, this remedy is a last resort, as it inevitably leads to avoidable legal fees and damage to the business and the relationships of the co-owners. Judicial dissolution is much less likely to be necessary when deadlock-breaking provisions have been included in the LLC’s operating agreement.
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Destructive consequences can emerge if a business is structured to lead to deadlock and the LLC’s operating agreement lacks provisions for resolving such an impasse. We can help you to prepare an LLC operating agreement designed to prevent this situation from arising. Please contact us to set up an appointment to discuss this or any other issues related to the formation of your new business by calling (813) 852-6500 to request an initial courtesy discussion to see how we may help you.