A 50/50 limited liability company (LLC) is a lot like a marriage, and the decision to enter into one should not be taken lightly. If you’re forming a new business, registering a 50/50 LLC may seem like the easiest and most logical choice right now, but there are some pitfalls to consider, including the following:
- Control: With an even split, and the resulting each partner having an equal say in running the business, a struggle for the upper hand is likely to arise eventually.
- Management: In a 50/50 LLC, delegating responsibilities and roles can get sticky. For example, new enterprises often benefit from one person taking charge and leading the way, but this formula can get clouded if there are two people with equal power but slightly (or vastly) different views. That’s even more of a potential issue if one owner contributes more financially while the other puts in “sweat equity.”
- Voting: Decision-making could become tedious, always requiring equal input—and votes—from both partners. And in a true 50/50 split, you will hit an impasse at some point. Having a provision in place to resolve this may avoid court battles, but butting of heads could still lead to resentment and other problems within the business.
- Profit-sharing: Your LLC’s operating agreement will define how owners will split profits and losses, which may or may not be 50/50. It’s crucial for owners to read the agreement carefully to make sure it reflects your understanding.
- Break-Up Issues: Even if you have agreed on an exit strategy for both partners (if they choose to leave the business), other events could potentially affect the LLC’s ownership as well. Divorce, retirement, bankruptcy or criminal conviction of a member could potentially transfer ownership to an outside third-party—which, of course, could disrupt the business.
Overall, when choosing a structure for your business, it’s important to keep in mind a simple fact of life: People and circumstances change. What may seem like a good idea now may not be the ideal situation in the long-term, so you should always look at the bigger picture.
Are you thinking of forming a 50/50 LLC? We can help you think long-term and find the best solution for your business. Get in touch by sending a message or giving us a call at (314) 454-9100 today.
Joel Green is a seasoned attorney working closely with individual and business clients to provide advice and counsel in addressing their legal questions and concerns. Joel is licensed to practice law in Missouri and Illinois and splits his time between AEGIS’ main office, located in Clayton, Missouri, and its office in O’Fallon, Illinois.