Deadlock among business owners: things to consider and avoid

January 17, 2018 - Posted by: admin - In category:

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noun: deadlock; plural noun: deadlocks
a situation, typically one involving opposing parties, in which no progress can be made.
“an attempt to break the deadlock” (source: Google dictionary)

That doesn’t sound like much fun in any situation. In the context of business ownership, management and operations, the corresponding “fun” measurement is zero.  Further, deadlock among business partners, in addition to being unpleasant, can become a serious threat to the viability of the relevant enterprise.  More than a few businesses have met an untimely end as a result of unresolved (and unresolvable) disputes among owners.  Given this, it is good to consider what might be done in a proactive manner to avoid deadlocks.  Let’s consider a few ideas below.

Having an LLC Operating Agreement or Bylaws customized to your business and its owners is vital. This is true in general and particularly when we are focused on being proactive in setting forth protective mechanisms and rules to avoid future problems.  In other words, if you and your fellow partners will take the time now to sit down and consider how you want things to work later, a great many potential problems can be avoided.

Many small businesses are owned by two persons and because such individuals often start the company as “friends” or spouses or family members, they tend to skip over the part about getting customized foundational documents such as an operating agreement or bylaws. After all, when friends or family or spouses are starting a venture, why in the world should they need to worry about how to resolve disagreements? Sarcasm aside, that surely must be the rationale of many, because a shocking number of two-owner businesses have no such organizational documents.

Many other small business owners do in fact have an operating agreement or bylaws, but these are the cookie-cutter internet or office supply software forms.  Forms can be useful at times, but usually, such forms have very little relation to the business using such forms.  For example, it is very common for an internet form to deal with corporate decisions and authority generally by way of majority vote. Further, the most common division of voting among small businesses with multiple members is to tie voting to ownership.  So, in the case of two owners, each with fifty percent ownership, we have now set ourselves up very nicely for deadlock.  But wait, you may be thinking, isn’t it true that 50/50 owners sometimes want to have an equal vote and equal say generally concerning business operations? Yes, I agree that is often the case from a first glance.  And yet, it is my experience over the course of almost two decades of law practice that when pressed to examine this idea further, very few business owners REALLY desire a structure that could lead to a deadlock situation–a standoff of wills and no practical mechanism to resolve such a stalemate.  Rather, I have found that in most of these types of situations, people much prefer to have a pre-determined way of resolving such deadlock situations without seeking a decision from a court.

Is it possible to have your cake and eat it too? In this situation, the answer may very well be yes. Next time, we will discuss some options to retain equitable voting rights while at the same time resolve deadlock situations.

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