When entering into business arrangements, partners must decide on the ownership split of the new business. Although a 50/50 split is intuitively the most logical way to divide the business, it is important to know that the 50/50 split can lead to problems.
For example, with equal ownership, gridlocks, and stalemates are real possibilities when partners disagree - and the impasse may be so great that the company must be dissolved. Fortunately, careful planning from a partnership formation attorney can help you avoid the issues that arise with 50/50 partnerships.
Understanding the 50/50 Business Partnership: How It Differs from Other Types of Partnerships
The 50/50 business partner agreement is an arrangement where there is no majority owner, and both partners in the agreement have an equal share in the management and operation of a business. How each partner contributes to the business depends on how the business partners want to organize these affairs.
In many cases, business partnership agreements will see the partners handling the affairs they are most adept at managing. For instance, the partner with the most extensive business skills and experience may be the partner handling the management of the business.
Although the duties and responsibilities required of each partner need not be perfectly split down the middle, the profits and losses generated by the partnership are divided in half.
Weighing the Pros and Cons of a 50/50 Business Partnership
Exploring the Pros of a 50/50 Business Partnership
People choose 50/50 business partnerships for the advantages and benefits they offer, including:
- Increased and diversified talent and ideas for the business;
- Increased business stability;
- Increased operational flexibility;
- Shared costs;
- Shared responsibilities.
People also choose the 50/50 split because of the mutual support and motivation that each partner provides the other partner.
Exploring the Cons of a 50/50 Business Partnership
Despite the benefits, some decide that 50/50 split partnerships are not right for them for the following reasons:
- Profit sharing;
- Gridlocks and impasses;
- Confusion and contradictory orders and mandates.
The constant need to communicate and work through disagreements also dissuades many from choosing the 50/50 partnership agreement model.
Strategies for Achieving Success in a 50/50 Business Partnership
With the proper strategies and the right amount of trust, you can find the success you are looking for through a 50/50 partnership. Some of these strategies include:
- Clear roles and responsibilities: Leave no doubt as to the roles and responsibilities of every player in the partnership. Doing so will help prevent confusion, overlaps, and redundancies while both partners work toward the same objectives;
- A culture of communication: 50/50 partnerships require ample communication between the partners. As such, it is important to operate in a culture where frequent communication is of utmost importance to help avoid problems and misunderstandings;
- An established decision-making process: With a clear decision-making process in place, partners will avoid disagreements and gridlocks that paralyze business;
- Realistic goals and expectations: Clear and realistic goals and expectations keep everyone on track and leave no room for doubt as to what is required of partners, their workers, and objectives;
- Emphasizing complimentary strength: Partners need to focus on the complementary strengths that they possess to ensure that each party is adding unique value to the business venture;
- Flexibility and adaptability: Be ready to evolve with the needs of your partnership, which may change significantly as the partnership evolves and grows;
- A culture of trust and respect: Both partners must have trust and respect for one another if the partnership is to survive and thrive.
Implementing these strategies can greatly benefit your partnership.
Preparing for a 50/50 Business Partnership: Key Steps to Take Before Signing an Agreement
Step 1: Conduct Due Diligence on Potential Partners
Before entering a business partnership agreement with a potential partner, make sure to conduct thorough due diligence reviews of all potential partners. You need to know as much about their previous and current business and financial dealings as possible before entering into an operating agreement.
It's better for one partner to find out the bad news about the other before an agreement is forged. For example, if a potential partner has a history of bad decisions in the realm you plan to operate within, you want to know sooner rather than later.
Step 2: Clarify and Define Roles and Responsibilities
When a partnership is formed, both sides need clear, unequivocal statements regarding the roles and responsibilities of every player in the partnership. Leave nothing up to chance, and take whatever time necessary to ensure that every base is covered, so both sides of the partnership are not blindsided later by surprises.
Use the services of an experienced business formation attorney to help ensure you leave nothing of importance out. Doing so can lessen your risk of business disputes with your partner significantly.
Step 3: Establish Clear Communication Channels
It is also essential to have a culture of communication in your partnership to reduce confusion and misunderstandings. This culture should also involve clear channels of communication and communication protocols, so individuals on both sides of the partnership know who to talk to and how to get a hold of them when necessary.
Additionally, clear communication channels and protocols prevent partners from stepping on each others' toes and give workers a well-defined process of communication without the stress of guesswork.
Step 4: Create a Comprehensive Partnership Agreement
You will need a professionally prepared comprehensive partnership agreement to cover every aspect of the business venture you will be entering into. It is one of the most important legal documents your partnership will possess, and it should detail each partner's authority and set clear boundaries, responsibilities, and roles.
This partnership agreement should be created, drafted, and reviewed by experienced legal counsel for the correctness and to ensure the partners receive the guidance they need to grow and thrive in the future.
Step 5: Seek Legal and Financial Advice
It is vital not to enter into any partnership agreements unless you have contracted the services of an experienced business formation lawyer. You need relevant legal guidance to help you understand the ramifications of your decisions and to protect you and your interests in the proposed partnership agreement.
With an attorney handling the legal side of things, you get a professional that will help you set up the partnership in a way that helps avoid and resolve disputes. An experienced attorney will also make sure that the business relationship is legally solid and in compliance with relevant business laws and regulations.
Step 6: Consider a Trial Period or Pilot Project
You may have the finest business idea you have ever thought of. But with the wrong partner or an inadequate partnership agreement, the idea is at a high risk of failing. So consider implementing a trial period for your partnership or a pilot project to give you a safe zone from which to evaluate the partnership's potential before going all in.
If things don't seem to be working out at first, you and the other partner can decide to make changes or if you want to call an end to your partnership for good.
Step 7: Review and Revise the Agreement Regularly
Business goals and needs evolve over time. So no matter how well your original partnership agreement might be, it should be reviewed and revised on a regular basis to ensure that the partners benefit equally from the venture.
You will need the services of an experienced business attorney to analyze your agreement in light of the ongoing operations of your business. An attorney will bring to your attention any changes that might be of benefit to the current state and future of your partnership.
Common Pitfalls to Avoid When Entering into a 50/50 Business Partnership
No one wants to enter into a bad agreement or one that ultimately fails. Unfortunately, partnerships fall into pitfalls on a regular basis. Some of these pitfalls include:
- One party contributing more assets, company property, credit, or time to the partnership;
- Unbreakable gridlocks, stalemates, and impasses due to the 50/50 structure;
- Asset liquidation by the court when a decision cannot be reached.
To help prevent or resolve the decision-making problems that may arise, some partnerships allocate a small percentage of decision-making power to a neutral, trustworthy third party, who will have the deciding vote in the event of gridlock.
Trusted Legal Advice for Your Business - Hire a Lawyer For Business
Choosing to enter into a partnership agreement can be a lucrative decision. But there are many considerations to be aware of to prevent the partnership from suffering the common potential pitfalls.
At Lawyer For Business, we work diligently to ensure that our clients throughout the State of New York are protected as they conduct business through partnerships or whatever fashion they choose. Contact us today for a free consultation, and learn how we can help you accomplish your business objectives.
Maximize Your Business Partnership Potential – Reach Out for Tailored Advice!
Make confident decisions about your business venture. Reach out for legal assistance regarding 50/50 partnerships.
Back to Blog