Avoiding Deadlock

Why Going 50/50 Can Hurt Your Business Down the Road

written by Shannon Almes

Forming a business is an exciting and challenging endeavor. In the formation phase, however, one thing that can be overlooked is the allocation of power to ensure decisions can be made efficiently.

People often tell us at the outset that they want things to be fair, so they want decision making authority or “voting power” to be split 50/50. However, if a disagreement arises (as it often does), the parties (and their company) will be in a deadlock and unable to make a decision one way or another. Thankfully, there are a variety of structures you can use when forming your company to avoid future deadlock. 

If you have an odd number of parties, deadlock is easier to avoid. For example, if you are forming a member-managed limited liability company and you wish to have equal voting powers among members, it would likely be advisable to have an odd number of members; likewise, when forming a board of directors, it is good practice to maintain a board with an odd number, so that there will be a tie-breaker in the event of a closely split vote.

The goal of avoiding deadlock can be achieved through carefully considering the number of individual people or entities with voting power as well as other factors such as allocation of such power or the number or percentage of votes needed to approve certain actions. The attorneys at RR&A are experienced in business formation and can counsel you and your business on not only what type of business entity may be best for you, but how to structure your entity to ensure decisions can be made swiftly and efficiently.

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