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The 2% Solution for Disputes among Business Partners and Partnerships

Updated on July 12, 2014

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Preparation Avoids Business Partnership Problems that could Kill a Business

Many people start a business with friends, neighbors, relatives or spouses and it's often a partnership 50/50 arrangement. Rarely is there a written business partnership agreement and this can be a big mistake. These arrangements often work well until there is a problem but then...the problem could be a big problem and the dispute can spin out of control quickly.

Small business partnerships should come with a warning label "Caution: Partnerships work best when the partners document the problem resolution methods before entering the partnership."

There are many advantages of a partnership which can lead to business success far beyond what an individual might have accomplished on there own. However, the success of a partnership 50/50 agreement is often determined by the care taken when the partnership agreement is put in place. A good and well defined partnership in business agreement can serve as a tool to help you run your business professionally and increase your chances of getting outside investors.

I've seen what appear to be small issues to outsiders become big issues to business partners. A simple and very effective solution is available to business partners who have the foresight to set up a system to break impasses should they arise. A business partnership dissolution doesn't have to be a financial catastrophe for the business or it's owners if there is a well documented and thought out business partnership agreement.

I have seen businesses fail because the owners were stuck on issues that most of you would say "oh, that would never happen to us" but you are rolling the dice. What happens if your business partner is involved in a divorce and suddenly there is a new spouse in the picture who thinks 50/50 means opportunity?

I saw a situation a few years back (I know you're thinking I'm making this up but I'm not) where one partner put out a contract on the other. The partner got out on bail and showed back up at the business! He was a 50/50 owner and the other partner couldn't do a thing about it without resulting in a lawsuit and a request for an injunction and restraining order through the court system.

Another benefit of going through these "what if" scenarios with your soon to be business partner is it will help you understand how they think and how they might react in a business crisis which will surely present itself in one form or another.

Avoiding the Perils of Partnership

Here's an excellent guide to forming a good partnership. Setting up your business partnership correctly at the beginning is the key to resolving inevitable problems in a manner that doesn't destroy the partnership or the business.

The 2% Solution to Business Partnerships

This is elegant, simple and highly practical. In your LLC partnership or operating agreement put in a provision that grants a third party, agreed to by the partners, a 2% voting interest. Each partner would have 49% voting rights each. That way if the partners agree they have 98% vote and they can do what they want. But if the partners disagree, they take their problem to their 2% voting partner and whichever position the 2% takes means there is 51% of the votes and that's the decision.

Some attorneys may prefer to have a separate business partnership document or member agreement to govern this issue, certainly get legal advice from a business attorney.

Remember, the only time the 2% vote is required is if the partners can't agree on an issue. As long as the partners agree then the 2% vote doesn't effect anything. And that's exactly the purpose of this partnership agreement, to have a mechanism to resolve issues when the partners can't agree.

The important part of this strategy is to do it long before there are any disputes. It will be much easier to select who the 2% voter is if there aren't any pressing disputes at hand.

Here's an excellent guide to forming a good partnership. Setting up your business partnership correctly at the beginning is the key to resolving inevitable problems in a manner that doesn't destroy the partnership or the business.


Picking up the Pieces of a Failed Partnership

I am a business broker who has been involved in the sale of over 500 businesses. Many of these business sales were forced to happen because the partners didn't have good agreements going into business and therefore didn't have a practical way to end the partnership without killing the business. Only rarely, in the dozens of partnership failures I witnessed, did I hear any partner say that they ever thought through the idea of partnership failure.

Things change. Don't let the fear of talking about a partnership break-up prevent you from starting the partnership with all the care possible.

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    • profile image

      Young Kwon 5 years ago

      I had a partership on oriental food distributing co., before.

      we, partners chose both same CPA who was interesting in to be a 2 % partner of this co., to join.

      We solved the problems and later sold to him 51% shares when the business was settled to operate.

      That was a great experence in my business.

    • profile image

      George 5 years ago

      I am not sure I would want someone controlling 100% of a company, in the case of a deadlock between partners that only has a 2% stake, but I guess there are less attractive ways to resolve.

    • BizVT34 profile image
      Author

      BizVT34 5 years ago from USA

      George, you are correct in that who has the 2% is important but it seems to me a well chosen 2% voter beats a coin flip or a lawsuit.

    • jpcmc profile image

      JP Carlos 4 years ago from Quezon CIty, Phlippines

      Of course in theory this can resolve matters. But what I dislike about corporate world is the politics under every corporate decision.

    • BizVT34 profile image
      Author

      BizVT34 4 years ago from USA

      jpcmc thanks for stopping by and commenting.

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