How do I establish a fair partnership?

June 16, 2023

by a professional in Nashville, TN, USA

I'm adding a partner to my LLC, and he will have 49% member interest. One question we have grappled with is how to ensure both partners are putting in similar effort and time, despite a defined distribution of proceeds. For example, what happens if one partner decides to spend very little time in the business, while the other one doubles down?

Is anyone familiar with language they've included within their operating agreement to account for this? Thanks in advance for any insight!

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Reply by a professional
from American University in Irvine, CA, USA

Hi, Warren. In my experience, if the parties spend as much time and attention to drafting their expectations concerning contributions and performance among the members, as they do to their monetary allocations, it will help enormously. If you are unable to put into clear and concise language at the beginning what each Member understands the other Members will be doing for the benefit of the entity, it will be extremely difficult (if not impossible) to prove that a member did not meet their obligations down the road, which can lead to significant disputes and potentially time consuming and expensive litigation. If the Members themselves have trouble articulating these things, I recommend having a meeting which is facilitated by a trusted advisor to pull it out of the group, ensure 100% agreement among everyone, and have it written up and incorporated into the Operating Agreement or a Shareholders' Agreement prior to embarking on the business.

Reply by a searcher
from Harvard University in Cambridge, MA, USA

Are you worried about being fair to each other, or about your new partner putting in less effort than you in a business you've established? Those are actually very different questions with different possible options. Vesting is an option, for your partner if you've been at it a long time, or both of you. Clean exit process and terms, as well. Slicing Pie is decent, but can end up at some solutions that feel fair at the outset and incredibly unfair after you've both been grinding nonstop for years. Also, be careful of the "dyanmic resplitting of equity" stuff - can have tax consequences, depending on structure/valuation, etc.

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