Married couples often go into business together.
Married couples frequently go into business together and form LLCs that they own 50/50. Previous articles discuss some of the pitfalls of a 50/50 or “deadlocked” relationship. This 50/50 set-up might have risks, but it makes sense that a married couple forming a business wants equal voting and economic rights. Fortunately, smart married couples can reduce risk.
Smart married couples enter into a company agreement for their business.
For married couples, discussions about the company agreement may feel almost like discussing a prenuptial agreement. Many married couples forego the company agreement altogether. Maybe because it makes them uncomfortable, or because they cannot consider the possibility of divorce. While starting a business without addressing major issues that may arise down the road may initially avoid some discomfort, it may cause greater turmoil down the road.
We hate to talk about it, but married couples get divorced.
Let’s use a fictional married couple—Brad and Natalie. Brad and Natalie formed their company in 2010. They run the business together for the next seven years. Business is good and their marriage is stable. But in 2018, after nearly a decade of working together in the business, their personal relationship deteriorated. They decide to divorce.
But what about the business? Maybe Brad and Natalie are happier divorced and can find a way to run the business together. But, more likely, the previously married couple can no longer bear the thought of working together in the business on a daily basis. Now what?
When going into business together, the couple should agree on a process to handle member or manager deadlocks in the future.
The company agreement between a married couple may address this situation in several ways. First, it should address a deadlock of the members and managers. Oftentimes, these 50/50 spousal arrangements mean that both the manager and member decisions are deadlocked. And—surprise, surprise—married couples going through a divorce sometimes disagree. Consider adding a way for the members or managers to resolve a deadlock. We often have the married couple start with a mediation to resolve differences. Arbitration or litigation occurs only after mediation fails. Mediation is more efficient and cost effective, and hopefully resolves disputes prior to litigation.
Consider including a special sale procedure in the company agreement.
Let’s say Natalie wants to buy Brad out of the business. One option is to include a special sale procedure. This procedure allows Natalie to make an offer to purchase all of Brad’s membership interest in the company (or vice-versa). The offer must specify the purchase price and the terms and conditions of the purchase.
But there’s a catch—Brad (the offeree in this scenario) has an option at his sole discretion. He can either elect to sell his membership interest under the terms of Natalie’s offer, or he can elect to purchase all of Natalie’s membership interest under the terms proposed in her offer. If Natalie decides to make a low-ball offer to Brad, she’s increasing the risk that Brad buys her out of the company.
We hate to talk about it, but spouses die or become disabled.
Now let’s change Brad and Natalie’s story a bit. Brad and Natalie formed their company in 2010. Their business is profitable and well-known in their community. They love working together and remain a happily married couple. Six months ago, Natalie developed a serious health condition. She’s incapable of voting and unable to perform her duties as a manager of the company. Their company agreement provides that a manager may be removed by a majority vote of the members. Because Natalie cannot vote her 50% membership interest, Brad is stuck.
Consider including company agreement provisions that define and address the death or permanent disability of a member or manager.
Married couples should consider including death and permanent disability in the company agreement as a trigger for certain events (e.g., transfers of membership interests or resignation of a manger). Death is easy to define. The members need to decide how to define a “permanent disability.” For example, they may define “permanent disability” as an illness or physical or mental impairment or some other incapacity that continues for some defined period during a year (e.g., 120 days during a consecutive 365 days).
A death or “permanent disability” would trigger a transfer of membership interests or the removal of a manager. For example, a manager’s term may expire on his or her “permanent disability.” This provision may also trigger an option for the non-deceased/non-permanently disabled members to purchase the deceased/disabled member’s membership interests at some pre-determined value (e.g., book value or fair market value). This type of provision may also limit the voting rights of a trustee, executor or administrator who oversees the membership interests due to the death or disability of the member.
It often makes sense for a married couple to split membership and management 50/50, but it is imperative that they enter into a company agreement to address future risks associated with the 50/50 split.
Discussions about difficult topics such as divorce or death are no fun. However, smart married couples are willing to endure some temporary discomfort at the beginning of a business relationship. This brief discomfort will likely reduce fighting and costs in the future. Consider reading this article about the importance of discussing the possibility of divorce even before a couple gets married. These strategies are also useful in discussions about a future “business divorce.”
Be sure to visit our articles page to find general information about limited liability companies, more reasons why you should have a company agreement or other strategies for addressing issues head-on when you’re forming a new business.
Disclaimer: This article is not a substitute for legal advice. Every situation is different; you should not rely or act upon the contents of this article without seeking advice from your own attorney. Use and access to this article or any materials or information provided herein do not create an attorney-client relationship between you and Christine Stroud, PLLC d/b/a Fincher Stroud Law, PLLC (the “Firm”). By providing public access to this article, the Firm is not purporting to solicit or render legal or other professional advice or opinions on specific facts or matters, and the Firm is not creating or intending to solicit or create an attorney-client relationship between you and the Firm.