Sharing ownership of a business is a great way to pool financial resources and talent. It may occur at the beginning of the life of your business, in the form of a partnership, or it may occur later, in the form of an investor who is seeking equity in a solely owned business.
But while the concept of shared ownership is easy to understand, it can result in a paralyzing business disaster, if the ownership is allocated unwisely. So in this post, I will focus on the ideal way to divide up ownership and decision-making responsibilities for your business.
The 50/50 Myth
Many people who go into business with other parties believe that ownership should be divided on a 50/50 basis. But nothing could be further from the truth. That’s because a 50/50 ownership structure gives each owner 100% veto power. This means that every decision must be unanimous. That’s just not realistic. Furthermore, such a set-up will literally paralyze your business from moving forward when there is a major disagreement between owners. For these reasons, splitting up decision-making power on an equal basis doesn’t work in the real world.
But there is an objective and easy way to resolve this dilemma. In my experience, the most successful tactic is to designate one person with 51 percent ownership and the other with 49 percent ownership. In this way, you have an arrangement where someone has the final say.
Of course, this plan leads to obvious questions: Who should have the additional 2 percent ownership? Why does this person get more power? Can such a 51/49 structure be changed? These are all valid concerns, which can be fairly and effectively addressed by the owners at the outset, by using the following simple techniques and strategies.
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Choosing the 51 Percent Owner
Choosing the individual who gets 51 percent of the control may put a lot of stress on the relationship between owners. But this is not necessary. The decision can be very clear and straightforward. You might consider factors such as:
- Ethnicity and/or Gender – If an owner is a minority and/or a woman, giving this party the larger ownership may qualify your business for valuable “minority-owned” status, which may entitle you to certain benefits depending on the industry of your business (e.g. construction – public sector vendor contracts).
- Investment – If one person has invested more money in the start-up, it may make sense to give this individual 51 percent ownership, so as to strengthen the financial appearance of the business when dealing with banks, vendors or potential customers.
Changing the Ownership Allocation
It’s important to keep in mind that choosing the person to receive 51 percent ownership doesn’t mean the arrangement is permanent. Each owner may experience having the final word in critical decisions concerning your business. No one is left behind and the business can continue to evolve without any political hold-ups from year to year.
Obviously, such a regular “changing of the guard” may be limited or not permissible if your business is benefiting from “minority-owned” ownership status. But even in such circumstances, owners may use the same alternating technique, but simply apply it to the offices of “President” and “Vice President.”