By Lane V. Erickson, Idaho Business Attorney
The reason you’re reading this article is because you may be having, or you anticipate that you may be having some trouble in your own LLC. Don’t despair, this is common. The reality is that if your LLC has numerous owners, those owners are likely going to disagree about what the LLC should do in certain circumstances. This could include disagreements about the vendors that you use, the customers that you service, or even the distributions that will be made from the LLC to the owners. Whatever the disagreement is, it is inevitable that a disagreement will happen at some time or another. The real issue when a disagreement arises and there is a deadlock on what the LLC should do is how to resolve the deadlock or tie vote.
The attorneys on our premier Idaho business law team include partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Each of the attorneys on our team is skilled, knowledgeable, and experience in assisting clients with their business needs including dealing with a deadlock situation. We have the ability to help you move your business forward. We have helped numerous businesses anticipate and deal with these kinds of problems and we are confident we can help you too!
This article can’t provide you with all the different ways on how to resolve a deadlock when one arises but it does offer some tips. However, if a deadlock exists, or you are concerned that one could arise, we strongly encourage you to contact us so that we can meet with you and discuss your problems and help you find a solution.
Start With the Operating AgreementThe very best way to avoid a deadlock, or any other type of disagreement or issue is within the operating agreement itself. An operating agreement for an LLC is a contract between all of the owners of the LLC. Because it is a contract, all of the owners of the LLC are bound to follow the specific sections, instructions, and declarations that are in the operating agreement.
The operating agreement should contain language that would be specific about how the LLC is run. In other words, the operating agreement will be very specific about who the owners are, what percentage of ownership interest each owner owns, and how management of the LLC will occur.
When it comes to management, especially when it comes to the day-to-day operation of the LLC, it’s almost always wisest to not have all of the owners involved in the decision-making process. This is especially true when the LLC business is large, has many employees, and does a large volume of business. In this situation it’s almost always best to allow some hierarchy of management within the business operation itself.
By having this type of management system in place, the business operation of the LLC does not come to a halt. Rather, when problems arise, the business operations can continue to go forward, and the problems can be solved in the meantime by the owners of the business.
So whenever a problem or issue arises within an LLC, the first place that you look is in the operating agreement. The operating agreement should contain the management mechanism that will allow the LLC to continue to operate and allow the owners to resolve the problems that arise, including resolving a deadlock or a tie vote about how to move forward.
Choose a way That Will WorkWithin the operating agreement the owners of the LLC can actually institute one or more mechanisms that will allow any deadlocks or tie votes to be resolved. When it comes to how these mechanisms work, the sky is the limit. A few examples might help.
Imagine an LLC owned by 4 owners that operates a car wash business. Two of the owners want to use an eco-friendly soap, and the other two owners don’t want to use this soap because it’s far more expensive which would reduce the profit the business earns. Because there are only 4 owners, this results in a deadlock about the decision of which car wash soap to use. What is it that the owners can do in the operating agreement to resolve this type of a situation?
The owners could state in the operating agreement that if there is a deadlock, or a tie vote, that one specific individual will have an additional vote for the purposes of breaking this type of deadlock. Or, alternatively, the owners could agree in the operating agreement that they do something simpler such as flipping a coin. Further, you can even be more creative if you’d like to. If you chose to, you could specifically state that one owner from each disagreeing side can bowl one frame at the bowling alley and whoever gets the highest score gets to cast the deciding vote. Like I said, the sky’s the limit when it comes to deciding what the mechanism is that will be used. The only key is that it must be within the operating agreement so that it is binding on each of the 4 owners.
CommunicateThe final piece of advice that we can offer when it comes to their being a deadlock or a tight vote in an LLC is to continue to communicate. Through experience we’ve found that if the owners of the business will simply continue to communicate in many instances the issues can be resolved without having to resort to serious means as a way of keeping the LLC in operation.
We have helped numerous business clients create LLCs, continue to operate LLCs, and deal with problems when they arise within an LLC. If you are concerned that you could have an issue about a deadlock or a tie vote in your LLC, we are confident that we can help you too!
Enlist an Idaho Business Attorney to Help YouOur team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.