Idaho Business Law Operating Your Business When a Stalemate Exists With the Owners

By Lane V. Erickson, Idaho Business Lawyer

It's an all-too-common scenario: The owners of the business don't agree on what the business should do in moving forward. This can happen either on a large scale of the business where the overall vision of the business changes or it can happen on just an isolated small project. Regardless, the question usually comes up in the form of who has control of the business and who can make decisions about what the business is going to do.

Really, the last thing you want in a business is for the owners to be fighting about how the business should operate. This obviously cuts into the ability of the business to move forward and be profitable. However, anytime you have several individuals involved its possible that there's going to be differences of opinions about what needs to be done.

At the Racine law office we have assisted our clients in the creation, operation, and structure of business entities including corporations and LLCs for more than 70 years. Our team of experienced and skilled Idaho business lawyers can help you work through either the simple or the complex changes that your business needs for it to be successful including resolving a stalemate between the owners of the business. Our team of attorneys includes partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley who together can provide essential business counsel and advice on all business issues including business structuring, financing, planning, and taxes.

The purpose of this article is to discuss the options that exist for a business when the owners don't agree on what needs to be done to move the business forward. In other words, how will the business be operated when a stalemate exists with the owners. First, we'll discuss the business documents that may control the decision-making process for the business. Second, we'll discuss what the owners can do as far as agreeing on a process of resolving disagreements about how the business should be operated. Finally, we'll talk about the last option that exists which is litigation between the business owners.

The best place to start any time there is a disagreement on how a business should be operated is with the business documents themselves. When the business is an LLC, the document that you'll be looking at is the operating agreement. When the business as a corporation the document will be the bylaws. Each of these documents is essentially the controlling document that describes not only how the business operates, but also its management structure.

For instance, the operating agreement of an LLC will indicate whether management of the business is controlled by a single manager, a group of managers, or by the owners all together. Obviously the bigger the business, and the larger the structure, the less likely it is that all of the owners will be involved in the day-to-day decision making for the business. Rather, in this instance, management of the business is usually turned over to a manager or a president.

In a similar way, the bylaws of a corporation specifically outline the structure of officers that handle the day-to-day operations of the business. The shareholders of the business don't necessarily want to be involved in making decisions about every aspect of the business. Rather, they would rely on a management structure that starts with the president, and then usually goes down to department managers, and then down again even lower to midrange managers. This is the structure a large corporation would have. A smaller corporation would have fewer layers or levels of management.

The documents of the business can also specifically spell out what happens when the owners of the business can't agree and a stalemate occurs. In other words, The documents themselves may spell out the way that the business resolves a stalemate. The owners of the business could be as creative as they would like to be. As an example, we structured a business operation for a small business that involved just a few owners. Because there was an equal number of owners, the possibility of the stalemate existed. We discussed this with the owners and talked about what process they would like to use to resolve the stalemate if one ever occurred. The owners became creative and decided that they would resolve a stalemate by whoever got the highest score in one frame of bowling. If it was a tie, they would continue to bowl one frame at a time until one person got the higher score. Whoever got the higher score would be able to make the final decision that would break the stalemate.

To be clear, you don't need to use bowling as the way you're going to resolve a stalemate. However, this example shows how creative you can be in the corporate documents in creating a structure or process to resolve a stalemate if one occurs.

If the corporate documents are silent on the issue of how to resolve a stalemate, don't lose hope. The owners of the business may still be able to agree on the process of resolving the disagreement. Again, it really doesn't matter what they decide to do so long as all the owners agree.

Because there is room for one or more of the owners to complain about the results that may occur, it's always best for an agreement to be put in writing about resolving the stalemate before the process begins. Similar to the example given above with bowling, the owners can agree on whatever process they believe would work. It could be as simple as flipping a coin, or drawing straws, or it could be some other more complex process. Whatever it is, make sure it is in writing, and get every owner to sign the agreement indicating that they approve of the process.

You might be asking yourself why an owner would be motivated to agree on a process to remove a stalemate. The main reason for this is so that the parties can avoid the time and expense associated with litigating the issue. Remember, we're talking about a business. The goal of the business is to be profitable. If the owners are involved in trying to resolve the stalemate, rather than focusing on operating the business itself, it's likely that the profits of the business will go down. None of the owners wants this. As a result usually owners are motivated the find a way to resolve the stalemate so that they can continue to operate the business.

The final option that exists, which really is the atomic bomb of options, is litigation. If there are no options for resolution written into the corporate documents, and the owners simply cannot agree on the process to be used to resolve a stalemate, the owners of the business can still achieve a resolution through litigation. As we stated above this should be the last resort of a way to resolve the stalemate. However, every once in a while, the owners of a business are so emotionally charged and involved that litigation could be the only true way to bring a resolution to the problem.

Because relationships are usually destroyed through litigation, and because litigation is such a difficult and adversarial process, we usually suggest that our clients avoid this option unless there really is no other way. When litigation occurs, it almost always results either in the dissolution of the business, or in some owners buying other owners out and the group ceasing to operate together in the business.

We have helped numerous businesses work to resolve conflicts between owners including stalemates on how the business should operate. If you have questions or concerns about what you can do with your business when a stalemate exists, we are confident that we can help.

Our 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 consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a 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.