What Happens When 50/50 LLC Owners Cannot Agree?

In Montana Food, LLC v. Todosijevic, two people each owned 50% of a Wyoming LLC. Over time, however, one of them formed the belief that he had contributed substantially more capital than the other. He eventually tried to adjust the ownership percentages to reflect that belief—giving himself approximately 99.7% and reducing the other member to less than 1%.

The Wyoming Supreme Court held that he could not do that unilaterally. The parties remained 50/50 owners. The court also observed that because they were the company's only members, neither could take action outside the ordinary course without the other's consent. Montana Food, LLC v. Todosijevic, 2015 WY 26, ¶¶ 1, 24, 344 P.3d 751.

That is one of the less obvious risks of equal ownership. A 50/50 split may accurately reflect the deal when the company begins. Years later, capital contributions, workloads, expectations, or business strategy may no longer be equal. The ownership structure does not automatically adjust with them.

A 50/50 LLC can work perfectly well. But if neither owner has authority to resolve a meaningful disagreement, the operating agreement should answer in advance what happens next.

Equal Ownership Does Not Necessarily Mean Equal Control

Ownership percentage, economic rights, voting power, and management authority are related. They are not necessarily identical.

Wyoming's default rules illustrate one approach. A Wyoming LLC is member-managed unless its articles or operating agreement provide otherwise. In a member-managed company, members generally have equal management rights, and for LLCs formed on or after July 1, 2010, the statutory definition of a “majority of the members” generally operates on a per-capita basis unless the operating agreement changes the rule. The operating agreement can also allocate management and voting rights differently. Wyo. Stat. §§ 17-29-102(a), 17-29-110, 17-29-407.

But statutory defaults are only the beginning. The operating agreement can create consent or veto rights that do not track economics at all.

A recent New Mexico case provides a useful example. In Western Albuquerque Land Holdings, LLC v. Westland Partners, LLC, the party managing the venture had a 65% economic interest. The other party had only a 35% economic interest, but the operating agreement gave it the right to refuse consent to land sales below a contractually specified minimum price.

Over time, that minimum price rose above market value. The 35% economic-interest holder refused to approve lower-priced sales. No more land was sold, the parties reached an impasse, and the district court eventually ordered dissolution. The New Mexico Court of Appeals affirmed. W. Albuquerque Land Holdings, LLC v. Westland Partners, LLC, 2024-NMCA-077, 557 P.3d 1032.

The case is a useful reminder that you do not need 50/50 economics to create a 50/50 problem. A negotiated consent right over a decision essential to the business can produce the same functional result.

That does not make the consent right a mistake. In Western Albuquerque, the court enforced the parties' express pricing arrangement rather than rewriting it through the implied covenant of good faith and fair dealing. The point is that reserved powers have consequences. A veto intended to protect one party's economics may eventually prevent the enterprise from acting at all.

Separate Ordinary Management From Fundamental Decisions

One way to reduce deadlock risk is to avoid requiring both owners to approve every meaningful action.

The operating agreement can identify who controls ordinary operations and then reserve a narrower category of fundamental decisions for joint approval.

For example, a manager might have authority to hire employees, purchase inventory, enter ordinary vendor contracts, and spend within an approved budget.

Both owners might still have to approve admitting a new member, issuing additional ownership interests, borrowing above a specified amount, selling substantial assets, changing the company's business, or amending the operating agreement.

The dividing line matters.

Requiring unanimity for too many decisions can turn a protective provision into a recurring veto. Giving one owner unlimited authority solves the deadlock problem in the opposite direction by leaving the other owner with little meaningful control.

The better question is not simply whether a decision is “important.” It is whether the consequence of making the decision without the other owner's approval is serious enough to justify the risk that the company may be unable to act.

Define What Counts as a Deadlock

An operating agreement that says disputes will go to mediation is useful, but incomplete.

Mediation can help parties agree. It cannot require them to agree.

A more developed deadlock provision identifies what kinds of disagreement trigger the process. Repeated failure to approve a fundamental decision might qualify. A disagreement over a $500 office expense probably should not.

The agreement can then establish a sequence: direct negotiation, perhaps mediation, and ultimately an exit mechanism if the owners remain unable to proceed.

It should also address what happens while the dispute is pending.

Can the business continue under its existing budget? Who can make payroll? Can existing contracts be renewed? Can either owner incur debt? What happens if immediate action is necessary to preserve an asset?

Deadlock provisions tend to focus on ending the dispute. Sometimes the more urgent question is how the company keeps functioning while the dispute continues.

A Buyout Provision Needs More Than a Price

Many operating agreements answer deadlock with a buyout right.

That may be preferable to dissolving an otherwise valuable business. But the provision must work economically, not merely grammatically.

The Delaware Court of Chancery confronted that problem in Haley v. Talcott. Two members each owned 50% of an LLC that held the real estate used by a restaurant. Their relationship broke down and the company became deadlocked.

The operating agreement contained an exit mechanism. On paper, that might have appeared to solve the problem.

But both owners had personally guaranteed the mortgage on the company's property. The contractual exit process would have allowed one member to surrender his ownership interest while leaving him exposed on the guaranty. The court concluded that the contractual mechanism was not a reasonable practical exit and ordered judicial dissolution. Haley v. Talcott, C.A. No. 098-S (Del. Ch. Dec. 16, 2004).

That is a useful drafting lesson.

A buyout provision should, in some circumstances, address more than valuation. It may also need to deal with financing, installment payments, security for deferred payments, personal guarantees, leases, indemnification, and other obligations that survive the transfer of ownership.

Consider a business worth $2 million. If one 50% owner wants to leave, a provision requiring the other owner to pay $1 million in cash immediately may be economically impossible.

Allowing installment payments may make the purchase feasible but turns the departing owner into a creditor of the company or continuing owner. That raises another set of questions: interest, security, maturity, default remedies, and whether distributions can be made while the purchase price remains unpaid.

A “shotgun” provision presents another tradeoff. One owner sets a price, and the other must either buy at that price or sell at it. The symmetry sounds fair because the person proposing the price does not know which side of the transaction that person will occupy.

But the mechanism works differently when one owner has access to financing and the other does not. The better-capitalized owner may have an advantage even if both sides agree on what the company is worth.

An exit clause is therefore partly a dispute-resolution provision and partly a financing arrangement.

Wyoming Defaults

The state-law defaults matter if the operating agreement does not supply its own complete answer.

Under Wyoming law, a member can become dissociated from an LLC, which generally ends the member's management rights. But Wyoming does not generally give a voluntarily dissociating member an automatic statutory right to force the company to purchase the economic interest simply because the member leaves.

That can create an uncomfortable result: a former member may lose management rights while retaining a transferable economic interest unless the operating agreement supplies a buyout mechanism.

What If There Is No Workable Exit?

Litigation may eventually become the deadlock-breaking mechanism.

Wyoming permits judicial dissolution when it is not reasonably practicable to carry on the company's activities in conformity with its articles and operating agreement. Wyo. Stat. § 17-29-701(a)(iv).

Dissolution, however, is not necessarily the same as a buyout. It can require winding up the enterprise rather than transferring one owner's interest to the other.

That may destroy value that both parties would have preferred to preserve.

Plan for the Business Relationship Changing

The useful lesson from Montana Food is not that 50/50 ownership is inherently defective.

The original split may have been entirely sensible.

The problem arose later, when the parties' economic relationship changed and the governing structure did not permit one member simply to rewrite the ownership arrangement to match his view of the new reality.

Western Albuquerque shows the same problem from another direction. Economic ownership was not equal, but the parties deliberately gave the smaller economic stakeholder a consent right powerful enough to stop an essential part of the business.

And Haley shows that even anticipating a breakup is not enough if the agreed exit mechanism leaves important liabilities behind.

A two-owner operating agreement does not need to predict every future disagreement. It should answer a smaller set of questions well: who can operate the business, what requires joint approval, what happens if joint approval becomes impossible, and whether either owner has a financially workable path out.

The 50/50 split is only the beginning of that conversation.