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In many privately held businesses, especially those co-founded by two individuals, a 50/50 ownership structure is seen as a symbol of balance and fairness. But in practice, equal equity can become a governance liability—particularly when disagreements arise over executive compensation.

Whether you’re operating in New York, Washington D.C., Virginia, Maryland, or any other jurisdiction, these disputes can lead to deadlock, litigation, or even judicial dissolution if not addressed early through proper structuring and documentation.

The Compensation Deadlock Scenario

In many closely held businesses, one co-owner may take a more active role—running operations, managing staff, or driving revenue—while the other plays a more passive part. This imbalance often goes unaddressed until profits fall, growth stalls, or outside funding pressures emerge.

At that point, compensation becomes a flashpoint:

• Should the working founder receive a salary increase?
• Is a bonus appropriate when distributions are tight?
• Is one owner doing all the work while both share equally in the rewards?

In companies with a 50/50 split, where mutual consent is required for decisions, these disagreements can escalate quickly into paralyzing deadlock.

Legal Exposure for Private Companies and Their Founders

A disagreement over executive pay isn’t just a business problem—it’s a legal risk. Owners who assume their compensation arrangements are immune from challenge may be surprised to find they’re vulnerable to claims of:

• Breach of fiduciary duty, if compensation is viewed as excessive or self-dealing;
• Unjust enrichment, particularly if compensation lacks approval or documentation; and
• Wage violations or payroll tax issues, especially when owners rely on informal draws instead of structured salaries.

Courts across the U.S.—including in New York, Washington D.C., Virginia, and Maryland—have increasingly scrutinized compensation decisions in closely held entities, especially when one party alleges abuse of control or mismanagement.

When Compensation Disputes Lead to Judicial Dissolution

If unresolved, compensation deadlocks can lead to the ultimate breakdown: judicial dissolution. Many state laws allow a 50% owner to petition for dissolution where deadlock prevents the business from functioning effectively. This often results in a forced buyout, an expensive valuation dispute, or a full wind-down of the company.

What begins as a disagreement over salary or bonuses can end in the loss of the entire enterprise.

How to Prevent Compensation Disputes in 50/50 Companies

To reduce the risk of litigation or business disruption, companies should:

1. Define Compensation in Governing Documents

Include terms in the operating agreement or shareholders’ agreement that specify how working owners will be paid, with formulas, benchmarks, or external review options.

2. Add Deadlock-Resolution Mechanisms

Use tie-breaker provisions, rotating decision-making authority, or deadlock-breaking clauses to keep disputes from stalling the business.

3. Clarify Roles and Employment Status

Separate equity ownership from employment roles. Formalize who holds officer positions and how compensation is set or changed.

4. Use Employment Agreements for Working Owners

Clearly define duties, pay structure, bonus eligibility, and termination rights in writing—even between co-founders.

5. Maintain Transparency and Keep Records

Document all compensation discussions and decisions. Revisit them periodically to ensure they remain fair and legally sound.

Final Thoughts

Executive compensation disputes in 50/50 ownership structures are common—and dangerous. They create friction, erode trust, and can lead to serious legal consequences if not managed properly. These risks exist everywhere, business owners in New York, Washington D.C., Virginia, and Maryland should be especially mindful of how their agreements and compensation policies align with their long-term business and legal goals.

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Need help with a founder dispute or executive pay issue in a closely held company?

Our firm represents clients in New York, Washington D.C., Virginia, and Maryland in matters involving business structuring, compensation design, and ownership litigation.

Contact us to schedule a consultation, or visit our business litigation, executive compensation, and corporate & transactional pages to learn more about our practice.