Minority Partner: Everything You Need to Know
A minority partner is a member of a partnership who owes less than 50 percent of the business.3 min read
2. Advantages of a Minority Partnership
3. Disadvantages of a Minority Partnership
4. Firing a Minority Partner
A minority partner is a member of a partnership who owes less than 50 percent of the business. This has implications for the partner's level of control over the company's administration and operation.
The advantages of partnerships in which each party owns a proportional stake in the business are:
- Agreement on rewards and responsibilities
- A fair relationship between input and receipt
- The person who contributes the most to the partnership has the most power
However, disadvantages may include:
- The need for challenging conversations about what each responsibility is worth to the business
- The need for a detailed agreement that sets roles and responsibilities
- The risk of marginalization for the minority partner
Even equal partnerships can have a minority partner if one person has fewer rights and decreased options for recourse if actions are taken by the majority that conflict with his or her interests.
Uneven partnerships are more appropriate for corporations than for limited liability companies (LLCs). Most states offer more protection for the minority partner in corporations than in LLCs, and some states (including New York) have even ruled that the minority partner doesn't warrant the same protections.
If you do opt to form an LLC with an uneven partnership, it's important to create a comprehensive operating agreement. This should include information about how the business is operated, who has decision-making power, who can veto decisions and when, and how conflicts are solved. You should also include a provision that details what will happen if the partners disagree, such as mediation or arbitration.
Advantages of a Minority Partnership
If you're still involved in the day-to-day operations but want to reduce your role, it may make sense to reduce your partnership stake from majority to minority. This is also appropriate if you are nearing retirement, want to gain expertise, are seeking additional capital, or want to withdraw some of your ownership stake. Selling some shares to a new partner can bring in new experience and increased capital.
Disadvantages of a Minority Partnership
If you are used to taking charge of business decisions, receding to a minority role can be challenging. This is especially true if you disagree with other partners on an issue. When seeking an investor, make sure he or she is aligned with your mission, values, and goals.
Firing a Minority Partner
Depending on the procedures established in your business partnership agreement, you may be able to fire a minority partner in the company. If these rights are not delineated in the agreement, however, it can be legally difficult to do so if the partner in question will not leave voluntarily. Sometimes, this makes it necessary to dissolve the partnership.
First, look at the existing partnership agreement and examine clauses that allow existing partners to be terminated. This often includes actions that are grounds for termination and/or the voting procedures for termination of a partner. It may also require you to follow certain steps to inform the partner about the intent to remove him or her from the business. It's important to follow all steps dictated by the partnership agreement to ensure the termination will hold up in court if the minority partner sues.
When firing a partner, you must be prepared to purchase his or her equity interest in the company, which includes the initial capital investment made plus any interest on that investment. Depending on the size of the company and its revenue, the partner's equity interest could be worth millions of dollars. Buying the partner out is essential even in cases of termination for cause.
If a partnership agreement does not exist or does not cover termination rights, you'll have to file a civil suit to remove the partner in question. This can be quite an expensive prospect and shouldn't be pursued unless you can prove wrongdoing, such as fraud or embezzlement.
If none of these routes is possible, the partners may opt to legally dissolve the partnership and sell their interests in the business. If at least half the company's capital interest and profit are sold within 12 months, the partnership is dissolved. In this case, you can develop a new business venture without the problematic partner.
If you need help with a minority partnership, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.