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The idea of starting a new business on a 50-50 basis with a close friend or family member sounds exciting, because it involves sharing creative ideas, a mutual desire for success in a new venture and, at least initially, enthusiasm in starting a promising, new company. But hopefully, these potential partners consult with a trusted advisor before they go down this road who sagely advises them: Just don’t do it. It would be an overstatement to suggest that all 50-50 owned new businesses are doomed to fail, but the steep risks inherent in this ownership structure are so high, they should be avoided, if at all possible, especially when there are better options available.

This post reviews substantial risks involved in owning and operating a 50-50 owned private business, and it evaluates a different ownership structure that is designed to avoid the pitfalls of forming a new business on a co-equal basis.

Why 50-50 Owned Businesses Are So Problematic

The primary risk of starting a 50-50 owned business is that the co-owners will end up in deadlock when a disagreement arises between them about important matters that relate to the company’s operations. When a disagreement takes place, if neither of the partners agree to compromise, this deadlock can bring the business to a halt and ultimately cause the company to shut down permanently. This may seem unlikely at the outset when the partners are aligned in their vision. But as challenges arise over time, the partners will have more opportunities for disagreement, and the potential for an impasse between them becomes much greater.

Even when one partner has clearly engaged in wrongdoing, the ability of one partner to show that the other partner engaged in wrongdoing will not result in the wrongdoer being removed as a partner from the business. For example, a partner who misuses funds or assets of the business can be sued for breach of fiduciary duty.  But under Texas law, the violation of a fiduciary duty does not give rise to a forfeiture remedy that would permit the non-breaching partner to force a buyout of the other partner. The wrongdoer may have to pay damages to the company or to the other shareholder, but one 50% owner of a private company cannot remove the other 50% owner of the business based on misconduct as the remedy for the claim is money damages.

In sum, there is no legal remedy available to a partner owning 50% of the business that will allow him or her to secure a court order judicially removing the other 50% owner from the business based on the other partner’s misconduct. The remedies that may be available to a 50% owner who believes the other owner is running amok are to seek the appointment of a receiver or to dissolve the company, but these harsh remedies are difficult to secure in court. Further, these remedies may not be attractive because they will require the majority owner to transfer control over the business to a court-appointed third party — a receiver — or to seek dissolution of the company entirely.

Adopting Tie Breaker Mechanisms to Avoid Deadlock  

If potential 50-50 partners cannot be dissuaded from forming a company on this basis, their governance structure should include a tie-breaking mechanism that prevents deadlocks between them from arising in the future. There are a number of tie-breaking options available to consider:

  • A board – The partners can appoint a board that could be limited solely to resolving disagreements (breaking deadlocks) between the partners, or they could empower the board to assist with the management of the business on an ongoing basis. They will need to protect the board from any potential lawsuit by a disgruntled partner unhappy with an adverse decision, which can be done through immunity and safe harbor provisions, as well as the commitment to pay any/all legal fees the board incurs in any dispute.
  • Individual arbiter – Rather than appointing an entire board, the partners could select just one trusted advisor from their mutual contacts who will resolve all disagreements and break deadlocks between them. Again, they need to protect this decision-maker through immunity provisions and coverage of legal fees.
  • Flip a coin or staggered governance – Some business partners require the partners to flip a coin when they are in conflict over a business decision. Other 50-50 partners rotate decision-making authority for some period of time so that one partner makes decisions for a defined period before the authority rotates back to the other partner. These provisions seem unwieldy, but they do reflect forethought by the partners to avoid a deadlock scenario.    

If these tie-breaking mechanisms are not adopted, the partners may have no method to resolve their deadlock. Even worse, if one partner leaves the company in frustration to start a new business, the remaining partner may allege that the departing partner misappropriated the company’s trade secrets/confidential information. While this claim by the remaining partner may not be valid, it will put a damper on the departing partner’s efforts to start over at a new company.  

The Better Alternative: 51%-49% Ownership, But With 50-50 Economic Impact

There is an alternative to the 50-50 owned business that will fully avoid any potential deadlock but also align the partners’ economic interests in the company.

Specifically, the partners can structure the ownership of the business on a 51%-49% basis, which means that one partner will have final decision-making authority and thereby avoid deadlock between them. But they can also agree that the parties will share equally in the financial returns from the business, which provides them with the same compensation (including bonuses) and same distributions, as well as ensures they have the identical financial return from the company. Further, the 49% owner can also insist on some veto rights so that the minority partner has to approve certain major decisions.

The type of major decisions that require the minority partner’s approval may include all of the following, as well as other decisions that are negotiated between the partners: (1) adding new shareholders or members, (2) selling the business or selling the majority of its assets, (3) removing the minority partner as a board member or manager, and (4) making changes to the corporate bylaws or to the LLC company agreement.

While many partners who are seeking a 50% interest in a new business may not be willing to accept a minority interest and cede most of the control over the company to the other partner, this approach is worth considering. First, it confirms that the partners will not become deadlocked over operational decisions and prevents the company from being derailed on a day-to-day basis. Second, it assures the minority partner that the financial benefits he or she receives will mirror those of the majority owner. Finally, to secure the 51% ownership stake in the company, the majority owner may be required to make a much more substantial capital contribution to launch the business than the minority partner contributed.

Conclusion

The idea of a 50-50 owned business sounds reasonable on paper, but it often leads to serious conflicts in the future between partners in the real world. Even closely aligned partners at the start can end up having major disagreements when challenges arise in the business or when they experience problems in their personal lives such as a divorce or health issues. The legal options for deadlocked partners are limited, and these types of conflicts can be devastating to the business. When a business cannot address problems or make important decisions, this dysfunctional situation creates stress that may cause the company to flounder and lose both clients and employees.  

To avoid the negative consequences of deadlock, potential 50-50 partners may want to adopt a 51%-49% ownership structure, but one where they agree to share all financial returns from the company on a 50-50 basis and which also provides the minority partner with veto rights over key decisions. If this ownership split is not acceptable, the partners who are committed to forming a 50-50 owned business should insist on adopting some form of a tie-breaking mechanism that avoids the calamity of a deadlock in the future that seriously impairs the business or results in its ultimate demise. 

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The warm summer months are almost here, and many business owners will be spending some time relaxing away from the office. Before or after that well-deserved summer vacation, however, owners may want to tackle important issues concerning the company’s key agreements that have not kept pace with the growth of the business. Changes in these agreements may be necessary due to the expansion of the company’s intellectual property (IP) assets, the larger size of its workforce, and/or the growth in the appreciated value of the business.

While growth is generally positive in a business, the company’s agreements with its employees and third parties may no longer adequately protect its interests, and the company may need to implement new practices to preserve the confidentiality of its sensitive information. This post focuses on changes the majority owner can make that are designed to (i) provide enhanced protection for the company’s confidential information, (ii) limit the scope of the fiduciary duties that apply to the company’s management team, and (iii) create buy-sell agreements that permit the owner to redeem ownership interests that are held by minority investors in the company.

Protecting the Company’s Confidential Information

The company’s continued success may be due, in part, to the growth of its IP, including its confidential information and trade secrets. The company’s IP may have grown through acquiring new patents, securing exclusive licenses or further developing its own trade secrets. As the company’s IP assets have expanded, the majority owner will want to assess whether the legal agreements that protect the company’s IP have kept pace with its impressive growth.

The specific questions the majority owner will want to consider regarding the growth of the company’s IP are (1) does the company need to bolster its confidentiality agreements with both employees and third parties, (2) do the company’s current employment and/independent contractor agreements sufficiently protect the company’s IP, and (3) should the company create or change the protocols it has in place to protect confidential information? These changes are each discussed below.

To protect the company’s IP from misuse by insiders, the company will want to secure confidentiality agreements with its officers, employees and agents. These agreements should describe the IP in meaningful detail (without revealing any confidential information of course), because courts generally give more weight to specific descriptions of confidential information in a legal proceeding. The training that the company provides to employees regarding its confidential information should also be referenced, because offering this type of training confirms that the company intentionally disclosed its confidential information to its employees to enable them to perform their duties for the company.

The more extensive the company’s IP becomes, the greater the likelihood that it will be shared with third parties. As a result, the company also needs to secure confidentiality agreements or non-disclosure agreements (NDAs) from third parties, including vendors, advisors and clients, if these third parties are provided with access to the company’s confidential information. Once the company’s confidential information has been disclosed to third parties without protections in place, this type of unprotected disclosure waives the company’s claim that the information is confidential.

Disclosing IP to employees also provides the company with a legal basis to require them to be bound by noncompete provisions and similar restrictions in their employment agreements. For current employees who have already worked for the business without any noncompete restrictions in place, however, it may not be possible to bind them to enforceable restrictive covenants on an after-the-fact basis. Instead, the company will need to require these employees to sign confidentiality agreements or NDAs that prevent their unauthorized use of the company’s IP.

Finally, securing NDAs and confidentiality agreements with employees and third parties is just one part of the process that the company needs to undertake to protect its valuable IP. In addition to these agreements, the company will also want to implement specific protocols that are designed to maintain the secrecy of its IP. The process required for a company to maintain the confidentiality of its IP goes beyond the scope of this blog, but these steps include (i) limiting access to confidential information solely to those with a need to be privy to the information, (ii) marking the information as confidential on the actual document so that its protected status is clear, and (iii) regularly training employees on how to protect and maintain the confidentiality of business-sensitive information.

Analyzing the Fiduciary Duties That Apply to Those Governing Private Companies

In a recent post, we discussed the scope of fiduciary duties that apply in Texas to directors, officers, and managers of private companies. As noted in that discussion, the Texas Legislature made important amendments during 2025 to the Texas Business Organizations Code (TBOC), which will potentially have major impacts on the fiduciary duties owed by governing persons (see TBOC Section 101.401).

The owners of existing private Texas companies now have the opportunity to opt into to the changes the legislature made last year to the TBOC, which permit owners to restrict or even eliminate the fiduciary duties that apply to those who run the business, and/or to limit the liability of the members of their management team. Whether or not to accept any of these changes for the protection of the company’s management team is an important analysis that majority owners will want to consider.

On the one hand, limiting the scope of fiduciary duties may provide the company’s directors, officers and managers with more freedom and flexibility in the way that they operate the business. For example, business managers may be able to more freely enter into transactions with affiliated companies that will benefit the company but also provide returns for the managers who have interests in both companies. On the other hand, potential investors may be more reluctant to provide investment capital for the business if these changes are implemented. Understandably, investors may be leery of providing growth capital to the business when they perceive that the members of the management team are no longer subject to the fiduciary duties that had traditionally applied under common law to those charged with running the company. In this situation, sophisticated investors will almost certainly insist that fiduciary duties apply to all company directors, officers and managers before they will agree to make a substantial investment in the company.  

Creating or Revising Buy-Sell Agreements

We have written extensively about buy-sell agreements (BSAs), which serve the interests of both majority owners and minority investors, and they can be created after the fact, even if these provisions were not adopted by the parties at the time the investment was made. For majority owners, BSAs provide them with a redemption right that allows them to acquire the interest of a minority partner if the owner wants to consolidate the interests held by minority partners, or if the minority partner becomes disruptive to the business. For minority investors, the BSA ensures that the investor will have the right to monetize its minority ownership interest in the business at the time that the investor decides to exit from the company. In short, a BSA allows either party to secure a business divorce in the future when it becomes necessary or desired.  

As the company grows, the majority owner will want to review the terms of the BSA to ensure that the formula used in the agreement to determine the value of the minority owner’s interest will continue to accurately reflect its fair market value. This assessment is necessary because, depending on the language that is used in the BSA, the valuation formula may produce a result that varies widely from the actual value of the minority owners’ interest. If the BSA is not updated, there is a risk that the original formula could result in a valuation of the minority interest that is unfavorable for the majority owner, which is not fully consistent with the actual market value of the interest.

Conclusion

Majority owners who have guided their companies to achieve growth deserve to celebrate that success with a relaxing summer getaway. The long days of summer are also a good time for business owners to consider whether they need to upgrade their company agreements to better protect the business in light of substantial growth that has taken place within the business.

Majority owners may want to (i) strengthen agreements that guard the company’s confidential information and create/revamp protocols that provide enhanced protection of this information, (ii) revise their governance documents to limit their exposure and liability to fiduciary duty claims from minority investors, and (iii) adopt or improve their buy-sell agreements to ensure they accurately determine the fair market value of the minority owner’s interests. These changes will better position both the company and the majority owner as the company continues its growth curve, and they also will offer more protection if storms arise in the future.

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People typically enter into business partnerships with the best of intentions. But when things go awry down the road, the minority partner may claim that the majority owner violated a fiduciary duty by failing to act in the best interests of the business or by acting so recklessly that it amounts to gross negligence. Before things go off the rails and the lawyers start firing off nasty letters, it is helpful to develop a basic understanding of the fiduciary duties that apply to those who control the company — officers, directors, managers and general partners. This post focuses on these fundamental questions: What are fiduciary duties and what conduct do they require? 

The First Question: Was There a Duty?

For a disgruntled minority partner, the first step is to determine whether the person who may be the subject of a claim owes a fiduciary duty to the company or its owners. Certain roles are usually subject to fiduciary responsibilities under Texas law — such as business partners, corporate officers and directors, or managers of an LLC — and these individuals are expected to act with loyalty, honesty, and care toward the business and, in some cases, its owners. But, as discussed below, the company’s governance documents may limit, or in some cases, eliminate the fiduciary duties of company officials or remove their monetary liability. As a result, it is critical to check the bylaws (corporations), the company agreement or regulations (LLCs), or partnership agreement (limited partnerships) to determine what limits they may impose on fiduciary duties.

Things can also get murkier in closely held businesses, especially those involving friends or family as co-owners. Many people assume the existence of long-standing personal relationships will impose fiduciary duties on one or both of the parties. In Texas, that’s usually not the case. Parents, siblings and close friends do not automatically become fiduciaries just because they trust each other. Courts typically require specific evidence of a deeper, pre-existing relationship of trust that existed before the business arrangement — not just trust that developed as part of it. That distinction often comes as a surprise, especially in family business disputes.

It is important to understand, as well, that defendants in a fiduciary duty case will ultimately bear the burden of proof if it is established that they owe a fiduciary duty. The average person typically assumes that the plaintiff always bears the burden of proof, but that is not always the case in fiduciary litigation.

Check the Fine Print

In May 2025, the Texas Legislature amended the Business Organizations Code to allow LLCs and limited partnerships to eliminate the duties of loyalty, care and good faith for managers, officers and general partners(seeTBOC Section 101.401). In addition, while corporations cannot eliminate the duties of loyalty and good faith, TBOC Section 21.418(f) provides that officers and directors are not liable for engaging in interested transactions unless it is established that they engaged in fraud, intentional misconduct or knowing violations of law. In addition, corporations can stipulate in their governance documents that their officers and directors are not liable to the company or its owners for monetary damages resulting from their acts or omissions.

Thus, the company’s governance documents may significantly shape the fiduciary duties that would otherwise apply and include provisions that:

  • Limit liability for certain decisions
  • Allow conflicts of interest if properly disclosed and approved
  • Replace traditional fiduciary duties with contract-based standards

In some LLCs, for example, managers may have reduced duties so long as they act in good faith and follow the agreement. And corporate directors and officers are often protected from liability for simple negligence, though not for conduct amounting to fraud or self-dealing.

The bottom line is that an initial review of the company’s governing documents is critical as it may often determine whether a claim is viable — or not.

Not All Bad Decisions Constitute Breaches of Fiduciary Duty

It is also important to understand that not every poor business decision amounts to a breach of fiduciary duty. Business leaders are generally protected by what’s known as the business judgment rule. This means courts won’t second-guess decisions that were made in good faith, with reasonable care, and in what the decision-maker believed was the company’s best interest — even if those decisions ultimately turned out badly. Problems arise, however, when someone:

  • Puts their personal interests ahead of the business
  • Uses company assets for personal gain
  • Hides important information
  • Engages in unfair or self-interested transactions

The business judgment rule that applies to these claims was codified in the same amendments to the TBOC that the legislature passed in May 2025 (see TBOC 21.419). The new form of rule applies to Texas corporations that are publicly traded and to corporations and LLCs that opt into this new section in their certificates of formation, bylaws, or company agreements.

The statute presumes that officers, directors and managers acted (i) in good faith, (ii) on an informed basis, (iii) to further the corporation’s interests, and (iv) in compliance with applicable law and the corporation’s governing documents. The plaintiff bringing the claim has the burden to rebut these presumptions and must also plead with particularity that the alleged breach constitutes fraud, intentional misconduct, an ultra vires act, or a knowing violation of law.

Who Owns the Claim — the Minority Owner or the Company?

One of the most confusing aspects of fiduciary duty cases is determining who has the right to bring the claim. In many cases, the harm at issue is suffered by the company — when company funds are diverted or its assets are wasted or misused. Those claims for injury to the company typically belong to the company, not to the individual owners. Therefore, to pursue this type of claim, the minority owner will need to bring a derivative claim on behalf of (in the name of) the business. On the other hand, if the individual owner was personally harmed — such as losing voting rights or if the owner’s interest was unfairly diluted — the owner may have a direct claim.

This distinction isn’t just technical. Filing the wrong type of claim can result in dismissal of the case. There are a variety of procedural rules the minority owner will be required to follow to bring a derivative claim, but there are two types of derivative paths in Texas depending on the size of the company. The first type has a host of procedural/statutory requirements, including providing the company with formal written notice and an opportunity to respond within 90 days before filling suit (seeTBOC 21.553). The second category of derivative claims exists when closely held companies are involved (i.e., companies that are not publicly traded and have less than 35 shareholders), and in those instances, the procedural rules are relaxed and no notice is required before a minority owner may bring a direct action in the name of the company(see TBOC 21.563). The rules for recovering damages to the company can also be different in closely held entities.    

Evidence Can Make or Break the Case

Fiduciary duty disputes are rarely decided based on who tells the better story. They’re usually decided based on documents and, in many cases, on the testimony and analysis of financial or valuation experts. Financial records, emails, text messages, contracts, and internal communications often provide the clearest picture of what actually happened to cause a dispute. In many cases, early access to these materials can quickly reveal whether a claim is strong or whether it’s likely to fall apart under scrutiny. One of the first things to consider is what evidence exists to support the claim and how readily it can be obtained. Gathering this evidence before the first meeting with an attorney is advisable.

What Recovery Is Permitted?

If a fiduciary duty was breached, the law offers several potential remedies, but remember that under the amendments to TBOC, the standard of proof has been heightened. The plaintiff is going to have to establish that the governance person engaged in fraud, intentional misconduct or knowing violations of law in order to recover. As noted above, however, this is where burden shifting rules get tricky. If that hurdle can be met, however, the minority owner may be able to recover financial losses, such as lost profits or diminished business value, and in some cases, courts can require the wrongdoer to return profits they gained from their misconduct — even if the plaintiff cannot prove traditional (actual) damages suffered.

When fraud or intentional wrongdoing is established, additional damages and legal or equitable remedies may be available, including temporary and permanent injunctive relief and the imposition of a receivership or constructive trust. Courts can also step in to unwind improper transactions or impose other remedies to protect the business.

Conclusion — Making the Right Call Early

Fiduciary duty cases are complex because they sit at the intersection of business relationships, legal obligations of the parties, and written agreements, and therefore, the minority owner may be able to assert claims for breach of contract, as well as claims for breach of fiduciary duties, or sometimes only breach of contract. At their core, these cases revolve around a few key questions:

  • Did the defendant owe a fiduciary duty?
  • Was that duty limited by some agreement?
  • Was the duty actually breached?
  • Who was harmed by the breach and how?
  • Is there enough evidence to prove the breach?
  • Is emergency relief necessary?
  • Is the heavy cost worth the requested relief?

Answering those questions early — and objectively — can save significant time, expense, and frustration down the road.

In sum, when a minority owner has a potential claim for breach of trust against a business partner, it requires a realistic evaluation of the claim, the evidence and the desired relief. This analysis is necessary as the first step to decide whether to pursue the claim, negotiate a resolution, or take a different path forward. Similarly, if a majority owner is faced with this type of allegation, an objective evaluation of the law, the evidence supporting the claim and damages sought is essential to assess whether to gear up to battle the claim head on or seek an early resolution.