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Shareholder Pay – Need it Always be Equal When Ownership is Equal?

When you and your business partner started your company, being 50/50 partners sounded like the only fair way to go.   After all, you were both putting in the same amount of money. You were both supposed to work equal hours, make the same sacrifices, and provide the same value.  But if you are reading this article, chances are that is not how it has turned out.  Often the problem is that 50/50 owners agree early on that they should be compensated equally.  Such an agreement can essentially become an obsession, not to be deviated from no matter how the company evolves.

What happens if one person winds up working most of the hours, and providing most of the ideas, or most of the clients/revenue – or all three?  The person who is contributing less finds it difficult to concede that the “equal pay” agreement should be abrogated, and that he or she should rightfully make less.  But a more self aware, magnanimous partner would recognize these inequities, and realize that equal pay under such a scenario could easily lead to resentment and jeopardize the business partnership.

What I just described though, is actually easier to deal with than a different, but similar, problem that often arises.  That is when one person has a warped sense of his or her own value, as well as a diminished view of the value that his or her business partner provides, neither of which is based in reality.  In such a case, a few things often happen.  First, that owner believes he or she should be doing everything, despite the fact that he or she has no more abilities than his or her business partner.  Second, he or she comes to believe that, as a result, he or she should make more, and starts to challenge the initial agreement to equal pay.

Such a mindset may create an untenable business relationship, leading to ultimate shareholder dispute litigation, and the possible exit by one or the other from the company.  For example, in New Jersey, it may be possible for either owner in this instance to sue, either to be bought out, or to buy out the other.  How such a suit would ultimately turn out would be dependent on additional facts not provided here.  However, when one 50/50 owner starts acting in a manner harmful to the business relationship, it does not necessarily mean that business divorce litigation is the only option.

If you find yourself in a situation where a disagreement over partner salary is impacting the relationship with your business partner – whether based in reality or in his or her distorted view of reality – speak to a seasoned business divorce attorney as soon as possible.  Often negotiations can lead to a new Shareholders’ Agreement resolving these issues.  Hopefully, business divorce litigation can remain nothing more than a subtle – or not-so-subtle – threat that need not be carried out.  But many times it takes just such a threat to achieve the result you need.

If you have any questions about this post or any other related matters, please contact me at dcroberts@nmmlaw.com.