I am picturing a client walking into an initial consultation asking this question considering some perceived wrongdoing by the respective other 50% shareholder of the corporation or member of the limited liability company. Of course, I would investigate the specific facts underlying the client’s concerns, but in general, what are your rights when you own 50% of a New York corporation or New York Limited Liability Company?
This heavily depends on the agreements underlying the corporation or limited liability company, in other words on the operating agreement for the LLC or the shareholder agreement and bylaws for the corporation. But for the following, let’s assume there are no such agreements and documents, which regrettably is very often the case. But keep in mind that the below can be different for you because your LLC or corporation has an operating agreement, bylaws or a shareholder agreement.
Let me preface the following by pointing out that being a 50/50 owner of a company is often difficult because at the end of the day you must agree on everything with the other business partner. If you don’t agree, the business is often doomed. In these cases, it is important that you have good underlying agreements that provide some form of deadlock resolution mechanism. It could be an obligation to negotiate with or without a mediator. Or you define areas of responsibilities where you or the other 50% owner have final decision-making power.
50% Owner Rights in a NY Corporation
First off, do you really own 50%? Ideally, you would have a share certificate stating that you have been issued X number of shares or the books and records of the corporation clearly state you as a shareholder owning X number of shares. If not, not all is lost, see “Shares were never issued, can I still be an Owner?“
As a 50% owner of a corporation, you have a right to elect directors, see BCL 614. If the directors currently in charge are not to your liking, you can call for shareholder meetings to elect new directors. The corporation acts through the board of directors. You, a shareholder, cannot directly manage the corporation.
You have other rights to vote on important matters, for example, whether the corporation should merge with another entity, BCL 903 or whether the corporation can sell substantially all of its assets, see BCL 909.
You have a right to petition for the dissolution of the corporation, if the directors are so divided respecting the management of the corporation’s affairs that the votes required for action by the board cannot be obtained, if the shareholders are so divided that the votes required for the election of directors cannot be obtained or if there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders, see BCL 1104. As you may guess, this can easily happen if there are two 50/50 shareholders.
If the directors of the corporation declare dividends, you have a right to 50% of such dividends.
You have a right to bring derivative actions under BCL 626. A derivative action is a lawsuit brought on behalf of the corporation if the corporation has been wronged in some way.
You have a right to demand access to the books and records of the corporation.
50% Owner Rights in NY Limited Liability Company
Do you own 50% of that LLC, i.e. are you a 50% LLC member? See “How to determine LLC Ownership Percentage.”
If the LLC is managed by members, which is the default situation if manager management is not selected in the articles of organization, you have a right to participate in the management of the LLC. As long as the decisions and actions you take are “apparently carrying on in the usual way the business of the limited liability company”, see LLC Law 412. This is different from being a shareholder in a corporation. If the decisions are not the usual business of the LLC, you have to agree with the fellow LLC member.
You have rights to vote on any matter that requires the consent of a majority of the LLC members. A majority under LLC Law means “the members whose aggregate share of the current profits of the limited liability company constitutes more than one-half of the aggregate of such shares of all members” LLC Law 102. How do you determine “aggregate share of the current profits”? Your share of the profits, if there is no operating agreement, is determined by how much work or money you put into the LLC vis a vis the other 50% LLC member.
If there is a deadlock over any decision with the other 50% LLC member, unlike in a corporation, the deadlock does not ordinarily entitle you to petition for dissolution of the LLC. A dissolution petition for an LLC requires that it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement, see LLC Law 702. This has been interpreted to mean that the LLC’s management is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or continuing the entity is financially unfeasible. It is a hard standard to fulfill.
Under current case law, you have a right to bring derivative action on behalf of the LLC.
You have a right to demand access to the books and records of the LLC.