Two equal owners can reach a point where neither can move the business forward without the other, and the other won’t agree. That is a deadlock. It can stall operations, jeopardize the company’s future, and threaten to wipe out substantial value to the owners. Fortunately, California law gives LLC owners a way out of a deadlock.

What deadlock means

Deadlock happens when the people who manage the company are evenly split on a decision the business needs to make, and there is no way to break the tie. In a two-member LLC with 50/50 ownership and no tie-breaking provision, a single disagreement can stall everything from hiring to signing a lease.

Start with the operating agreement

The operating agreement is the first place to look. Many agreements include a tie-breaker, a mediation or arbitration requirement, or a buy-sell provision that lets one owner buy the other out at a set price or by a set formula. When those terms exist, they usually control what happens next.

When the agreement is silent: Two distinct paths to dissolution

If a deadlock persists, and neither party wants to buy out the other, then the last resort option is dissolution. Dissolution initiates the winding up of the LLC’s affairs, including addressing obligations and distributing any remaining assets under applicable law and governing documents. It is not the same as simply removing a co-owner from the business. Rather, it ends a business like how no-fault divorce ends a marriage.

There are two main ways to initiate the dissolution process:

Dissolution by member vote. Under California Corporations Code § 17707.01(b), members holding at least 50% of an LLC’s voting interests may vote to dissolve it, unless its articles of organization or written operating agreement require a higher percentage. If each of two owners (or blocks of owners) holds exactly 50% of the voting interests, either may meet that default threshold without the other’s vote.

Judicial dissolution. A manager or member may ask a court to dissolve the LLC on statutory grounds, including management deadlock or internal dissension under § 17707.03(b)(4). A disagreement does not guarantee a decree; the court must determine whether necessary conditions stated in the law are satisfied.

The buyout alternative

The same law that lets a manager or member ask a court to dissolve the LLC also gives the other members a way to keep the company going. In a lawsuit for judicial dissolution, the other members can avoid dissolution by purchasing the moving members’ interests for cash at fair market value (section 17707.03(c)(1)). If the owners cannot agree on that value, the court can freeze the dissolution and determine the fair market value itself, with the help of appraisers. (§ 17707.03(c)(2)–(3)). This buyout process is not automatic, and usually requires assistance from a variety of professionals, including attorneys, accountants, and professional appraisers.

Where dissolution is triggered by a vote of one or more members, there is no provision in the law providing the other members with an opportunity to buy out the voting members. In fact, in Friend of Camden, Inc. v. Brandt (2022) 81 Cal.App.5th 1054, the Court of Appeal held that a valid 50% dissolution vote effectively wiped out a pending judicial-buyout proceeding.

Corporations have different dissolution and buyout rules under Corporations Code §§ 1800 and 2000.

General partnerships similarly have their own rules. Corporations Code § 16801 governs dissolution and winding up, while § 16701 generally requires the partnership to buy out a dissociated partner when the business continues.

Options to consider before litigation

Depending on the situation, owners may consider one or more options, including the following:

• Amending the operating agreement to add a tie-breaker for future decisions

• Mediation or another agreed dispute-resolution process

• A negotiated buyout, where one owner purchases the other’s interest

• A planned sale of the whole business, with proceeds split by ownership

Which path fits depends mostly on what the agreement already says and what the business is worth.

Common questions

Can one 50/50 owner force the other out of a California LLC?

It depends. As we discussed, dissolution winds up a business, but cannot be used as a mechanism to force out any members. An operating agreement could potentially be written to provide for removal or buyouts when certain conditions are met. In addition, California Corporations Code § 17706.02 lists various circumstances when a person becomes dissociated as a member of an LLC. For example, under limited circumstances, a member may be expelled by the unanimous vote of the other members. The LLC itself may also ask a court to expel a member for materially harmful wrongful conduct, a willful or persistent material breach of the operating agreement or statutory duties—including fiduciary duties—or conduct making it not reasonably practicable to continue with that member. Meanwhile, as another example, if the LLC is a member-managed LLC, then bankruptcy of a member will automatically dissociate that member to protect the LLC and other members from the creditors.

Does deadlock automatically end the LLC?

No. One or more of the disputing members will usually need to initiate a process that either seeks to break the deadlock or initiates dissolution of the LLC.

What if the operating agreement has a buy-sell clause?

A buy-sell clause often decides how a buyout works and at what price. But whether the buy-sell clause controls in a particular situation might depend on whether its procedures are mandatory or optional, and whether the conditions stated in the clause are satisfied or not.

To discuss whether we may be able to assist with your specific situation, you can schedule a consultation at book.razzlaw.com or call (909) 547-7299.

About the author. Jay Razzouk represents business owners in partnership and owner disputes, business purchases and sales, and estate planning, including wills and trusts. Before going out on his own in 2017, Jay represented and advised investors of public companies in shareholder derivative actions and complex class action litigation for over a decade. Jay earned a law degree in 2008 from Pepperdine University School of Law.

Jay Razzouk, Attorney at Law · 473 E. Carnegie Drive, Suite 200, San Bernardino, CA 92408.

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