Does Your LLC Need a Buyout Agreement?
When forming an LLC, a critical but often missed step is creating a buyout agreement. An LLC’s buyout agreement outlines what will happen in the event a member of the limited liability company leaves, goes bankrupt, divorces or dies. A buyout agreement is not only used when a co-owner leaves. The agreement also governs the terms of when and how a new member can join the LLC.
In addition to avoiding problems in the future, a key benefit of creating the buyout when the owners are forming an LLC is the honest dialogue. It fosters an environment of open communication between the owners of an LLC and forces the ownership team to discuss expectations for the business early on.
The odds are high that one member of the LLC will decide to leave before the others are ready to close or sell the business. Even when a business relationship is working well one of the owners could decide to leave. If your limited liability company does not have a buyout agreement you may be forced to dissolve the LLC and sell and divide the assets before you are ready. There could be serious financial and business impact if it is not determined when you are forming an LLC how leaving members will be bought out and what they will be paid for their shares.
Equally as important as detailing the rules for departing members, is outlining the rules for how new members can join the LLC. Without a buyout agreement, one owner could sell his shares to someone you prefer not to be in business with.
You have options when it comes to how the buyout agreement is written. The agreement can be incorporated into the LLC’s operating agreement or it can stand alone as a separate agreement. Events that should be covered under your buyout agreement are:
- Retirement or resignation of an LLC member
- A divorce settlement where an ex-spouse may receive membership interest in the LLC
- Financial issues such as the personal bankruptcy of one on the members or the foreclosure of a debt secured by a member
- The disability, incapacity or death of an LLC member
How does the old saying go? “The one thing is life that is constant is change” Get your limited liability company off to a great start by creating a buyout agreement when you form an LLC.
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