Forming an LLC with partners can be a lot like a marriage. What partners expect during the duration of the partnership are more clearly expressed than what’s expected when things end. In an LLC, the operations agreement is where these expectations regarding roles and responsibilities are expressed. However, like in a marriage, partners often don’t clearly plan and specify what they expect to occur when one member wants to leave or is forced out. We’ve seen several cases where not planning ahead can lead to both business and personal discord. This is completely avoidable with a properly structured LLC and buyout agreement.
A buyout agreement is also known as a buy-sell agreement. These agreements do not deal with outside parties acquiring a business. Rather, they deal with the shared expectations between members of an LLC on how to proceed when partnerships end. A buyout agreement may force members to confront some uncomfortable “what if” scenarios. This can save businesses and relationships. Here are three important questions to help guide the drafting of your buyout agreement.
There are two likely paths forward once one or multiple members decide that they want out:
Sometimes a business is forced to move forward through one member’s incapacitation, bankruptcy or even death. In any of these unfortunate circumstances dissolution of the LLC is a possibility, but not required. Members must ask themselves beforehand the following key questions:
This scenario can be a good sign as it signals that the company is an attractive prospect to outsiders. However, bringing in the wrong person can lead to conflicts down the line. A buyout agreement should set expectations regarding:
As you can see, a member buyout can be a complex process. However, thinking of potential buyout scenarios ahead of time and seeking legal counsel can avoid problems later on. We’ve helped numerous clients form their LLC with member buyout agreements that satisfy all parties. Call us today at [GLOBAL VAR=phone-number] for a consultation.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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