Letter of Intent to Form LLC: Everything You Need to Know
A letter of intent to form LLC is a written document that shows the intent of one party to start or purchase a limited liability company (LLC).3 min read
Letter of Intent
If you are negotiating to sell an LLC, you will need to make sure to use a letter of intent. This letter's purpose is to start the deal, ensuring that any involved parties clearly understand the main contractual and business issues that may be involved.
As you go through the negotiation process, you might want to start with an initial offer and some basic terms in the letter of intent. The letter will outline these general terms of a proposal to start or acquire a business. This proposal could include the terms of:
- Asset acquisition and descriptions
- Closing conditions
- Purchase price
After receiving the letter of intent, the owner of the business can start negotiating and hopefully end up with a deal that works for them and the other involved party. Although a letter of intent won't include a full listing of the deal's terms, it's smart to be as specific as possible about the major points in the deal to ensure that all involved parties understand the general terms.
A letter of intent has several key purposes:
- Outline a timeframe for the execution and completion of the definitive contract
- Spell out the expectations of the terms of the potential deal for each party each party
- Discuss a potential price for the purchase early in the transaction
- Determine who is responsible for drafting key documents
- Demonstrate the commitment on both sides to going through with the deal
An LLC is neither a sole proprietorship nor a corporation, although it will share some attributes with each of these business entities. Since an LLC offers some of the benefits of these two entities, this type of business is more attractive to potential buyers. An LLC is easier to operate and has less complex tax regulations and requirements, similar to a sole proprietorship, but also provides personal liability protection that is typically only available through the formation of a corporation.
The owners of an LLC are called members, and they hold the interest in the business. The terms for selling the business are outlined in the LLC's operating agreement. Some LLCs have just one member, while others have multiple members. If all involved parties are intent on purchasing or selling membership interests, the agreement to sell the business should reflect the intent. It's also critical to review the operating agreement to make sure the deal satisfies any conditions outlined before selling the business.
Selling an LLC can also be structured as the sale of assets. If this is the case, all assets held by the LLC, including intangible, tangible, and goodwill assets, will be sold to another party. In this case, the parties would still need to review the operating agreement and follow any outlined procedure when selling the assets.
Making the Decision to Sell an LLC
Deciding whether to sell membership interest in an LLC is complex and has a number of tax and business considerations. Consult with experienced professionals before you choose how to proceed. In order to express your good faith, commitment, and sincerity to a potential buyer of your LLC, you should avoid discussions with other possible buyers during the pre-closing and due diligence period.
In exchange for your sincerity, the buyer of your LLC may offer a deposit toward the purchase price. Some or all of the deposit could be non-refundable if the deal doesn't close due to the buyer backing out of the deal. A non-refundable deposit may be retained by the seller only if the buyer backs out for a reason that is not the seller's fault. If something comes up during the pre-closing or due diligence period that violates the terms of the agreement, the deposit may have to be refunded.
A letter of intent should only take a few days to finalize. If the involved parties can't agree on the main business issues or purchase price within several days, it may make sense to step away from the deal, whether to work with another potential buyer/seller or to come back to the agreement later.
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