LLC Buyout Agreement: Everything You Need to Know
An LLC buyout agreement is a binding contract between owners of an LLC that regulates what happens if a particular event occurs, i.e. a member wanting to leave the business. 3 min read
LLC Buyout Agreement
An LLC buyout agreement is a binding contract between owners of an LLC that regulates what happens if a particular event occurs, i.e. a member wanting to leave the business. This includes circumstances including the death or bankruptcy of a member. Simply put, the agreement is a prenuptial arrangement between LLC members, and acts as the legal agreement if disputes should arise among the LLC members.
The agreement itself includes several provisions for such events, along with what will happen to the LLC if that event does in fact occur. In addition to an LLC, a buyout agreement is beneficial for all types of business structures, including corporations and partnerships. The few times you wouldn’t see this type of agreement is if the LLC is owned by a single member, a married couple, or a parent/child.
Pros of an LLC Buyout Agreement
There are many benefits to an LLC buyout agreement, as the agreement itself can prevent lawsuits and other business issues that may arise if an unexpected event occurs involving any one of the members. The agreement itself can control several potential issues that might arise, including, but not limited to:
• Transferring of ownership
• Whether or not a member can sell interest rights to another member, or a new member
• How to value ownership interest
• What happens when a member goes bankrupt
• What happens if a member dies
• What happens when a member retires
• What happens if an outside investor wants to purchase the LLC from the current members
• What happens if one of the members gets divorced, and the spouse wants membership rights transferred to him or her
• Foreclosure of a debt that is secured by the member’s interest in the LLC
• What happens if a member becomes disabled
• What happens if a member becomes incapacitated
• What happens if the LLC loses its license
• What happens if a member defaults on a personal loan
You should draft this agreement, as it will be helpful if:
• A member leaves the LLC.
• A new member joins the LLC.
• The members want to bind themselves to a list of processes if a certain event occurs
Generally, if a member chooses to leave the LLC, the LLC will automatically dissolve, forcing the other members to divide and sell off their membership interests. This can cause financial issues, along with potential lawsuits among the members and creditors. A buyout agreement can provide the process by which a member sells his or her interest in the LLC to an existing or new member. Furthermore, simply providing the process of what happens when a member wants to leave will prevent the LLC from automatically dissolving.
If a new member wants to join the LLC, the process of joining should be laid out in detail in the buyout agreement. If this agreement is not in place, the new member might be someone that the other members wouldn’t otherwise want to work with. If details are laid out in the agreement, however, the member wishing to sell his or her membership interest could be forced to sell membership interest to the current members. If the agreement allows the sale to a new member, there could be additional requirements, i.e. the current members must approve of the new member joining the LLC.
If the members want to create a legally binding agreement that specifies the process for certain events, then the buyout agreement should specify each process, leaving no room for ambiguities or interpretation.
When to Create an LLC Buyout Agreement
You should draft a buyout agreement in the following circumstances:
• If you have a multi-member LLC and want to prevent owners from selling their membership interests to others who might not have the best interest of the company in mind.
• If you want to require members to sell their interests to another owner so that the owners can retain control as opposed to allowing new members to join.
• If you want to prevent potential lawsuits down the line among members of the LLC.
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