Plan for Changes in LLC Ownership with Buy-Sell Provisions
Many LLC owners overlook a critical element of their operating agreement: buy-sell provisions. Creating buy-sell provisions allows owners to prepare for events that can negatively impact small businesses, such as death, divorce, bankruptcy, or retirement of one of the owners.
What is a buy-sell agreement?
Contrary to popular belief, a buy-sell agreement is not about buying and selling companies. It is a binding contract between business owners. A buy-sell agreement consists of clauses in your operating agreement (or a separate agreement) that control business decisions, including who can buy a departing member’s share, what events trigger a buyout, and what price will be paid for a member’s interest in the LLC.
Think of a buy-sell agreement as a sort of "premarital agreement" between co-owners.
What events should you cover under a buy-sell agreement?
A buy-sell agreement should cover events that trigger a buyout, such as an attractive offer from an outsider to purchase an ownership interest, a divorce settlement that involves an ownership interest, the foreclosure of a debt secured by an ownership interest, personal bankruptcy, or the disability, death, or incapacity of a member.
Why you need buy-sell provisions
Ignoring the fact that your business will change is a huge mistake. Without a buy-sell agreement, you may face challenges when one member quits, dies, gets divorced, becomes incapacitated, or sells their share to someone you dislike. Creating a buy-sell agreement helps prevent personal and business conflicts, court battles, and the loss of your business.
Creating a buy-sell agreement
To create buy-sell provisions, you can use a self-help resource like Nolo’s "Business Buyout Agreements: A Step-by-Step Guide for Co-Owners" or consult with a lawyer. This resource provides fill-in-the-blank buyout clauses and instructions for incorporating them into your operating agreement. It also guides you through discussions with your co-owners, allowing you to decide at your own pace which terms to include.
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