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Buyout Agreements: Changing LLC Ownership

A buy-sell agreement, a business continuity agreement, or a buyout agreement is a contract between co-owners of a company that determines how to handle the departure of a member. A buyout agreement is an important part of LLC ownership because it regulates who can buy a member's interest and establishes a predetermined price for ownership interests.

Who Needs a Buyout Agreement?

Most LLCs should create a buyout agreement. The few exceptions include a business that has:

Why Create a Buyout Agreement?

Chances are that at some point a member will leave a company. Without a buyout agreement, state law may force the dissolution of an LLC when one member leaves. A buyout agreement can establish preset guidelines for handling changes in ownership and can prevent unwanted buyers from obtaining an interest in the company. A buyout agreement can control:

  • The transfer of ownership;
  • Whether the withdrawing member will be bought out by the other members;
  • How to value a ownership interest; and/or
  • The terms of payment for a withdrawing member's interest.

Buyout agreements are usually included in the LLCs operating agreement, but a separate document can also record buyout terms.

What Events Trigger a Buyout Agreement?

A buyout agreement determines what events will initiate a buyout of a member's interest. Common events include:

  • Bankruptcy (this initiates an automatic sale of the member's interest back to the company)
  • Death
  • Retirement
  • A divorce settlement that gives an ex-spouse an ownership interest (the ex-spouse must sell any acquired interest back to the company)
  • Disability or incapacity
  • Loss of a license
  • Default on a personal loan

Buyout Options and Forced Sales

When ownership interests change, a buyout agreement can not only give the LLC the right to purchase the departing member's interest, it can also include terms that force the LLC to buy a departing member's interest.

  • Option to Purchase an Owner's Interest: This option gives the LLC and its members the right to buy back an ownership interest from a member, a member's family, or the member's estate within a certain time and according to a predetermined price. This option, for instance, can be used to buy an interest from the estate of a deceased member, from a member that retires or quits, or from a member that becomes disabled.
  • Right to Force a Sale: This provision gives a member that decides to leave or retire the right to force the company to buy their interest. The LLC or its members must buy the interest within a certain time and at a predetermined price if the departing member or the member's family makes a request.

Get a Free Legal Evaluation of Your Small Business's Legal Needs

If you're in the process of deciding whether or not a buyout agreement is right for your LLC, you may want some professional legal advice. A small business attorney can walk you through the various options if a member decides to leave the LLC or otherwise, and ultimately can save your company money and hassles down the road. Get started today with a free legal evaluation of your small business needs.

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