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:
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:
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.
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.