When you start your LLC, it is unlikely that you envision yourself leaving the business.
Similar to a marriage, you may expect a perfectly harmonious relationship for the foreseeable future.
However, as time progresses, you may find your vision for the LLC has changed, or perhaps a member has found a more profitable opportunity they wish to pursue.
The operating agreement for an LLC outlines the expectations, roles, and responsibilities of the LLC members.
This agreement also provides a procedure for a member leaving the LLC.
While the term “buyout agreement” implies a sale, this is not entirely accurate.
In actuality, an LLC buyout agreement is an agreement between the members of an LLC about what will happen if a member wishes to leave. It is always prudent to have a buyout agreement in place.
Business owners are often surprised that a LLC member does not automatically give up his or her LLC membership interest when the member leaves. An LLC membership interest is property, and you cannot take it away without an agreement.
Business Attorney Trevor Brewer
What Is an LLC Member Buyout Agreement?
When you created your LLC, you probably also created an operating agreement. The operating agreement for your LLC provides information about day-to-day operations and the roles and responsibilities of all LLC members.
The operating agreement may also contain a clause regarding withdrawal procedures that all LLC members must follow. A buyout clause in an operating agreement might also include information calculating compensation for departing members.
If your operating agreement does not contain a buyout clause, you should draft a separate buyout agreement. Working through and completing a buyout agreement forces members to share their expectations when an LLC member leaves.
Perhaps you will want to dissolve the LLC if a member leaves.
Or perhaps you will want to give other members the opportunity to buy out their interest. Exploring and defining the terms of a buyout agreement may force LLC members to have real-life discussions about “what if” scenarios.
Addressing these “what if” scenarios before they occur could save the LLC and relationships when an LLC member decides to leave.
If your operating agreement does not address what happens when a member leaves and you don’t have a buyout agreement, Florida law will govern removal of members from the LLC The Florida Revised Limited Liability Act provides for the membership transfer of a Florida LLC. Under the Act, members may depart at any time.
Additionally, it addresses how to forcibly remove a member if a dispute arises. The Act provides for removal in these situations by judicial order or unanimous vote by other LLC members.
What Should a Buyout Agreement Include?
When drafting a buyout agreement, schedule a meeting with all the LLC members. If an LLC member is planning to exit the LLC, also include this person.
At the meeting, discuss topics such as the valuation of the departing member’s interest, who can buy out a member and under what circumstances, and the terms of any purchase of the membership interest.
Value Determination
One of the critical elements of any buyout agreement is the value determination of the LLC membership interests. LLC members may collectively determine the value of the LLC.
Alternatively, they can agree to a method for calculating that value at the time of a member’s departure. For example, the members might agree that the fair value of the LLC should be determined by formal valuation provided by a professional business appraiser.
A buyout agreement can then give the remaining members the right to buy back an LLC ownership interest for a predetermined price. Providing this language and information in an operating agreement simplifies the process if a member decides to leave the LLC.
Once a value of membership interests is determined, LLC members must agree on the method of purchase. For example, members may require the purchase price to be paid in full at the time of departure or over a specified period of time.
Triggering Events
An operating agreement should also consider whether any triggering event will prompt the buyout of a member’s interest. The members of the LLC should agree on what happens after a triggering event occurs.
There are several common types of triggering events.
Bankruptcy
Filing for bankruptcy could force an LLC member to sell their interest in the business. A buyout agreement could allow for the remaining members to buy the bankrupt member’s interest.
Death
If a member dies, their ownership interest in the LLC may pass to their heirs or spouse. Remaining LLC members may find themselves working with a person with whom they never intended to do business.
You can utilize a buyout agreement to prepare for this “what if” event and determine an LLC path forward.
Retirement/Resignation
When a member plans to retire from the LLC, an agreement should be in place regarding their interest in the LLC. Determining how the retiring member’s interest will be divided or sold prevents any conflicts or disagreements between existing LLC members.
Divorce
An LLC member may lose their interest in the LLC in a divorce proceeding. Including language providing a right of first refusal to existing LLC members prevents this scenario from occurring.
Incapacity
A buyout agreement can also address what to do if an LLC member becomes incapacitated due to injury or illness, including what will happen to their interest in the LLC.
Forced Sales
Forced sale language in an operating agreement provides that upon certain triggering events, such as when a member decides to retire, the remaining LLC members must buy the departing member’s interest.
When such a provision is included in a buyout agreement, it will generally require the remaining members to purchase the interest within a predetermined period at a predetermined price.
Why Should I Have a Buyout Agreement?
An LLC should always consider having a buyout agreement in case a member decides to leave the LLC. Including the language for a buyout in the operating agreement minimizes the possibility of a disagreement in the future.
For example, there may be situations where an LLC member opts to leave the LLC on bad terms. If the operating agreement fails to include language regarding a buyout, it may be difficult for parties to reach an agreement once the relationship has soured.
If attempts to negotiate and draft a buyout agreement fail, getting a buyout solution may be difficult. The LLC and the departing member may expend large sums in litigation costs to settle.
In fact, in some situations, the LLC may not continue after a member leaves. While it may be costly to dissolve the LLC, it may be less than the litigation costs to reach a buyout agreement. It’s essential to get a deal to buy out membership interests before the issue arises.
Additionally, determining the terms of a buyout agreement before the event happens prompts discussion among LLC members. All members of the LLC are free to discuss their goals and aspirations for the business.
Why Contact a Lawyer?
If you’re in the process of creating an operating agreement for your LLC or trying to determine whether a buyout agreement is right for your LLC, consult with a Florida business attorney.
An LLC buyout agreement provides direction in what can be a tough time of transition for any business. When a member decides to leave an LLC, determining what to do next can be complicated. If the LLC members cannot agree on an exit strategy for a member, it further complicates the process.
Avoid the possibility of costly litigation and address potential challenges for your LLC before they arise. The attorneys at BrewerLong possess extensive experience on all business-related legal matters. No matter the size of your LLC, BrewerLong provides clients with practical and attentive legal representation.
Our legal services cover every aspect of a business’s life cycle, from formation and operations to dissolution or sale. Determining what happens in a buyout saves your business unnecessary costs. Contact the qualified attorneys at BrewerLong for a introductory phone call.
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