Buyout Options for LLC

By Lisa Magloff

In a Limited Liability Company, or LLC, with more than one member, it often makes sound business sense to have a buyout option, also called a buy-sell option. The buyout option is an agreement between the members that states what will happen when one member wants to leave the company, dies or goes bankrupt. The buyout option is often included as part of the LLCs operating agreement, which is the contract that governs how the LLC operates.

Significance

Buyout options are important because they may help to avoid potential problems in the future. Without a clear buyout option, a change in circumstances could lead to costly lawsuits or the end of the business. Most states have no set laws governing buyouts, so if a member wants to leave, and there is no agreed buyout option, the LLC may be automatically dissolved, often forcing a sale of the assets. Similarly, without a buyout option, a member could sell his interest in the business to someone you do not want to be associated with.

Features

A buyout option can be thought of as a premarital agreement for the business. As such, members can include any circumstances they wish in the option. Buyout options generally set rules relating to whether the departing member can force the remaining members to buy her out; which members are allowed to purchase the departing member's interest in the business; how the price of the departing member's interest will be determined; what events can trigger a buyout; and whether interest in the business can be inherited in the event of a member's death.

Ready to start your LLC? Start an LLC Online Now

Triggers

The buyout option usually states what events will trigger a buyout. The most common triggers are usually death, disability, retirement and fraud or malfeasance against the LLC. Other triggers can include offers from outside the company to buy a member's interest; a divorce settlement involving a member's interest; foreclosure of a debt secured by a members' interest; or personal bankruptcy of a member. Malfeasance, bankruptcy and fraud triggers are often used to protect the reputation of the company and the other members.

Methods

The buyout option should also include how payment for the buyout will be funded. Events such as death and disability can be funded from insurance, provided the LLC has taken insurance against these events. Retirement may be financed through direct payments from other members, or over time through a promissory note. Each buyout trigger should also have a valuation associated with it. This prevents arguments over the value of a member's interests. Thus, a buyout triggered by malfeasance may have a book-value buyout, while a buyout triggered by a death can have a value that matches the insurance payout. Retirement buyouts are often based on the earnings of the LLC.

Ready to start your LLC? Start an LLC Online Now
How to Buy a Membership Interest in an Existing LLC
 

References

Related articles

What Kind of Insurance Does an LLC Need?

Many enterprises select a limited liability company, or LLC, as their form of business structure. LLCs offer you the tax advantages of a partnership -- no corporate double taxation -- with the limited liability of a corporation. For the most part, your personal assets are off-limits under an LLC, and you can only be held liable for the debts and obligations of the business itself. A number of states require health care providers to buy malpractice insurance, also known as professional liability insurance, and many health care providers are organized as LLCs. However, for the most part, an LLC is free to choose whether to cover different risks to the business by purchasing various types of insurance.

What Can You Transfer Into Your LLC?

State law gives a limited liability company the power to own property in its own name. This includes real property, such as land and buildings, personal property, which is any item besides real property that a person owns, or intangible property such as copyrights, trademarks or patents. An LLC is an independent legal entity, formed under state law, that combines attributes of a corporation and a partnership. Owners of an LLC, called members, have a lot of freedom in deciding what to transfer into an LLC.

Assignment of Interest in an LLC

Unlike corporate shareholders who are usually one step removed from the action, LLC members often have a hand in the day-to-day operations of the company. A member is often a company founder and takes a personal interest in company growth and direction. There are circumstances in which the member may choose, for the benefit of the company, to assign part or all of his interest in the company. Assignments are addressed by state law, and even though the specifics are left to the individual LLC's articles of organization and operating agreement, state law sets out the basic requirements for handing off a member's share of an LLC.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Name a Beneficiary for an LLC

Your business may be one of the most valuable assets you leave behind for your loved ones when you die, and if you ...

Can a Member of an LLC Be Fired?

Managing relationships between owners of a small business can be quite trying at times. In cases of severe disagreement ...

Can a Business Own Part of an LLC?

Members of a limited liability company (LLC) can be individuals or business entities, including corporations, trusts or ...

Can I File a Personal Chapter 7 If I Am a Partner in an LLC?

You can file a Chapter 7 bankruptcy, the same as any other person, even if you are a partner (known as a "member") in a ...

Browse by category
Ready to Begin? GET STARTED