In today's Freedom Friday blog and email newsletter, I want to talk about another topic that doesn't come up often enough, especially in an LLC with more than one member. If you have an LLC, and it's a single-member (or sole-member) LLC, then this issue generally doesn't apply to you. However, even if it's a husband-and-wife team that is owning the business, this topic is of an important concern, and that's whether your small business needs a buy-sell agreement, or a similar provision as part of the LLC's operating agreement. If you're forming a closely held corporation with more than one shareholder, then this is also an issue. However, because most small business owners form an LLC, that's what we're talking about. In today's Freedom Friday blog and email newsletter, I'm answering the question, “Does your small business really need a buy-sell agreement?”
The short answer is, if there is more than one owner or member of the LLC, then yes, a buy-sell agreement or provision should be included as part of the operating agreement or the bylaws of a corporation. However, what's a buy-sell agreement to begin with? A buy-sell agreement is an agreement or contract that governs what happens to an LLC membership interest or corporate shareholder's interest when the co-owner dies, becomes disabled, or leaves the business. It's kind of like a pre-nup or estate plan for the LLC or the corporation. An effective buy-sell agreement will identify who can purchase (or buy) the co-owner's interest, the price at which that interest can be bought, and how the business or remaining owners will pay for the interest. The buy-sell provision will also include triggering events, which usually include death, disability, departure, deadlock, disagreement, default, and sometimes even divorce.
Here are some examples of why a buy-sell agreement benefits your small business. First, imagine Alex and Bruce co-own a coffeehouse as an LLC, and each have a 50% interest in the coffeehouse LLC. If Bruce dies, without a buy-sell agreement, Bruce's heirs could end up as co-owners of the LLC with Alex, and Alex might not want that. However, if the LLC had a buy-sell provision as part of the operating agreement, if Bruce dies, Alex could have the first opportunity to buy Bruce's interest at an agreed upon price, or at a price calculated using a pre-determined formula or appraisal.
Similarly, if Alex wants to leave the business, then without a buy-sell agreement, he could sell his 50% interest to Bruce's enemy Chris, which could cause problems for the coffeehouse business. But an effective buy-sell agreement could force Alex to offer his interest to Bruce before he offered them to a third party.
Lastly, suppose Bruce wants to divorce his wife, Debbie. Without a buy-sell agreement in place, Debbie could receive some of Bruce's interest in the LLC for the coffeehouse as part of the property division or settlement. If divorce is a triggering event in a buy-sell agreement, Debbie won't be able to receive that interest, or there could be other options depending on the operating agreement, and Bruce might be able to keep his interest.
Any small business that has more than one owner needs a buy-sell agreement, or a buy-sell provision as part of the LLC operating agreement or corporate bylaws. Without it, the business, owners, heirs, and others may get into internal strife which isn't good for the business at all. It can also prevent the business from dissolving, so it is a very good idea, if you have more than one owner of the business.
Thinking about starting a small business? Or maybe your business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
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