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Why Do You Need a Buy-Sell Agreement?

Posted by Jonathan Krems | Oct 17, 2021 | 0 Comments

In this week's Freedom Friday blog and e-mail newsletter, I want to answer a question I was asked by a recent prospective client.  He is planning a multi-member LLC and wanted to know why a buy-sell agreement should be included in the operating agreement for his LLC.  In today's Freedom Friday blog, I want to answer the question of why you need a buy-sell agreement, especially in a multi-member LLC.

First of all, before I answer the question of why you need to have a buy-sell agreement for your LLC, I want to answer a different question to begin with, and that is what's a buy-sell agreement?  A buy-sell agreement is not an agreement to buy or sell a business.  Rather, a buy-sell agreement is more like a prenuptial agreement for your business, especially if you have two or owners of a business.  A buy-sell agreement will determine what happens to the business if an owner of the company leaves the company, gets divorced, files for bankruptcy, becomes disabled, incapacitated, or dies.

Having a buy-sell agreement can resolve a variety of issues when an owner wishes to leave a company voluntarily or is required to leave a company under several circumstances (e.g. bankruptcy, divorce, incapacity, or death).  As an owner (a member) of an LLC, you have an “ownership interest” in the company (this is similar to a “share” if you are a shareholder of a corporation).  If you leave an LLC, either because you want to, or because you have to, what happens to your ownership interest?  This is why you need to have a buy-sell agreement.

For instance, if you want to leave an LLC, you need to decide what happens to your ownership interest.  You can't just take it with you.  There are different options, but one of them can be the company as a whole, or the other owners of the company, can have the right to buy your ownership interest from you before you sell the ownership interest to a third party who might be interested in buying it.  Similarly, if you have to leave the company because you file bankruptcy or die, then the same provisions would apply.

There are three (3) reasons why you need to have a buy-sell agreement as a part of your LLC operating agreement.  The first reason why you need to have a buy-sell agreement is that at some point in the future, you or one of your co-owners may wish to leave the company.  Its not fair to hold owners of a company hostage and not allow them to leave a company.  Its better to plan in advance for when a business owner decides to leave an LLC.  The company needs to plan to continue if one of the owners leaves.  Without a buy-sell agreement in place, an LLC might dissolve if a member (owner) leaves, forcing the assets to be sold and divided among the remaining members.  If the remaining members wish to keep the business going, it needs to be determined in advance how a departing owner is bought out, and for how much.

The second reason why you need a buy-sell agreement for an LLC is how adding on additional owners (members) will be handled.  What do you do if a new member wants to invest and join the company in the future?  A buy-sell agreement can control who can join the company as a new owner, and how that person would join the company.  Without such a provision, an owner could potentially sell their ownership interest to an unwanted third party.

The third reason why you need a buy-sell agreement is that this encourages an open discussion among the owners of a company regarding future expectations.  It is very important when starting a new business to start on the right foot, and that includes a healthy discussion of planning for the future of the business.  This discussion would also include the hopes and expectations of the different owners of the company, making sure everyone is on the same page.

So, you need a buy-sell agreement for your LLC, especially if you have more than one member (owner), and this agreement should be part of the LLC operating agreement.  As always, when starting a new business, it is best to consult with an attorney to help you start your business on the right foot.

If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected] for a FREE strategy session. 

For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com

About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...

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