In today's Freedom Friday blog and email newsletter, I want to answer a question I get asked from a lot of new small business owners, especially when they are starting a small business with a partner, and that question is “Why does my small business need a buy-sell agreement?” This is an important issue when you are forming your small business as a multi-member LLC, which is an LLC owned by more than one person. Every operating agreement for a multi-member LLC should include a buy-sell agreement.
Before I answer the question of why your small business needs a buy-sell agreement, I want to answer a different question, and that is what is a buy-sell agreement? A buy-sell agreement is not an agreement to buy or sell a business. I help clients with that, too, but a buy-sell agreement is something different. A buy-sell agreement is more like a prenuptial agreement for your small business, especially when you have two or more owners. The buy-sell agreement will determine what happens to your small business if one of the owners of the company leaves, gets divorced, files for bankruptcy, becomes incapacitated, or dies.
As an owner (a member) of an LLC, you have an “ownership interest” in the company (this is similar to a “share” 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 your small business needs a buy-sell agreement.
For instance, if you want to leave your small business, you need to decide what happens to your ownership interest in the LLC. 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. Similarly, if you need to leave the company because you file bankruptcy or die, then the same provisions would apply.
There are three (3) reasons why your small business needs to have a buy-sell agreement as part of your LLC operating agreement. The first reason why your small business needs a buy-sell agreement is that at some point in the future, you or one of your co-owners may wish to leave your small business. Its not fair to hold owners of a company hostage and not allow them to leave. Its better to plan in advance for when a business owner decides to leave. Your small business needs to plan to continue if one of the owners leaves, and the other owner(s) stay. 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 (owners). If the remaining owners wish to keep the business going, it needs to be determined in advance how a departing owner can be bought out, and for how much.
The second reason why your small business needs to have a buy-sell agreement is how adding on additional owners (members) will be handled. What do you do if a new member (owner) wants to invest and join your small business 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 your small business needs to have a buy-sell agreement is that this encourages an open discussion among the current owners of the small business regarding future expectations. Its 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 small business. This discussion would also include the hopes and expectations of the various owners of the company, making sure everyone is on the same page.
So, your small business needs a buy-sell agreement if you have more than one owner, and this agreement should be a part of your LLC operating agreement. As always, when starting a new business, its best to consult with an attorney to help your small business get started on the right foot.
If you are interested in starting a small business anywhere in Oklahoma, or you are interested in taking your small business to the next level, please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/