Arizona LLC Buy-Sell Agreements

What Is a Buy Sell Agreement?

A Buy Sell Agreement is a binding contract among the LLC and its members that creates a mechanism for the orderly acquisition of a member's membership interest when a specified "triggering event" happens. Think of it as a prenuptial agreement for business owners. The members plan for a company divorce while everyone still gets along, and hope it never happens.

 

A good Buy Sell Agreement answers four questions before they become fights:

• When? Which events trigger a buy-out, such as death, disability, divorce, bankruptcy, retirement or a breach of the Operating Agreement.
• Who buys? The LLC, the remaining members, or both, and whether buying is mandatory or merely an option.
• How much? The method used to set the purchase price.
• How is it paid? Cash at closing, life insurance proceeds, a promissory note, guaranties and security.

A Buy Sell Agreement is like an insurance policy. It is a cost of doing business that you hope you never need, but when you need it, you are really glad you purchased it. No prudent business person would invest in a new business with unrelated co-owners without first creating an EXIT PLAN. Not only does a Buy Sell Agreement create binding legal obligations to buy and sell an interest in the company, it also sets the purchase price and the terms and conditions of the purchase.

A Real Life Example of the Disaster Caused by the Lack of a Buy Sell Agreement

In 2018 I represented an LLC owned equally by Bob and Mike. Bob was not married, but he had a long-time live-in significant other named Mary. Without Mike's knowledge or consent, Bob caused all the income of the LLC to be deposited into Bob's personal bank account, of which Mary was a co-owner. Bob died without a Will or a Trust that said who would inherit Bob's 50% of the LLC.

 

Mike suddenly became partners with an estate. Mike did not know who inherited Bob's share of the LLC. He knew Mary did not inherit Bob's membership interest because Bob did not have a Will or a Trust. We filed an Amendment to the Articles of Organization of the LLC with the Arizona Corporation Commission to name Mike as the manager and show that Bob's interest was owned by the Estate of Bob.

 

A buyer wanted to buy the LLC, but Mike could only sell his 50%. Because nobody had authority to sign legal documents to sell Bob's 50%, the sale fell through. Bob's failure to plan by having a Will or a Trust that left his share of the LLC to Mary cost her one half the value of the LLC.

 

Bob and Mike's failure to sign a Buy Sell Agreement hurt Mike and Bob's estate big time. If they had signed a Buy Sell Agreement that required the LLC to buy Bob's 50% on his death, then after Bob's death Mike would have owned all of the LLC and the purchase price would have been paid to Bob's heirs. They could have funded that buy-out with each member owning life insurance on the other. On Bob's death Mike would have collected the insurance proceeds and used them to pay whoever inherited Bob's 50%.

What Arizona LLC Law Does (and Doesn't) Do for You

Arizona LLC law does not require the members of an Arizona LLC to enter into a Buy Sell Agreement, and it does not provide for the mandatory acquisition of a member's interest. Without a written agreement that contains an exit plan, the members of an Arizona LLC are stuck with each other in sickness and in health and even after death. Here is what the Arizona Limited Liability Company Act does by default:

• Death makes a member "dissociated," not bought out. Under A.R.S. §29-3602 a member is dissociated on events such as death. Under A.R.S. §29-3603 the dissociated member's interest continues to exist as a transferable interest. Nobody is required to buy it and nobody is required to pay for it.
• Heirs and assignees get money, not a vote. Under A.R.S. §29-3502 a transferee is generally entitled only to distributions, with no right to participate in management. That leaves an heir owning a slice of your company with no control and no exit, and leaves you with an unhappy co-owner.
• The members can override the defaults in writing. A.R.S. §29-3105 lets the Operating Agreement govern relations among the members. A Buy Sell Agreement uses that freedom to replace the statutory default with a plan the members choose.
• The last resort is a lawsuit. When members deadlock, a member may ask the Superior Court to dissolve the LLC under A.R.S. §29-3701. That is expensive, slow and often destroys the value of the business.

As a business lawyer who has practiced in Arizona since 1979, I have seen too many companies, both corporations and LLCs, where the owners became at odds and desperately needed a "company divorce," but were forced to "cohabitate" indefinitely because they never signed a Buy Sell Agreement with a mandatory buy-out mechanism.

 

I recommend that the members of every multi-member Arizona LLC sign a Buy Sell Agreement. The one exception is an LLC owned only by a husband and wife.

Another Actual KEYTLaw Client Bad Example

In 1994 I formed an LLC for a small group of people to operate a business that became very profitable. I gave the members my comprehensive Operating Agreement that included buy-sell provisions, but the members never signed it. In 2002, after an extended period of disagreement and infighting, the company's built-in hair-trigger IED (improvised explosive device) exploded. After years of failing to document transactions such as assignments of membership interests, the owners could not agree on who the members were or the membership percentage of each member.

 

Result: a very expensive, time-consuming and worrisome Superior Court lawsuit where the parties asked the court to determine who owned what and what to do with a group of owners who could not agree on anything. The litigation lawyers made a bundle of money. (Not me. I don't litigate, and I could not ethically represent any of the parties because I had represented the LLC.) The lawsuit could have been avoided if the members had signed a Buy Sell Agreement when they formed the company. DO NOT LET THIS HAPPEN TO YOU AND YOUR LLC.

 

Prudent people who go into business together plan for a company divorce and hope it never happens. Experience shows that most multi-owner companies eventually reach a point where at least one owner wants another owner out, or wants out himself. If your LLC has no Buy Sell Agreement, the members have no way to go their separate ways unless they can agree on the terms of the split.

17 Typical Triggering Events

These are common events that can trigger a buy-out of a member. All of them are optional, and the members choose the ones that fit their company.

Triggering Event	Purpose
1. Any event the members desire	A Buy Sell Agreement can include any triggering event important to the members. For example, the members could agree that if the New York Yankees win the World Series, member 1 must sell to member 2 for $100.
2. Operating Agreement default	If a member defaults under the Operating Agreement, the LLC has an option to buy out the defaulting member.
3. Member fails to contribute money or property	Encourages a member to honor a written obligation to contribute money or property, because failing to do so gives the LLC an option to buy out that member.
4. Death of a member	The LLC or surviving members have an option, or an obligation, to purchase a deceased member's interest. Death buy-outs are commonly funded with life insurance on the members.
5. Member is convicted of a felony	Many members do not want to remain in business with a member convicted of a felony.
6. Divorce of a member	Prevents the "wrong" spouse from ending up with all or part of a membership interest that was community property.
7. Member files for bankruptcy	Lets the company and other members buy the interest back from the creditor or trustee who acquires it in the bankruptcy.
8. Unauthorized transfer of a membership interest	Members may not transfer or encumber any part of their interest without approval. A violation gives the LLC an option to acquire the interest, perhaps at less than fair market value.
9. Termination of employment	Applies to a member employed full time by the LLC. Especially important for a minority member who should own an interest only while employed.
10. Loss of professional license	Common in LLCs owned by licensed professionals. For example, a physician-owned LLC can buy out a member who loses his or her medical license.
11. Majority member sells ("Drag Along")	The majority member can require minority members to sell on the same terms and conditions, so a buyer can acquire 100% of the company.
12. Majority member sells ("Tag Along")	Minority members can require that their interests be included in the majority member's sale on the same terms and conditions.
13. Member is disabled	Acquires the interest of a member who becomes permanently disabled and can no longer provide needed services.
14. Member retires	Without a Buy Sell Agreement that provides for a retirement purchase, a retirement buy-out probably will not happen.
15. Member is incompetent	Applies if a member loses mental capacity and a court appoints a conservator to manage the member's financial affairs.
16. Member files a false document with the ACC	Filing a false document with the Arizona Corporation Commission is a triggering event that can cause a buy-out.
17. Unauthorized change to the LLC's bank account	Adding or removing a signer on the company's bank account without member approval under the Operating Agreement can cause a buy-out.

Mandatory Versus Optional Buy-Outs

After the members pick their triggering events, they decide which events require a purchase and which merely give the company and other members an option to purchase.

• Mandatory: the buyer must buy and the seller must sell. Termination of employment is almost always mandatory. Death is usually mandatory, requiring the company to buy and the deceased member's estate to sell. This guarantees the family gets paid and the surviving members get control.
• Optional: the company or the other members may buy, but don't have to. Options work well for events like bankruptcy, a felony conviction or an unauthorized transfer, where the members want flexibility.
• Put rights: some agreements also let a departing or retiring member force the company to buy. This protects minority members who otherwise have no way to cash out.

Entity Redemption vs. Cross-Purchase

The members also decide who the buyer is. The choice affects life insurance ownership, tax results and how many policies are needed.

Issue	Entity Redemption (LLC buys)	Cross-Purchase (Members buy)
Who buys	The LLC buys the departing member's interest.	The remaining members buy it personally, usually in proportion to their ownership.
Life insurance	The LLC owns one policy on each member.	Each member owns a policy on each other member. The number of policies grows quickly as members are added.
Simplicity	Easier to administer, especially with three or more members.	More paperwork; policies must be re-shuffled when a member leaves.
Tax basis	Buyers do not receive a new cost basis in their own interests; an election under IRC §754 may adjust the LLC's asset basis.	Buying members get cost basis equal to what they paid for the purchased interest.
Hybrid option	Many agreements, including ours, give the LLC the first right to buy and the members a second right, which preserves flexibility when the event occurs.

Tax results depend on each LLC's facts. Discuss the tax consequences of your buy-out structure with your CPA.

Fixing the Purchase Price

A very important job of the Buy Sell Agreement is to state how the purchase price will be calculated. The purchase price is a material term of the contract. If the price cannot be determined from the agreement, the agreement will not be enforceable. Common methods include:

1. Stated Value Method

The members agree on the value of the LLC and state it in the agreement. If the LLC is worth $100,000, the price for a 40% member's interest is $40,000. Stated values also work well for a minority member who is an employee. If Jane bought a 2% interest for $2,000, the agreement might say the company repurchases her interest for the same amount when her employment ends. The members must update the stated value regularly, because the value always changes. A stale stated value is one of the most common causes of buy-out disputes.

2. Formula Method

The members agree on a formula, such as the average net profits for the last three fiscal years multiplied by three, or two times book value.

3. Future Appraisal Method

The selling member and the company mutually select an appraiser. If they cannot agree, each selects and pays for an appraiser, and the value is the average of the two appraisals unless they differ by more than 15%. If the difference is too great, the two appraisers select a third appraiser (cost split), whose value controls if it falls between the first two.

4. Single Appraiser: Select Now, Value Now Method

The company hires an experienced appraiser to value the company now, and that same appraiser updates the value later. For companies with substantial value, this is the method I recommend.

Members should also decide whether the price for a minority interest gets a discount for lack of control or marketability, and whether a member who triggers a "bad act" event (such as an unauthorized transfer) receives a reduced price. Spelling this out avoids arguments later.

Funding the Buy-Out

A promise to buy is only as good as the buyer's ability to pay. The best Buy Sell Agreements address where the money comes from:

• Life insurance. The most efficient way to fund a death buy-out. The insurance pays the heirs quickly and the surviving members keep the company without draining its cash. If the LLC owns the policy, the rules of IRC §101(j) can require written notice to and consent from the insured before the policy is issued to keep the death benefit income tax free, so work with an experienced insurance professional.
• Disability buy-out insurance. Specialized policies fund the purchase of a permanently disabled member's interest.
• Installment payments. A down payment plus a promissory note paid over several years, so the buy-out does not bankrupt the business.
• Company reserves or a sinking fund. Cash set aside over time for future buy-outs.

Terms and Conditions of the Purchase

Once a member must sell and the company or members must buy, the Buy Sell Agreement sets the terms of the sale. I can draft any terms the members desire, but a common scenario is:

1. Closing occurs within 60 days after the buyer becomes obligated to buy.
2. At closing the buyer pays the greater of 20% of the purchase price or the life insurance proceeds on a deceased member (not to exceed the purchase price).
3. The balance is paid by a promissory note with equal monthly payments of principal and interest over five years, with interest at Bank of America prime.
4. The continuing members and their spouses guaranty payment of the note.
5. The guaranties are secured by pledges of the continuing members' membership interests.

Common Buy Sell Agreement Mistakes

• Waiting. If the members don't sign a Buy Sell Agreement when they form the company, they almost never sign one. Once there is money or conflict, everyone knows which side of the deal they are on. For new companies, time is of the essence.
• Using a stated value and never updating it. A price set five years ago can be wildly unfair to the seller or the buyer.
• No funding plan. A mandatory death buy-out with no life insurance can force the company to borrow or sell assets at the worst possible time.
• Conflicts with the Operating Agreement. The two documents must work together. Contradictory transfer or voting provisions invite litigation.
• Forgetting spouses. In a community property state like Arizona, spouses should sign a consent so a divorce or death doesn't put an unwanted spouse in the company.
• Ignoring estate planning. A Buy Sell Agreement tells the company what to buy; your Will or revocable living Trust tells the world who receives the money. Bob's story shows you need both.
• Signing and forgetting. Review the agreement whenever a member joins or leaves, the business changes significantly, or insurance coverage no longer matches the company's value.

Richard Keyt's Buy Sell Agreement: Table of Contents and Letter of Explanation

You cannot appreciate the important territory covered by our Buy Sell Agreement without reading its Table of Contents and LLC attorney Richard C. Keyt's letter of explanation. You will see the document is very comprehensive.

Our Buy Sell Agreement Preparation Service

We prepare Buy Sell Agreements custom drafted to meet the desires of the members of Arizona LLCs. Our agreement is the result of preparing this type of business agreement many times since I began practicing law in Arizona in 1979.

Our Flat Fees

• $1,294 if we formed the LLC within the last 90 days, or if you also hire us now to prepare an Operating Agreement for an additional $797.
• $1,994 for all other Arizona LLCs.

The fee includes one hour of attorney time conferring with the members, modifying the agreement and drafting custom provisions. Few LLCs exceed the allotted time. We want the final agreement to contain every provision the members want. Any attorney time beyond one hour is billed at $295 per hour.

How It Works

1. Complete and submit our online Buy Sell Agreement Questionnaire.
2. Pay by credit card in our secure online store using the $1,294 Buy Sell Agreement Order Form or the $1,994 Buy Sell Agreement Order Form. You can also pay by calling 480-664-7478, or by mailing a check payable to KEYTLaw, LLC, 7373 E. Doubletree Ranch Road, Suite 135, Scottsdale, Arizona 85258.
3. Within 3 to 5 business days we email the draft Buy Sell Agreement and a letter of explanation in PDF format to the LLC's contact person for distribution to all members.
4. The members review the draft, mark changes and list their questions for attorney and former CPA Richard C. Keyt. Email the changes to him or call 480-664-7472 to schedule a phone or office conference.
5. Richard C. Keyt revises the agreement and sends a final PDF for signature, plus a PDF showing the changes made to the first draft.
6. The members sign the agreement. We can arrange digital signatures at no additional cost.

Frequently Asked Questions

Does Arizona law require an LLC to have a Buy Sell Agreement?

 

No. Arizona LLC law does not require one, and it does not force anyone to buy a departing or deceased member's interest. That is exactly why multi-member LLCs need one.

 

Isn't a Buy Sell Agreement already in my Operating Agreement?

 

Some Operating Agreements contain basic transfer restrictions, but most do not contain a complete buy-out system with triggering events, valuation methods, funding and payment terms. Our Buy Sell Agreement is a separate, comprehensive document designed to work alongside the Operating Agreement.

 

Does a single-member LLC need a Buy Sell Agreement?

 

No. There is no other owner to buy or sell. A single-member LLC owner should instead have a revocable living trust that owns the LLC so it passes to the owner's heirs without probate.

 

Does an LLC owned by a husband and wife need a Buy Sell Agreement?

 

Generally no. A husband-and-wife LLC is the one exception to my recommendation. Their estate plan usually handles what happens on death.

 

What happens to my share of the LLC if I die without a Buy Sell Agreement?

 

Your interest passes under your Will, Trust or Arizona's intestacy laws. Your heirs typically receive only the right to distributions, with no management rights and no way to force a sale, and your surviving partners are stuck with them.

 

What is the best way to value an LLC in a Buy Sell Agreement?

 

There is no single best method, but in my experience over 95% of the members I work with choose an appraisal method, because owners rarely agree on a stated value or formula and stated values go stale.

 

How do the members pay for a buy-out?

 

Death buy-outs are commonly funded with life insurance. Other buy-outs are usually paid with a down payment and a promissory note over several years, guaranteed by the continuing members and secured by their membership interests.

 

When should we sign a Buy Sell Agreement?

 

Now, ideally when the LLC is formed. If the members don't sign one at formation, it is very unlikely they ever will.

How to Hire Richard Keyt to Form Your New LLC

Arizona LLC attorneys Richard Keyt and his son, attorney and former CPA Richard C. Keyt, have formed 10,000+ Arizona LLCs. Our Gold LLC is the confidential LLC for people who do not want their name and address on the Arizona Corporation Commission's public records.

 

See a detailed description of the 8 Bronze LLC services, 12 Silver LLC services & 20 Gold LLC services we provide when we are hired to form an LLC or PLLC.

 

To hire us to form an LLC submit our online questionnaire at keytlaw.com/llcq, call 480-664-7478 or email rk@keytlaw.com.

 

This article is general information only and is not legal or tax advice. Reading it does not create an attorney-client relationship. © 2026 KEYTLaw, LLC.