Most multi-member LLCs other than a two member LLC owned by a married couple should have an exit strategy because like marriages, more than fifty percent of multi-member LLCs have one or more members who want a company divorce. If members of a multi-member company do not sign a contract that provides for the buy out of one or more members on the happening of an event described in the contract they are stuck together forever unless a member convinces a court in an expensive lawsuit to judicially dissolve the company. See my article on this important topic called “A Multi-Member LLC’s Most Important Document” aka a “Buy Sell Agreement.”
My Buy Sell Agreement is very comprehensive because it is the product of my 38 years of being a business lawyer who has seen far too many LLC divorces. I updated my Buy Sell Agreement to add more “triggering events.” A triggering event is an event that gives the company an option to buy the entire membership interest of the member who is involved in the event. Members can also provide in their Buy Sell Agreement that certain triggering events such as the death of a member require the company to buy the entire membership interest from the estate of a deceased member.
To hire me to prepare a Buy Sell Agreement one of the members must complete and submit my online Buy Sell Agreement questionnaire. The questionnaire asks the LLC member who completes the questionnaire to pick and chose the provisions and triggering events that will be included in their company’s Buy Sell Agreement. Look at the Buy Sell Agreement questionnaire to see the many triggering events that you can select or deselect for your company’s custom drafted Buy Sell Agreement. FYI: We can also arrange for all members to digitally sign their Buy Sell Agreement using DocuSign.
Here is a list of the triggering events from which my clients can select for their Buy Sell Agreement.
|1. Any event the members desire||A Buy Sell Agreement can include any triggering events that are 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 signed by all of the members the LLC has an option to buy out the defaulting member.|
|3. Member fails to contribute money or property||This provision encourages a member to satisfy the member's obligation in a written document to pay money or assign property to the company because if the member fails to satisfy that obligation the LLC will have an option to buy out the defaulting member.|
|4. Death of a member||The LLC or surviving members have an option to purchase the interest of a deceased member. The Buy Sell Agreement can also require the LLC to buy-out a deceased member. These types of buy outs can be funded with life insure on the lives of members.|
|5. Member is convicted of a felony||Many LLC members do not want to have another member who has been convicted of a felony.|
|6. Divorce of a member||Prevents the wrong spouse from acquiring an interest in the LLC if two members own their interest as community property and they get divorced and the wrong spouse becomes the sole owner of all or a portion of the membership interest.|
|7. Member files for bankruptcy||If a member loses the member's interest in the LLC because of filing for bankruptcy, the company and other members should be able to buy the interest from the creditor who acquires it out of the bankruptcy.|
|8. Member transfers all or part of the member's membership interest without the approval of the other members||The Buy Sell Agreement provides that a member may not transfer or encumber all or any interest in the member's interest in the company without the approval of the members and compliance with the terms and conditions of the Operating Agreement and/or the Buy Sell Agreement. If a member violates the no transfer/encumbrance provisions, the LLC should have an option to acquire the interest of the defaulting member, perhaps at an amount less than the fair market value of the interest.|
|9. Termination of employment of a member||Applies only to a member who is employed full time by the LLC. Especially important when the employee is a minority member and should only own an interest while employed.|
|10. Member loses his or her professional license||Commonly used for LLC's that are owned by members who must be licensed in a particular area. For example, the Buy Sell Agreement of an LLC owned by physicians might give the LLC and other members an option to acquire the interest of a physician/member who loses his or her license to practice medicine.|
|11. Majority member sells membership interest||"Drag Along" provision: Majority member has the option to require minority members to sell their interests in the LLC if the majority member sells. The sale of the minority members' interests are on the same terms and conditions as the sale of the majority member's interest.|
|12. Majority member sells membership interest||"Tag Along" provision: Minority members have the option to require the majority member to include the sale of the minority members' interests in the LLC if the majority member intends to sell. The sale of the minority members' interests must be on the same terms and conditions as the sale of the majority member's interest.|
|13. Member is disabled||Used to acquire the interest of a member who become permanently disabled and unable to provide needed services for the LLC.|
|14. Member retires||Members sometimes want to retire, but without a Buy Sell Agreement that provides for a retirement purchase, it probably will not happen.|
|15. Member is incompetent||Applies if a member loses his or her mental capacity and a court appoints a conservator to manage the members financial affair.|
|16. Member files a false document with the ACC||If a member causes a false document to be filed with the Arizona Corporation Commission it is a triggering event that can cause a buy out,|
|17. Member causes somebody to be added or removed from the LLC's bank account||If a member causes a signer to be added or removed on the company's bank account without the approval of the members per the operating agreement it is a triggering event that can cause a buy out.|
Other Important Provisions in My Buy Sell Agreement
My Buy Sell Agreement also contains the following provisions:
- Restrictions on Transferring Membership Interests: Members may not transfer all or any part of their membership interest without the consent of the members. Transfers to family members or trusts are allowed unless your Buy Sell Agreement also prohibits these transfers.
- Right of First Refusal: If a member desires to sell or transfer the member’s membership interest the company first and then the other members have the option to match to proposed sale and acquire the membership interest.
- Life Insurance: Members may purchase life insurance on the life of other members and use the life insurance proceeds to pay the purchase price to buy the membership interest of a deceased member.
- Non-Compete: This provision prohibits a member and/or ex-member from competing with the company’s business and hiring the company’s employees.
- Dispute Resolution: This provision obligates the members to settle disputes without resorting to litigation.
If you have any questions about Buy Sell Agreements, call me, Richard Keyt, at 480-884-7478 or send an email message to me at [email protected] I don’t charge to answer questions about Buy Sell Agreements.
How to Purchase an LLC Buy Sell Agreement
To hire me to prepare your Buy Sell Agreement complete and submit my Buy Sell Agreement questionnaire.