When you run a business that is a limited liability company, you have a lot of personal and legal protection from your business debts like a corporation does. Unlike a corporation, though, paying your taxes is simple and similar to what you would do if you were a sole proprietor.To secure the future of your LLC, you should create a buyout agreement. Otherwise, if even one member decides to leave the LLC, the company could cease to exist. Here are a few considerations worth thinking about for buyout agreements changing LLC ownership.
1. Understanding the Purpose of Buyout Agreements
Buyout agreements might be a misleading term. In fact, they are agreements between or among folks who own a business about future ownership of the company. They should include provisions for events in which a partner would leave the business, such as divorce, bankruptcy and death. A buyout agreement functions somewhat like a prenuptial agreement does for married couples, and it helps ensure the smooth functioning and transition of a business.
2. Common Areas to Cover
When you are starting up a business, it is easy to get caught in the rosy glow of promise, but buyout agreements force you to be realistic. Your buyout agreement should include areas such as whether an owner who is leaving can force the others to buy him or her out and who is eligible for buyouts. For example, could a person outside of the LLC qualify to do a buyout? Your agreement should include price considerations and triggering events for a buyout. Common ones include disability, loss of a license, contract breaches, owner disagreement, felony conviction, divorce, death and bankruptcy.
3. What Happens After a Triggering Event
If an event occurs that triggers the buyout agreement, you will follow the procedures outlined in the agreement. This could include the remaining partners buying the leaving partners shares in the company, an outsider buying the shares or a restructuring or closing of the business. The buyout agreement terms and the type of trigger often play a huge role in what exactly will happen after a triggering event.
4. Pricing and Terms
Pricing your ownership interest can be subjective. One approach is for the owners to agree on a fair price each year, but they might forget, and the price gets out of date. Thus, when the triggering event occurs, the owners have vastly differing views as to price. To take care of this problem, many LLCs turn to a professional arbiter or appraiser. It is probably important to you for your LLC to set buyout terms that are fair and realistic. Price a buyout too high or make the terms too complicated, and no one will be able to buy the ownership interest. Consider these factors: Down payments Interest rates Loan terms Buyout period lengths Using LLC assets (or not using them) in order to secure a new loan Life insurance requirementsThe laws of some states require that LLCs have operating agreements. You could put a buyout agreement in the operating or partnership agreement, or it can be a separate entity. After a partner leaves a LLC, remember to remove any access to credit cards, business documents, business bank accounts and the like. Also check potential tax implications; for example, if you were in an LLC with a partner who leaves, your partnership now becomes a single-member LLC, and you may need to file taxes differently.It is a good idea to take the time to develop a buyout agreement before your LLC is officially formed. You are acting to save your business a lot of potential trouble and headaches down the road.