Limited Liability Company Buyouts

A client and his wife came in a few weeks ago with some questions. He, his wife, and another couple had formed an LLC for a new business venture. Each member owned 25 percent. The venture was still fairly new, though experiencing some apparent success already, when one of the two couples decided it wanted out. My clients, who wanted to keep the business going, came to me for some counsel about what to do.

Fortunately for all parties, we reached a very easy and amicable solution by which my clients will, next week, buy out the other couple for a sum representing their initial investment. It's a good thing that everyone was reasonable, however, because the Operating Agreemeent did not provide a good "dissolution" mechanism, in the event that the discussions had become acrimonius, and it made me realize the importance of a good buyout provision in these operating agreements.

The operating agreement, like most in our state, was written so that the departing couple could not have sold its interest in the company without my clients' approval. And without my clients' approval, they'd have been out of look. Worse yet, my clients owned the physical location of the LLC's business, and, if they'd wanted, could have evicted the LLC from the location and simply set up a new LLC to run practically the same business.

Of course, the departing husband and wife were decent people, and my clients were decent people, and they quickly and fairly negotiated a fair resolution that was mutually beneficial.

The majority of limited liability companies I set up seem to be two parties (usually two men, but sometimes two couples), and in these LLCs, when you're setting them up, think about the exit provisions:

1. Consider putting in a provision that would allow you to sell your interest to a third party if the remaining owners are not willing to buy you out; and/or

2. Consider a provision that will value your interest and set up a payment plan so that while you can force the remaining parties to buy you out, conversely a mechanism is in place so that they can do it without ruining their cashflow.

Of course, picture yourself in the reverse provision: what if you want to stay in but your co-owners do not? A good operating agreement will provide provisions that will provide you a comfort level so that if you start going different ways, you'll already ahead of time know that Agreement has provided a way for all of you to easily separate your interests.

Buying out your business partner.

Perhaps you've been buddies since high school or college; or maybe mutual interests or kinship brought you together. Over the years you entered into a joint venture (whether as a partnership, an LLC or a corporation). But now, for whatever reason (a falling out, or simply to pursue different interests), you and your business partner have decided to part ways. You're buying him out, and he's moving on. What things do each of you need to consider?


1. Mutual Releases (both): If this is going to be a clean break, the both of you need to execute mutual releases releasing each other from any causes of action or claims you might have against the other. If this is an amicable split, it might not seem necessary, but if you're leaving not on the best of terms, this is an absolute must.

2. Release of Company Liabilities (Seller): If you're the one leaving the business venture, the business still might have some liabilities and debts, for which you are personally liable, such as bank loans which you were required to personally guarantee. Some lawyers simply have the buyer sign an indemnity for you, which simply means that he (the remaining partner) agrees to pay the loans, and to protect you from liability against them. The problem with this is that the bank is not bound by this agreement, and if your partner at some point is unable to make the payments, the bank can still come after you. Sure you've got a contract, but your ex-partner is now bust, so what good is that going to do? Instead, ensure that your break is a clean one by getting the bank to release you from your personal guarantees when you leave.

3. Proper Corporate Filings (Buyer): If you're buying out a fellow shareholder (corporation) or member (LLC), it is important to execute the proper corporate paperwork and filings. For example, if buying out a fellow shareholder in a closely-held corporation, you need to have prepared proper corporate minutes in which the stock certificates are conveyed, and in which the seller resigns from all corporate offices, directorships and registered agency, if applicable. If the seller is a member in an LLC, you must make sure that he resigns as manager and (if there is more than one remaining member of the LLC) that all members consent to the seller leaving and to the sale, if any, of his membership interest.

Buying out a fellow partner (or selling out, as the case may be) can be relatively straightforward, so long as the proper procedures are followed.

If you need further advice on dissolving a venture, or buying out a fellow partner, contact me at wldeaton@vnet.net .