Many small business owners understand the importance of creating an LLC or similar entity to protect the individual owners from potential liabilities of the company. However, standard operating agreements or bylaws of these entities typically do not include stipulations covering what will happen in a prospective event that will change ownership in the business.

Businesses are usually created when times are good. Two or more business partners have an idea and, through their LLC for instance, commit time and money to the initial steps necessary for the business to succeed. These relationships often impacted by divorce, disability, death, or simple disagreement, with owners conflicting on how the business should move forward and their involvement in the matter. If an agreement cannot be reached by the owners, it is likely that the corporate documents do not have provisions applicable to how the entity must proceed, as indicated above.

An example of this is an LLC with two members who each own 50% of the entity. If one member wishes to withdraw and expects their ownership interest to be bought out by the other owner, typical LLC regulations include no requirements or guidance. This leaves the members in a situation where, if they cannot reach an agreed buyout, there is nothing allowing one owner to assume full ownership of the company.  Further, by this point the relationship between the owners is often strained, adding to the difficulty of reaching an amicable conclusion.

A buy/sell agreement is a document signed by the owners of a business which dictates how one owner’s interest or stock in the business will be bought out in a number of events. Death of an owner, election to withdraw, and divorce of an owner are examples of events which impact ownership of the entity. All of these and more are addressed in buy/sell agreements Waldron & Schneider regularly prepares for our corporate clients.

The point of entering into a buy/sell agreement when business owners are on good terms is to set agreed-upon conditions for those impactful events included in the preceding paragraph. A buy/sell agreement should dictate the price at which the entity or remaining owners may elect to purchase the ownership of the individual who will no longer be part of the business. This takes away the lack of concreteness in potential negotiations and the potential inability to act under corporate documents which do not address such a situation.

If you are a co-owner of a business, it is advisable to consider the potential benefits that a buy/sell agreement may have for later events impacting ownership of your entity. Waldron & Schneider’s team of transactional attorneys are experienced in crafting buy/sell agreements tailored to the needs of a wide range of businesses and their owners. Call our office today to speak with one of our attorneys about how we can help ensure that your business is prepared to operate smoothly for years to come.

This article and website are made available by Waldron & Schneider for educational purposes only and to give basic information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and Waldron & Schneider. The article and website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. For more information or questions you can contact us and one of our attorneys will be in touch soon.