Buy Sell Provisions in an LLC Operating Agreement

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While many LLC Operating Agreements are silent on this point, it is a good idea to include so called Buy Sell provisions in the LLC Operating Agreement.

Buy Sell provisions set forth what is going to happen when an LLC Member wants to leave the LLC, dies, is unable to continue his or here duties, declares bankruptcy,  wants to sell his or her interest to an outsider, or when the LLC members are hopelessly deadlocked in the management of the LLC.  All of these scenarios could seriously harm the LLC or the remaining members.

The most common buy sell provision is probably the so called right of first refusal, which would provide that an owner can sell his LLC membership interest to an outsider if he or she has first offered it to the LLC or the remaining LLC members and such members declined.

Then there could be provisions forcing a buy out of an LLC member if such member has committed a serious breach of his obligations against the LLC.  Or, in case of a professional LLC, if any member has lost his license to practice the profession of the LLC.In each buy-out situation it is important to have terms that provide the exact mechanism of a sale and exit of an LLC member as well as the method of determining a price for the LLC membership interest.
It is also common to limit the price being paid for an LLC membership interest under certain circumstances.  For example, if a member decides to leave before the expiration of a certain period after formation of the company, he may not be able to get much if anything for his interest, since he or she hasn’t put in enough effort to have earned it.
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**This post is for informational purposes only.  For actual legal advice contact a business lawyer, business attorney or business law firm**

About Imke Ratschko

Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.