Why Your LLC Agreement Must Be Customized To Consider The End
(Even Before You Launch)
Starting a business is
exciting, but it can quickly become a stressful situation if the owners can’t
agree. This is especially true when it comes to closely held businesses, such
as LLCs, with two equal owners. In these situations, it’s ideal for key
agreements, such as LLC operating agreements, bylaws, or buy-sell agreements,
to have deadlock provisions.
Deadlock provisions in
an agreement are clauses that outline the actions to be taken in the event that
the members are unable to make important decisions because of a deadlock.
A deadlock can occur when there is a stalemate among members over important
matters, such as the direction of the business or the allocation of profits.
These provisions can include procedures for resolving the deadlock, such as
mediation or arbitration, or procedures for dissolving the LLC if the deadlock
cannot be resolved. It can also include provisions for buying out one of the
member's interests, or in some cases, removing a member who is causing the
deadlock.
Consider Two Recent Cases
Two recent cases, In
re: Dissolution of Doehler Dry Ingredient Solutions, LLC, and James H.Q. Davis
Trust vs. JHD Properties, LLC, demonstrate why it’s so important to have
customized, considered, and well-drafted deadlock provisions in your operating
agreement or bylaws when you have more than one owner, investor, or member of
your business.
In the first case, In
re: Dissolution of Doehler Dry Ingredient Solutions, LLC, a court denied a
request for judicial dissolution because the LLC operating agreement contained
a buy-out option in the event the members were deadlocked on a material
decision. This buy-out option allowed any member to deliver written notice to
the other members proposing a purchase price for the units, and after receiving
the notice, the other members must either buy all of the electing member’s
units at the offered price or sell all of their units to the electing member at
the offered price.
In the second case,
James H.Q. Davis Trust vs. JHD Properties, LLC, a court denied a motion to
dismiss a request for judicial dissolution. The two managers of LLCs that owned
undeveloped land disagreed on the proper management of the LLCs and the court
found that the allegations were sufficient to show that it is not practicable
to conduct the LLCs’ business in conformance with the operating agreements.
This was due to the deadlock on the use of the land and the lack of a mechanism
in the LLCs’ operating agreements to break the deadlock.
These cases
demonstrate that having custom, clear, and well-considered deadlock provisions
in your LLC agreement is not only important, but can be the difference between
a successful business and one that gets tied up in court or unable to move
forward in the event of a conflict among the partners.
How We Can Help
When creating an LLC
agreement, it’s important to consider how you’ll handle conflict, and even an
exit of the business, not just how you’ll enter the business. Buy-out
provisions should detail a method for settling
on a buy-out price, just as with any other buy-out event (e.g., death,
permanent disability, or retirement). The agreement should also specify the
payment provisions, such as payments can be made over “x” years at “y” interest
rate, and the terms under which a buy-out may occur.
If you have a
multi-member entity, it’s critically important to have custom-drafted
agreements to avoid unwanted outcomes, especially when it comes to how one or
more of the owner/investors may want to exit from the business. Working with us
is the key to ensuring that you and your business partners are thoroughly
protected, now and in the future.
Contact us today so we can support your next steps.
This article is a service of Ganvir Law,
Personal Family Lawyer™. We offer a complete spectrum of legal services for
businesses and can help you make the wisest choices on how to deal with your
business throughout life and in the event of your death. We also offer a
Business Strategy Session for an ongoing business, which includes a review of
all the legal, financial, and tax systems you need for your business. Call us
today to schedule.
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information. This material was created for educational and informational
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