Option to Purchase Membership Interest in LLC

The option to purchase membership interest in LLC differs from purchasing the interest in other types of business.3 min read

Buyout Options in an LLC

It is a good idea to have a buyout option in an LLC with multiple members. This is often referred to as a buy-sell option. A buyout option covers the regulations and processes in the event that one member wants to exit the business. This option should be included in the operating agreement. The specific details and requirements should be decided when initially forming the LLC to prevent disagreements later.

The buyout might include the following details:

  • Whether or not the member leaving can force the other members to buy them out.
  • Which members are allowed/not allowed to purchase the available interest.
  • How the value of their interest will be determined.
  • What events allow for a buyout to occur. This might include disability, fraud, or death. A member's divorce or bankruptcy might also force them to sell their interests in the LLC business.
  • If inheriting interests is allowed with the death of an LLC member.
  • How the payment will be arranged in the event of a member's buyout.

Creating buyout specifications ahead of time can help to prevent any disagreements later on. Without clear buyout requirements, LLC members can be faced with costly lawsuits. It is also possible that the state could require the LLC to completely dissolve if an agreement is not made. Another possible concern is without regulation, one member could sell their interests to a party that is not approved by the other LLC members.

Put Option

Many LLCs have a requirement that if one member wishes to sell their shares, they must first offer them to the other LLC members. They can then only sell their shares to an outside party if every other member first declines to purchase. A put option is a legal obligation to the other LLC members to buy a party out. If the party interested in leaving is unable to secure a buyer, then the other LLC members are required to purchase their shares.

In order to activate the put option, the party wishing to leave notifies the other members of their desire. Once they have served that notice, the other members must purchase the shares at a previously agreed price.

Call Option

A call option is essentially the opposite of a put option. A call option is activated when one member retires, is disabled, or dies. In this case, the other LLC members will call for the member to sell his shares. This requires the leaving member to completely cut ties with the LLC business.

Funding a Buy Out

It can be difficult assigning a value to an LLC member's shares. This is why it is important to place a value on the share when first giving the shares. If an amount is not previously assigned, it may be valued by the following methods:

  • Malfeasance buyout: This may be valued with a book-value buyout.
  • Death of an LLC member buyout: This may match the insurance payout amount.
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