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 Stafford 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 LIFT Start-Up Session™ or a LIFT Audit 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.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.