If you are a business owner, you know that planning for the unknown and unforeseen is critical. For business entities with multiple owners, the most common tool for this type of planning is a Buy-Sell or Buyout Agreement. Buy-Sell Agreements are contracts between the owners in a business that list out what happens to the ownership equity of an owner after he or she exits the company.
The most common reasons an owner may exit a business are death, disability, or divorce. These things happen to people all the time, so why are Buy-Sell Agreements so important? Consider the following justifications:
- They prevent dissolution of the business, allowing for operations to continue smoothly when something unplanned or disastrous happens.
- They serve as later proof of an agreed upon decision for certain situations.
- They prevent disputes and litigation.
- In some states, partnerships may face complete dissolution upon the occurrence of certain events, unless a partnership agreement addresses it directly.
Buy-Sell Agreements may be standalone agreements or incorporated in the Operating Agreement (for a LLC) or Bylaws (for a Corporation). Buy-Sell Agreements may, and in most cases should, have other optional provisions that suit your business’s specific needs. At their core, Buy-Sell Agreements should address the following:
- Whether or not an owner’s interest in the company must be bought out;
- A pre-determined price, or method of valuation to determine price, for the owner’s interest;
- Whether the interest will be bought by the other owners or some third party; and
- Buy-Out triggering events
Virginia & North Carolina Specifics
As noted, partnerships may face complete dissolution in some states unless specifically dealt with in partnership agreements. In Virginia, one of the events that will trigger dissolution is upon application by one of the partners and a court determines that it is not practicable to carry on the business in accordance with the partnership agreement. (Va. Code Ann. § 50-73.117). However, if there is a buy-sell agreement in place, the court would be very hard pressed to go against it.
In North Carolina, dissolution will occur upon the death of a partner, unless partnership documents indicate otherwise. (N.C. Gen. Stat. § 59-61). This specific statutory provision is a more compelling reason to have a Buy-Sell Agreement in place.
Are you a part of a partnership or are there multiple owners involved in your LLC or Corporation?
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