Legal Documents Needed for LLC Succession
When you're building a business, you're focused on growth, clients, and day-to-day operations. But what happens when it's time to step away—whether...
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Most LLC owners know they need an operating agreement. Fewer realize the buy-sell agreement is just as important—especially when planning for the future. Without it, even a thriving business can unravel in the face of a partner’s death, retirement, or sudden desire to exit.
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Think of the buy-sell agreement as a set of instructions for what happens when someone leaves the table. It ensures the business stays stable, protects the remaining members, and provides a fair exit path for the departing owner (or their family).
In this guide, we’ll unpack how buy-sell agreements work, why they’re critical to succession planning, and what you need to know to get yours right.
What Is a Buy-Sell Agreement—and Why It Matters
A buy-sell agreement is a legally binding contract between LLC members that lays out what happens when someone wants—or needs—to leave the business. Whether that departure is voluntary (like retirement) or involuntary (like death or disability), the buy-sell agreement defines:
- Who can buy the departing member’s interest
- How that interest is valued
- How and when payment will be made
At its core, it protects both sides. For the remaining members, it prevents having to suddenly co-own the business with a spouse, child, or stranger. For the departing member or their heirs, it ensures they receive a fair payout without confusion or drawn-out conflict.
Without a buy-sell agreement, you're left with default state laws and personal assumptions. That’s a dangerous mix when emotions are high and money is on the line.
When Should You Create a Buy-Sell Agreement?
The best time to create a buy-sell agreement is before you need one. Waiting until a member wants out—or worse, passes away—can lead to rushed decisions, emotional arguments, or even lawsuits. These agreements are meant to be proactive, not reactive.
Ideally, you draft a buy-sell agreement when the LLC is formed or as soon as multiple owners are involved. That’s when everyone is on good terms and thinking about the long-term health of the business. But even if your business is already established, it’s not too late. In fact, bringing on a new member, shifting ownership percentages, or reaching a new stage of growth can all be great reasons to finally put one in place.
It’s also essential for family-run businesses. Family dynamics often bring unspoken assumptions—about who will take over, what’s fair, and how decisions should be made. A written agreement forces those assumptions into the open, which can prevent serious tension down the line.
Example – Avoiding a Crisis After a Sudden Death
Two friends co-owned a successful brewery through their LLC. One handled operations; the other managed marketing and finance. They had talked casually about what would happen if one of them passed away, but never put anything in writing.
Fortunately, before opening a second location, they sat down with an attorney and drafted a buy-sell agreement. They included a clause that, in the event of death, the surviving member would buy out the deceased’s interest using a life insurance policy they each carried.
Less than a year later, one of them was killed in a car accident.
Thanks to the agreement, the buyout was clean. The surviving partner maintained control of the business, and the deceased partner’s family received a fair payout—without conflict, confusion, or delays.
Common Triggers That Activate a Buy-Sell Agreement
A well-crafted buy-sell agreement doesn’t just say what will happen—it defines when it happens. These triggering events are what activate the terms of the agreement and signal that it’s time for a transition.
One of the most common triggers is the death of a member. Without a buy-sell in place, the deceased’s ownership interest might pass to heirs who have no involvement—or even interest—in the business. This can create immediate friction between the surviving members and the new owner.
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Disability is another overlooked trigger. If a member becomes permanently incapacitated and can no longer fulfill their role, the remaining owners need a clear process for buying out their interest or adjusting control. Disability buyouts can be complex, especially if there’s no insurance or valuation method already in place.
Voluntary exits—like retirement or simply choosing to move on—are also common. Even when relationships are good, disagreements can arise over how much the departing member’s share is worth and how the payout will be handled.
Other possible triggers might include divorce, where a member’s ownership stake becomes part of a marital settlement, or bankruptcy, where creditors might attempt to seize a member’s interest.
The point isn’t to guess every future scenario. It’s to identify the events most likely to disrupt your business and spell out a plan that protects all sides.
Pro Tip – Customize Triggers for Your Specific Business
Many templates offer a basic list of triggering events—but real protection comes from tailoring them to your company’s structure and risks. If you're in a high-liability industry, build in protections for lawsuits or license revocations. If you're a family business, address generational transitions or multi-heir ownership splits.
A good buy-sell agreement reflects the real-life stress tests your business is most likely to face.
Structuring the Terms: Price, Payment, and Process
One of the biggest sources of conflict during a succession is how much the business is worth—and how that value gets paid out. A good buy-sell agreement doesn’t just outline triggers; it gives you a clear roadmap for what happens next.
Start with valuation. Some businesses agree to a fixed dollar amount, but that number quickly becomes outdated. Others use a formula—like a multiple of earnings or revenue—which can better reflect the business’s growth. A third option is to require an independent appraisal. While more expensive, it adds objectivity and reduces disputes.
Example – Using Installments to Keep the Business Afloat
A three-member marketing agency faced a buyout when one member decided to retire. Their agreement required an independent valuation, which came back with a $300,000 price tag. The business had strong revenue but not enough liquid cash to make the payment all at once.
Because they had planned ahead, the buy-sell allowed for a five-year installment plan with interest. That gave the business time to budget for the payout, and the retiring partner received steady, predictable payments without forcing the agency into debt or layoffs.
The agreement saved both the relationship and the business.
Next comes the payment structure. It’s easy to say someone gets bought out, but how that actually happens matters. Will the business pay in full immediately? Over time in installments? Use life insurance to fund a death-triggered buyout? The wrong structure can put strain on the business’s cash flow—or leave the departing owner in limbo waiting for their money.
Finally, set expectations around the timeline. Does the payout happen within 30 days? Can the remaining members delay payment under certain conditions? The more clarity you provide up front, the smoother the transition will be when it’s time to execute the agreement.
Pro Tip – Don’t Forget About Taxes
Buyouts aren’t just financial—they’re taxable. Depending on how the agreement is structured, the selling member may owe capital gains tax, and the business could be limited in how it deducts the payments. Transferring ownership also raises questions about basis, goodwill, and accounting treatment.
Work with a CPA to make sure your agreement is tax-efficient on both sides. It's much easier to structure things the right way from the start than to fix them after the fact.
How to Keep the Agreement Updated and Enforceable
Creating a buy-sell agreement is a big step—but it’s not the final one. Businesses evolve. Ownership changes. Laws shift. An agreement that made perfect sense five years ago might be outdated or even unenforceable today.
The first key to maintaining a solid buy-sell agreement is regular review. Set a recurring time—every two or three years—to revisit the agreement with your attorney and accountant. You’ll want to review ownership percentages, member roles, and whether the valuation method still fits your business’s current size and structure.
Next, consider what’s changed. Has a member gotten divorced? Has a new member joined? Has someone become less involved in the business? These changes might seem small, but they can significantly affect how the agreement works when triggered.
Also, make sure the agreement aligns with your operating agreement and other foundational documents. If one says a member’s interest must be bought out upon death, but another says it passes to heirs, the conflict could stall the transition—and land you in court.
And don’t forget enforceability. Your buy-sell agreement should be signed, dated, and clearly acknowledged by all members. If ownership stakes change or a new person joins the LLC, make updating the buy-sell part of the onboarding process.
Pro Tip – Tie It Into Your Operating Agreement
One of the smartest moves you can make is referencing your buy-sell agreement in your operating agreement—or embedding its key provisions directly. This creates internal consistency and reduces the risk of two documents saying different things about how ownership transitions work.
Even a simple clause like this can help lock everything together legally:
Sample Provision:
“Any transfer of membership interest shall be governed by the terms of the Buy-Sell Agreement dated [date]”
It’s a small detail that pays off in a big way if the agreement is ever challenged.
What to Discuss with an Attorney or CPA
A buy-sell agreement might sound straightforward, but the details can get complex fast—especially when it intersects with tax law, estate planning, and multi-member ownership structures. This isn’t the kind of document you want to handle alone or pull from a generic template.
An attorney can help you tailor the agreement to your LLC’s unique needs, making sure it reflects the right triggers, fits your operating agreement, and protects all members fairly. A CPA, meanwhile, brings essential insight into the tax impact of ownership transfers, valuations, and payment structures.
Some key questions to ask your advisors:
- What’s the best valuation method for our industry and size?
- Should we consider funding the agreement with life or disability insurance?
- How can we structure payments to avoid draining the business?
- What are the tax consequences for both the LLC and the departing member?
Involving professionals early doesn’t just protect your business legally—it makes the process smoother for everyone involved when the time eventually comes to activate the agreement.
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