When setting up a new business, everything is so exciting and new that many people don’t even want to talk about the possibility of dissolution down the road. But at the beginning, while everyone is getting along and working toward the same goals, is precisely the right time to talk about how things should go in case the business ends.
In other words, if you’re setting up a 50/50 LLC, you should agree to an exit strategy at the outset, not once you’re busy and perhaps even fighting with your partner. Doing so now may save you a lot of headaches—and potentially lawsuits—later.
The LLC “Prenup”
Think of forming a 50/50 partnership as similar to entering a marriage. Both parties enter into the union with the highest of hopes, but just as in marriages, sometimes the reality of a business plays out differently than planned.
Planning a business exit strategy now is akin to drawing up a prenuptial agreement before a marriage. In the business context, people contribute different skill sets. For example, some may bring intellectual property into the partnership while others put up capital. When devising a properly considered exit strategy, you can and should weigh each partner’s contributions to the business accordingly in the event of business “divorce.”
Exit Strategy Options
To cover the event of one partner wanting to leave the business, one option you may include in the partnership agreement is a “shotgun clause.” This clause includes a commitment where one partner offers to buy out the other at a certain price: The other partner must either accept the offer or turn around and buy out the first partner at the offered price. Theoretically, this arrangement protects both partners, because the first partner has the incentive to offer fair market value. With this solution, the LLC stays in business though one partner leaves.
Shotgun clauses do have drawbacks, however, as the party with more money can be at an advantage. Moreover, partners may feel ongoing stress, always wondering whether the other party is about to “shoot” when disagreements arise.
Another option is to make partner interests subject to vesting according to a specific schedule, which can prevent one party from leaving a business abruptly.
Overall, though, there are countless ways to structure exit strategies for LLCs—many of which also have tax implications—so it’s best to speak with an experienced attorney to take your specific circumstances into account.
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Joel Green is a seasoned attorney working closely with individual and business clients to provide advice and counsel in addressing their legal questions and concerns. Joel is licensed to practice law in Missouri and Illinois and splits his time between AEGIS’ main office, located in Clayton, Missouri, and its office in O’Fallon, Illinois.