Law Outside the Box

If you are on the threshold of starting up your own multi-owner LLC (Limited Liability Company), or even if you are already up and running, a Member Control Agreement (also known as a Buy-Sell Agreement) is an essential document you should have.  A Member Control Agreement can be as limited in scope or as complex as you wish.  It can be drafted to cover a wide range of issues including: protection of minority members/owners, voting control, termination of an owner’s employment, bankruptcy of an owner, death or disability of an owner, management deadlock solutions or even the divorce of an owner whose spouse may be awarded a partial interest in the LLC. 

The best time to get a Member Control Agreement in place is generally at the onset, before the business partnership even opens its doors.  If the parties cannot agree on the terms of ownership before the entity is organized it will only become more difficult, sometimes even impossible, to come to an agreement once the business is successful or been in operation for an extended period of time.  Confronting the challenges head on in the beginning will reduce controversy later.

In Minnesota, Statute 322B.37 controls the validity of such agreements.  In order to draft an enforceable agreement the following must be met:

1)      The agreement must be in writing and be signed by the persons who, on the date of signing, comprise all the members/owners of the LLC and all persons who are party to contribution agreements not yet fully preformed.

2)      A copy of the agreement must be filed with the LLC.  The LLC should note in its required records that the members’ interests are governed by a Member Control Agreement.

The Member Control Agreement will be enforceable by those owners who were a party to it; in other words those owners who signed the agreement.  In addition, the Membership Control Agreement will not limit or otherwise restrict other valid agreements in relation to the LLC such as Bylaws. 

For a more in depth look at the law governing Member Control Agreements, follow this link.

Image Credit: © 2010 – Public-domain-photos.com

As a business attorney, I’ve seen a number of situations where remaining owners have been financially burned to the tune of tens of thousands of dollars by a departing owner because there wasn’t a buy-sell agreement in place to protect the remaining owners or the business itself.  Many times, the departing owner brings a lawsuit to try and get his “share” of the business and this can result in expensive and unplanned court costs and legal fees to resolve.

A buy-sell agreement is a written contract between co-owners of a business that dictates what happens when one owner leaves the business.  Although it may not be foreseeable at the time of business formation, certain circumstances may present themselves where a buy-sell agreement would prove to be extremely beneficial.  Dealing with these contingencies before they manifest themselves is key to a harmonious business relationship among owners as well as reducing legal fees by addressing the “what ifs” up front. 

For example, what happens if one owner decides to voluntarily leave the business?  In the alternative, what would be the result if the other owners wanted one owner out immediately?  In a worst case scenario, what does the business do if one owner is permanently disabled or dies?  What steps need to be taken to ensure the success of the business and protect the rights of the remaining owners?  A buy-sell agreement can govern this process by laying out guidelines for each of the above scenarios.