If you are going to register your company as an LLC, you will have to take care of many things as there might be many benefits of registering your company as an LLC, but along with the benefits, LLC brings along some complexities as well. Although many questions pop up in the mind of people running an LLC, in this blog post, we will discuss the most common question ‘How can I buy a partner’s share of an LLC?
Well, if you have the same question in mind, you have come to the right place; as in this blog post, we will discuss all that you need to know about buying a partner’s share of an LLC.
To begin on the right foot, you first need to understand the role of operating agreement as this will set the base of buying a partner’s share of LLC.
Understanding operating agreement
An LLC can always function as a partnership. In this case, the partners are also known as members, and all these partners must agree on the terms and conditions outlined for selling and buying the ownership interest in the firm. This is the most important thing you should know if you are planning to incorporate LLC NY.
But deciding on selling or buying ownership interest is not that easy, and you might have to deal with a long list of issues. This is why it is always an ideal approach to use an operating agreement at the outset of the firm, as this will help build the methods of a member’s withdrawal.
If you do not have an operating agreement, then the LLC will be bound to the default provision of the state law. And according to this law, you might have to force a sale of the firm to build a value for a withdrawal member’s interest.
So, the first thing that you should do is go through the provision of the company’s operating agreement. In most cases, the operating agreement includes all the terms of a member’s withdrawal. So, we can say that the operating agreement has the force of a contract between all the members of an LLC. And if there is a proper procedure mentioned in the operating agreement, you should always follow it.
What to do if there is no operating agreement?
If there is no operating agreement in an LLC, you have to determine the share value of the members. There are two ways of deciding the valuation; formal and informal. In the informal method, all the members sit together and agree on the actual interest value of the member who is withdrawing, while in the formal method, a professional is hired to deal with the valuation.
But all the current or remaining members can never force withdrawing members to accept any price as this is entirely against the law. And in many states, the member who is withdrawing has the right to move a sale of the company if all the remaining members are deadlocked. This must be kept in mind when you plan to incorporate LLC NY.
Voting and liquidity
You can also take votes when deciding how the company will pay the interest of the withdrawing member. There are mainly two cases in this type of situation: the company has enough liquidity and the other where the company lacks liquidity.
If the firm has enough liquidity, then the company can simply buy back the interest of the member who is withdrawing by writing a check in the member’s name. But if the company doesn’t have enough liquidity, then all the remaining members are bound to add capital to the firm as this will keep the company solvent and help it meet the obligations.
You will also have to adjust the capital account of all the remaining partners or members. And in this case, the ownership percentage of the member who is withdrawing must be equally distributed among all the remaining partners or members.
But if there is an operating agreement, it can state the sale of the interest to a single member. In such a situation, the specific member buying the interest will have to adjust his capital account upwards, and the account of all the other members will be adjusted downwards.
The way you will deal with purchasing a partner’s share in LLC is determined by the presence of an operating agreement. So, before taking any step, always check whether there is a properly designed operating agreement or not. Even if you are not going to deal with purchasing a partner’s share, it is always advisable to have this basic knowledge when you plan to incorporate LLC NY.