Maggie Knaust Authors Article Breaking up a Florida LLC is hard to do, a business prenup can make it easier
Tampa Bay Business & Wealth Magazine – September 2021
Breaking up a Florida LLC is hard to do, a business prenup can make it easier
By: Maggie Knaust
Much like a marriage, at the beginning of a business venture everyone is excited. People are contributing. Trying their hardest. Responding to emails. Consulting each other on financial decisions. Working as a team. Then something changes. Someone gets a new job or has a big life change. An owner starts contributing more (or feels like they are contributing more). Emails and phone calls go unanswered. Conflict abounds. Distrust sets in. It doesn’t look like there is a way to fix the relationship. You and or your partner(s) want a divorce. But where do you start?
The operating agreement
The first step is to determine whether your limited liability company has an operating agreement. An operating agreement is an oral or written agreement between the parties that governs their relationship. Operating agreements can be as simple or complex as the parties desire and vary greatly by industry and the business needs of the members.
If there is an operating agreement, the next step is to determine if there is a key buy-sell provision. Buy-sell provisions allow the transfer of an owner’s interest under certain conditions. Frequently, a buy-sell provision will provide to whom the interest can be transferred and how the price for the interest is to be determined. For two-member limited liability companies, a traditional buy-sell provision is common. One member can initiate an offer to buy the other’s membership interest. The member receiving the offer has two options – accept the offer or purchase the offering member’s interest for the identical price. For multi-member companies, the parties may include a buy-sell provision that provides for a right of first refusal or right of first offer. The parties can also agree to a buy-sell provision that values members’ interests by applying a predetermined formula based on financial records or a third-party appraisal process. As with other provisions of the operating agreement, there are a broad variety of options for how a buy-sell provision is structured. A thoughtfully planned and well-drafted buy-sell provision, appropriate to the industry and business owners, can be helpful in the business divorce process.
What if there’s no operating agreement?
Similar to marrying without a pre-nuptial agreement, if there is no operating agreement or the agreement is silent as to how interests in the company can be transferred, the default rules and provisions of Florida’s LLC statute apply. The options under the default statute are far more limited than what the parties can contractually agree to in an operating agreement regarding divorce. Depending on the circumstances, the options can include voluntary dissociation by a member, involuntary dissociation of a member and dissolution of the company. Quite often, members attempting to exit a company, or remove a member from a company, find that the default provisions under the statute do not provide them with an efficient, satisfactory solution. While it is possible for the parties to agree to an alternative solution other than what is set forth in the LLC statute, by the time the parties are at the point of divorce, coming to an agreement without legal intervention is challenging.
While the new business butterflies are going, take the time to thoughtfully discuss and plan what the end of your business relationship might look like. Draft your business pre-nup. If you are already out of the honeymoon phase, consider revisiting your operating agreement to address changes to the business and the dynamics of the relationship. While it might not be fun to talk about the potential for the end of your relationship, going through the process will likely save you some heartache down the road.
Maggie Knaust is an attorney at Trenam Law and a member of the firm’s Litigation and Dispute Resolution Practice Group. She can be reached at firstname.lastname@example.org.