The Basics on Buy-Sell Agreements

The average business owner spends 10 hours per day, six days per week to get their business to the point where it can provide a measure of security for their family. When the business is owned by partners, all those hours of work can go to waste if they fail to establish a plan in the event one of them suffers an untimely disability or death. Only by planning ahead can the survivor be assured of a smooth transition.

A Buy-Sell Agreement is a written contract between the owners of a business which details what is to occur upon the happening of certain “triggering events” which “trigger” an owner’s obligation to sell their interest in the company. The most common triggering events are disability or death of one of the owners. Typically, the Buy-Sell Agreement provides that the surviving owner of the business will purchase the deceased or withdrawing owner's share of the operation. Other triggering events that should be included situations where one of the owners retires, divorces, files for bankruptcy, loses a professional license necessary for the continuation of the business, or wishes to sell their interest in the business.

The agreement should set forth the purchase price to be paid or should provide a formula for determining the price. The value of the business can be mutually agreed upon by the owners as long as it is a reasonable value. However, this value should be reevaluated on an annual or bi-annual basis. Alternatively, a certified business appraiser is an acceptable way to make a third-party objective determination of the value of business.

Perhaps most importantly, the agreement must have a mechanism for providing the funds needed to make the purchase. Life insurance is generally the vehicle used to fund a buy-sell agreement. However, the full value of the insurance policy would only be realized in the event of death. An insurance policy may provide for a cash surrender value, which could also be used for a triggering event other than death, but may not be sufficient to cover the entire purchase price. As a result, alternative methods to provide funds for the purchase of a withdrawing owner’s business interest should also be considered.

We will be further discussing buy-sell agreements and other important aspects of business planning on May 17, 2012,  from 6:00pm to 8:00pm, during our complimentary workshop on Business Succession Planning. This workshop will be held in the Learning Center located at the Law Offices of Hoyt & Bryan, LLC at 254 Plaza Drive, Oviedo, Florida 32765. Please call (407) 977-8080 and reserve your seat today.

The Olmstead Decision and What it Means for Single-Member LLCs in Florida

On June 24, 2010, the Florida Supreme Court, the highest court in Florida, issued a much anticipated decision in a case entitled Olmstead v. Federal Trade Commission.  In this case the Court ruled that a charging order is not the exclusive remedy for a judgment creditor against a debtor's single-member Limited Liability Company ("LLC") interest.  This means that in Florida, a judgment creditor can seize a debtor's single-member LLC interest and gain full control of the LLC. 

It is important to understand the Olmstead decision does not affect or diminish asset protection for individuals using LLCs to shield personal assets owned outside the LLC from claims that may arise from property owned inside the LLC.  Single-member LLCs still provide limited liability protection for the owner from a judgment against the LLC itself.  For example, rental real estate held in a single-member LLC and the liability that may come from the rental real estate would be limited to the LLC assets.  Personal assets owned outside the single-member LLC would not be exposed to the claims of creditors related to the rental real estate.  Instead, Olmstead applies to claims arising outside the LLC when the single-member LLC owner tries to use the charging order to protect assets inside the single-member LLC.   

So, there are some instances in which the single-member LLC is still appropriate, such as in the landlord example used above or for the business owner who wants to protect assets owned outside the LLC from lawsuits occurring inside the LLC. But, when a single-member LLC is no longer the appropriate asset protection strategy, there are solutions.  For example, a single-member LLC formed in states other than Florida can offer better protection than a single-member LLC formed in Florida.  Further, multi-member LLCs generally offer better asset protection than single-member LLCs.  Although, some experts believe the Olmstead decision opened the door for creditors to attack all LLCs, including multi-member LLCs.  This is because the Court reached its decision in Olmstead based on the charging order language in the Florida LLC statute, which applies to both single and multi-member LLCs.

Determining whether a single-member LLC is appropriate for you will depend on you and your family’s goals and what you hope to accomplish with the LLC.  The Olmstead decision made it clear the law is not settled regarding the amount of asset protection provided by LLCs.  LLCs, like all asset protection strategies, are not bullet proof but may help provide bullet resistance.