Operating agreements outline key details about ownership, management, and operational rules, but one area that should not be overlooked is how members can exit the LLC. Building a clear exit strategy into your operating agreement prevents confusion and conflict when a member decides to leave, or new circumstances force you to reevaluate your current agreement.

Why LLCs Need Operating Agreements

Operating agreements are the heart of an LLC. They go beyond essential formation documents to establish how decisions are made, share profits, and handle membership changes. Your LLC defaults to state laws if you do not have an operating agreement. Whereas this may seem like a shortcut, state laws are intentionally broad, and in all likelihood, they will not reflect your business's or its members' needs. For example, some states allocate equal voting rights and profit distributions to all members, regardless of their contributions. By drafting an operating agreement, members build a structure that matches their goals and avoids default rules that may cause friction.

Operating agreements also provide legal clarity. They formalize agreements that might otherwise rely on verbal understandings, which lead to disputes if recollections differ over time. By documenting expectations and procedures, operating agreements protect the LLC's limited liability status, ensuring the business operates as a separate legal entity and shielding members from personal liability.

The Importance of Exit Strategies

Including an exit strategy in an operating agreement is forward-thinking. Members may leave for various reasons, such as personal goals, financial constraints, or conflicts within the group. Exit provisions ensure the process is handled predictably and fairly, reducing the chance of prolonged disputes. A buy/sell agreement is a standard method for structuring an exit. This allows one member to propose buying out another's interest or selling their own. The other member must then either accept the buyout or agree to purchase the initiator's share. This approach motivates fairness, as the initiator does not know whether they will end up as the buyer or seller.

Another option is a put/call provision. This clause allows one member to require another to buy their interest or enable a member to buy out another's share under predetermined conditions. These provisions work well in situations like deadlocks, where decision-making grinds to a halt due to irreconcilable differences.

Exit strategies also help manage external risks. For instance, an operating agreement can include provisions to prevent a member's ownership interest from being transferred to an outside party, such as through divorce, bankruptcy, or inheritance. Members can agree on buyout rights that activate under these circumstances, keeping control within the group and maintaining stability.

Finally, valuation procedures are essential when discussing exit strategies. Determining a fair price for a departing member's interest can avoid disputes over perceived inequities. Valuation can be based on a pre-determined formula, independent appraisals, or agreed benchmarks. Whatever method is used, it should be clearly outlined in the operating agreement to avoid uncertainty.

Be Proactive With Protecting Yourself & Your Business

Operating agreements with well-defined exit strategies do more than manage membership changes—they contribute to the long-term stability of the LLC. By addressing the possibility of change from the outset, businesses can avoid unnecessary disputes and ensure a seamless transition when needed. These provisions give members a clear path forward, no matter the circumstances. If you have further questions or want to discuss a different business law matter, contact us to schedule a consultation.