Florida law does not automatically give a departing LLC member the right to be paid for their interest. Without an agreement that says otherwise, a departing member may retain an economic interest without management or voting rights.
A buy-sell agreement can address this outcome before a departure or dispute occurs. As part of business ownership planning, the agreement can establish the price, process, and timeline for a future buyout. Waiting until a partner wants to leave can make those terms much harder to negotiate.
What a Business Buy-Sell Agreement Does and When It Applies
A business buy-sell agreement governs what happens to an ownership interest when a defined triggering event occurs. Common triggers include:
- Death of an owner, when the interest may otherwise pass to an estate or heirs
- Disability that prevents an owner from continuing to work in the business
- Divorce that may affect an owner's interest in the business
- Voluntary departure when an owner wants to leave the business
- A forced buyout under circumstances defined in the agreement
Without a written agreement, owners may have to negotiate these issues after the triggering event occurs. Reaching terms while the owners' interests are still aligned can be easier than doing so after a disagreement develops.
The Three Ways to Structure a Buyout Agreement for Business Partners
Buy-sell agreements generally use one of three structures. The structure determines who purchases the departing owner's interest and can affect the tax treatment of the transaction.
In a cross-purchase structure, the remaining owners buy the departing owner's interest directly. Life insurance may be used to fund a buyout triggered by an owner's death. A direct purchase can increase the purchasing owners' basis in the interests they acquire. The specific tax treatment depends on the business structure and circumstances.
In an entity redemption structure, the business purchases the departing owner's interest. The company may own life insurance policies to fund a death-triggered redemption. This structure can be easier to administer when several owners are involved because the business handles the purchase. However, a redemption generally does not provide the same basis increase to the remaining owners as a direct cross-purchase.
A hybrid agreement allows the entity and individual owners to participate in the buyout according to terms established in advance. For example, the business may receive the first option to purchase the interest, followed by the remaining owners. This approach provides flexibility when ownership, funding, or tax considerations change.
| Structure | Who Buys the Interest | Tax Consideration | Administrative Consideration |
| Cross-Purchase | Remaining owners individually | Purchasing owners may receive increased basis in the acquired interest | Can become more complex as the number of owners increases |
| Entity Redemption | The business entity | Generally does not increase the remaining owners' basis in their interests | Often simpler when the business has several owners |
| Hybrid | Entity or remaining owners, depending on the agreement | Tax treatment depends on how the purchase is completed | Provides flexibility as ownership and circumstances change |
How to Structure a Buy-Sell Agreement Around Valuation
Disagreement over a business's value can make an owner buyout much harder to resolve. A well-structured agreement establishes a valuation method before either side has an incentive to argue for a higher or lower number.
Three common approaches include:
- A fixed price that the owners agree to review and update on a set schedule, such as annually
- A formula based on factors such as earnings or revenue, applied when a triggering event occurs
- An independent appraisal process that determines the value at the time of the buyout
A fixed price requires regular review to remain useful. A valuation set years earlier may no longer reflect the company's financial position when a buyout occurs.
The 2024 U.S. Supreme Court decision in Connelly v. United States shows another reason to follow the valuation process established in the agreement. The owners had agreed on a process for valuing the company, but no appraisal occurred after one owner died. Instead, the parties later agreed on a $3 million redemption price. The IRS subsequently challenged the estate's valuation of the deceased owner's shares.
Funding Mechanisms: Life Insurance and Installment Payments
Life insurance can provide funds for a buyout triggered by an owner's death. How the policy is owned and how the agreement structures the purchase can also affect the tax consequences.
Connelly v. United States addressed this issue in the context of a corporate redemption. The corporation owned life insurance on its owners and received the proceeds after one owner died. The Supreme Court held that the corporation's obligation to redeem the deceased owner's shares did not automatically offset those proceeds when valuing the company for federal estate tax purposes.
The decision does not prohibit entity-owned life insurance or require businesses to use cross-purchase agreements. The Supreme Court noted that a cross-purchase arrangement could have avoided the same valuation issue because the insurance proceeds would have gone directly to the surviving owner. It also recognized that cross-purchase arrangements have their own costs and tax consequences.
For other triggering events, such as voluntary departure or disability, an agreement may allow installment payments when an immediate lump-sum purchase is not practical. The agreement can establish the payment period, interest terms, and consequences of a missed payment in advance.
What Happens to a Florida LLC With No Agreement in Place
Florida's default rules do not guarantee a buyout when an LLC member leaves. Under Florida Statute 605.0601, a member generally has the power to dissociate from the LLC at any time. Dissociation alone, however, does not require the company or remaining members to purchase that person's interest.
After dissociation, the former member loses the right to participate in the company's management and affairs. Their transferable interest is retained solely as a transferee. In practical terms, the former member may retain economic rights without the management rights they previously held.
When the owners cannot resolve the situation themselves, Florida law provides potential judicial remedies under specific circumstances. A member may seek judicial dissolution on grounds that include management deadlock or when continuing the business under its governing documents is no longer reasonably practicable. Florida law also provides circumstances in which a court can direct the purchase of a petitioning member's interest instead of dissolving the LLC.
Florida corporations have their own statutory framework. Qualifying shareholder deadlocks can support a petition for judicial dissolution. In certain dissolution proceedings, the corporation or other shareholders may instead elect to purchase the petitioning shareholder's shares at fair value.
These statutory remedies do not provide the same predictability as terms negotiated in advance. A buy-sell agreement can establish the triggering events, valuation process, and purchase terms before an ownership dispute develops.
Putting a Buy-Sell Agreement in Place Before It Is Needed
A buy-sell agreement is most useful when owners establish its terms before a departure, dispute, or unexpected event occurs. At that point, the owners can address valuation, funding, and purchase terms without knowing who may eventually be the buyer or seller.
Once an owner has decided to leave, those same decisions can become harder to negotiate. A valuation method, payment schedule, or triggering event may affect each owner differently. Establishing the process in advance gives everyone a clearer understanding of what will happen if circumstances change.
If your business has multiple owners but no agreement governing a future buyout, consider speaking with the business law team at Lulich & Attorneys. An attorney can help structure a buy-sell agreement around the company's ownership, valuation, and funding needs before those terms have to be negotiated during a dispute or transition.
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Lulich & Attorneys can help you structure a buy-sell agreement around your ownership, valuation, and funding needs.
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