I'm drafting an operating agreement for my LLC with two other members. One of them insists we include a detailed exit section, how a member can withdraw, what happens to their shares, notice periods, etc. Another says it's unnecessary and might even lock us into terms we'll regret. Our lawyer is on vacation and won't weigh in for a week. What do you all think? Should an operating agreement explain how members can leave?
LLC
Should an operating agreement explain how members can leave?
Ugh, operating agreements. i think you absolutely need an exit plan. Otherwise you're begging for a messy breakup. But that's just me.
That's what I lean toward, but the other member worries it'll be too rigid. Can you give an example of what happens without one?
Without exit terms, state default rules kick in. In many states, a member can withdraw at any time and demand fair value—but thee process is often unclear and expensive. That's why you put it in writing.
I've seen both sides. A super detailed exit clause saved my old company from a lawsuit when one guy wanted out suddenly. But I've also seen an operating agreement so rigid that a member felt trapped and ended up suing anyway. So it's about balance.
Balance? In an operating agreement? Good luck with that.
GrumpyOwl, what made the rigid one so bad? Was it the notice period or the valuation method?
Mostly the valuation method—it required a costly independent appraisal every time someone left, and had a 2-year lock-in. If you wanted out earlier, you'd forfeit your stake. That's a bit extreme.
Just have a simple clause: 90 days notice, buyout at fair market value determined by a formula. Done. No need for a 10-page dissertation.
PixelatedPineapple, that's fine until someone disputes the formula. Then you're back to lawyers. A good exit section should include a dispute resolution mechanism too.
Okay, so consensus seems to be: yes, but keep it reasonable. I'll bring that back to the group. Thanks, all.
Wait, do you even have a buy-sell agreement? That's often separate from the operating agreement. Don't conflate them.
ZebraSocks makes a good point. In some states, the operating agreement can incorporate a buy-sell, but it's cleaner to have them separate. Ask your lawyer when they're back.
I still say just put a clause that says 'don't leave' and hope for the best. Kidding. Mostly.