I Have a Partnership Agreement or Operating Agreement — Do I Also Need a Buy-Sell Agreement?
Business owners who have an LLC operating agreement or partnership agreement often assume they have addressed succession and exit planning as well. That assumption is worth examining carefully. An operating agreement and a buy-sell agreement are related documents, but they serve different purposes — and having one does not necessarily mean you have the other.
What an Operating Agreement Does
An operating agreement is the foundational governance document for an LLC. It defines the ownership structure, establishes the rights and obligations of members, sets out the rules for decision-making and management, addresses how distributions are made, and governs the day-to-day and structural operation of the business. Most operating agreements also address membership transfers to some degree — typically by restricting members from freely transferring their interests to outsiders without consent.
What operating agreements often do not address comprehensively — particularly those that were drafted quickly or based on a basic template — is what happens when a specific triggering event occurs: a member dies, becomes permanently disabled, wants to retire, files for bankruptcy, or gets divorced. The transfer restriction provisions in many operating agreements say something about who must approve a transfer, but they do not necessarily establish a pricing mechanism, a funding source, or a clear obligation to buy or sell.
What a Buy-Sell Agreement Does
A buy-sell agreement — which can be a standalone document or a comprehensive set of provisions within the operating agreement — specifically addresses exit events. It identifies what triggering events activate a buyout right or obligation, establishes how the interest is valued at the time of the trigger, sets the payment terms, and often addresses how the purchase is funded.
The key distinction is specificity around exit. An operating agreement that says members cannot transfer their interest without approval tells you what cannot happen. A buy-sell agreement tells you what must happen — and on what terms — when a trigger event occurs.
The Gap Risk
The gap between these two documents is where disputes arise. When a triggering event occurs and the operating agreement does not have clear buy-sell provisions, the parties may disagree about whether there is any obligation to buy or sell, what the price should be, and how the transaction gets completed. That disagreement can result in prolonged litigation, with the outcome determined by courts applying default statutory provisions that may not reflect what the parties would have agreed to had they planned ahead.
New Jersey and New York both have LLC and partnership statutes that supply default rules in the absence of agreement. Those defaults are not always favorable to either party, and they are rarely as efficient or certain as a well-negotiated buy-sell provision.
One Document or Two?
Whether the buy-sell provisions are contained in a standalone buy-sell agreement or integrated into the operating agreement is largely a matter of drafting preference. Some practitioners prefer a standalone agreement because it is easier to amend independently and because life insurance funding arrangements are often documented separately. Others prefer to keep everything in one governing document to avoid conflicts between separate agreements.
Either approach can work. What matters is that the buy-sell provisions exist, are comprehensive, and have been thought through — not that they appear in a particular document.
Business owners who are uncertain whether their operating agreement adequately addresses exit events should have it reviewed by a business attorney who can identify any gaps and recommend whether additional provisions or a separate agreement are appropriate for their situation. See also our pages on succession planning and operating agreements.
Business owners uncertain whether their operating agreement adequately addresses exit events are welcome to schedule a consultation with Russo Law LLC to identify any gaps.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This corporate lawyer blog post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey. It may not reflect laws in other jurisdictions.
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