M&A
Delaware LLC co-founder buyout: process and Operating Agreement implications
Buying out a co-founder requires explicit Operating Agreement procedures, fair valuation, and proper documentation. Here is how to do it.
Valuation
Operating Agreements with buy-sell provisions typically specify one of three methods: (1) Fixed formula (e.g., 3x trailing-twelve-month revenue), (2) Third-party appraisal, (3) Mutual agreement with fallback to appraisal.
Without explicit Operating Agreement provisions, valuation often ends up in dispute. Resolve via mediation, arbitration, or Court of Chancery if necessary.
Documentation
Buyout requires: Member Interest Assignment Agreement, Operating Agreement amendment (removing departing member), tax K-1 cleanup, and any required IRS notifications (if structure changes).
K-1 final-year reporting matters; departing member receives K-1 for partial-year period only.
Tax implications
For departing US-resident member: gain taxed at capital gain rates (long-term if held over 1 year). For departing non-resident member: gain typically not US-taxed unless ECI or FIRPTA applies.
For ongoing member: basis adjustment in remaining LLC interest. Engage CPA for proper accounting.
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