Starting a business with partners and associates, you have aspiring projections and target success. You think about the good and create ambitious growth plans. However, business is also about unpleasant moments and complications. Thus, at some point in conducting your LLC business, you might face an issue of an LLC member removal. No matter if you want to expel an LLC member for some reason, such member is to be withdrawn following their own voluntary decision, or a member deceases, such ownership changes are to be legalized. Commonly, a member withdrawal procedure should be described in an LLC Operating Agreement. Otherwise, you’ll have to stick to the process established by the state law. If you find yourself in a situation where you need to make changes to the LLC membership structure and remove a member, our article provides detailed guidance on how to complete this process legally.
Main Reasons for LLC Member Withdrawal
Basically, it’s either an LLC member wants to withdraw from the company voluntarily or other LLC owners seek to remove a member, and there are some basic reasons for those decisions.
Thus, common reasons for voluntary dissociation or withdrawal cover retirement, resignation due to a disagreement or conflict with other LLC members, and personal reasons such as family issues, health conditions, relocation to another state or even country, etc.
Involuntary removal, on the other hand, is usually caused by certain internal problems. It could result from one of the members regularly breaching company bylaws or doing some actions that are potentially harmful to the business or could negatively affect the course of business in the long run. Besides, LLC members might seek to expel one of their business companions since they simply don’t want to work with that person anymore following some serious conflict or the lack of common vision of business perspectives, etc.
LLC Member Removal: Common Guidelines
To legalize the withdrawal of one of the LLC members, you should either follow the Operating Agreement provisions on that or apply the procedure stipulated by the state LLC law in case you don’t have an Operating Agreement in place.
Member Withdrawal and an Operating Agreement
Most often than not, LLCs do have an Operating Agreement, especially when it comes to multi-member LLCs, for the need to have strict operational procedures and internal business management rules in place. The document is a legal instruction on how your company will be run and what are the rights and liabilities of the LLC members in this concern. Daily operations aside, this agreement also regulates such important procedures as the changes in LLC membership and business dissolution. The ownership-related clauses cover both the willing resignation and involuntary withdrawal along with a detailed description of the whole process in each case. So, this is an Operating Agreement where you can find voting rules for changing the membership structure.
An important thing to keep in mind is that an LLC member withdrawal doesn’t mean the ownership interest of such member is terminated. By depriving a member of the right to manage and control the business, the act of removal doesn’t necessarily cut down the equity rights. And a removed member might remain entitled to continue receiving profit distributions. So, consider buying out such owner’s share after resignation. Unless an Operating Agreement sets forth procedures for that, you can negotiate the deal and sign a separate document, which is a Share Buy Agreement.
To avoid any negative legal consequences of the member removal procedure, make sure you’ve executed all steps and actions in writing by supporting each decision made by appropriate internal documents. Those papers are to be stored in the company records, should any dispute on that issue arise in the future.
Basic Options for Removing an LLC Member
There are three common routes to follow when withdrawing a member from LLC that are determined by the ground for such withdrawal. And those options might imply a bit different procedures.
Expelling an LLC Member
Involuntary dissociation is something that needs close regulation and control the most. The member is not willing to leave and is forced to resign, so to make the whole process as smooth and hassle-free as possible, there have to be strict procedures governing this process. To avoid any disputes and undesired conflicts in this concern, most entrepreneurs thoughtfully include membership termination provisions into the Articles of Organization when filing an LLC or outline those in an Operating Agreement. Hence, check those documents first.
Should LLC formation documents lack clear instructions on member removal, you’ll have to observe state law provisions. Law approaches vary by state and might even lead to business dissolution in locations where involuntary LLC member withdrawal is not regulated by the state statutes. Over 20 US states are governed by the Uniform Limited Liability Company Act that prohibits voting out LLC members. In this case, member removal might be ordered by the court if there are solid grounds for that.
Overall, before initiating the member expulsion, you should check all possible details to avoid any mistakes that might invalidate such expulsion.
Willing Member Withdrawal
Voluntary withdrawal or resignation when it’s the member’s decision to leave the company for some reason is an easier and less problematic process. However, there are also a number of details to take into account here. First, a departing member should provide a notice of resignation expressly showing such member’s will to withdraw from the LLC. Upon the notice submission, the member has the right to get his share in company assets and profits.
Member Removal Upon Decease
If one of the company members passes away, you’ll have to remove such a member anyway. It’s a so-called compulsory withdrawal. It’s something that might happen unexpectedly, so you’d better define procedures for this situation in an Operating Agreement in advance. The possible solutions include the purchase of the deceased member’s interest by other company members. Besides, the heirs could inherit the equity share of such member without the right for business management and operation. Or the LLC might be dissolved after the death of one of its members, in which case the company assets are distributed among the member successors.
Default state rules might be more restrictive and binding in this concern requiring an LLC dissolution if any of the company members deceases. This is one of the reasons to take care of signing an Operating Agreement at the stage of LLC formation.
LLC Compliance After a Member Removal
LLC member withdrawal or expulsion is an essential change in the company’s business structure. So, you can’t leave it unnoticed and should diligently execute it on the legal level. Thus, to make this move lawful and eligible, you’ll have to file amendments to your formation documents and update an Operating Agreement. If a departing member had some management position in the LLC structure, you’ll have to appoint a new member to this position and notify the changes to any government agencies and financial institutions to be informed.