People choose to go into business together over a shared vision. However, as a limited liability company (LLC) grows, or faces hardship, the goals of business owners may change, resulting in the need for removing an LLC member. Let’s discuss how to remove a member from an LLC.
The removal of one person from an LLC can be simple if your company has a detailed operating agreement stating how a member should be removed. However, if your operating agreement doesn’t cover the scenario listed, you’ll have to follow the state default procedure and/or consult a business lawyer to ensure a legally compliant removal of a member. To avoid any legal issues, an experienced business formation attorney should be used when starting your LLC to go over LLC operating agreement guidelines with you.
When you formed your LLC, hopefully you created an LLC operating agreement that covers how to remove members. Whether the situation calls for a voluntary or involuntary removal, the operating agreement should contain all the requirements for notice, voting, valuation methods, grounds for removal, and any other details surrounding the removal process.
If your LLC doesn’t have an operating agreement covering how to remove a member, you’ll have to follow the procedures in your state’s laws governing LLCs. You’ll likely want to consult a business attorney to see what your options are.
In either scenario, you and the other LLC members will need to buy out the ownership interest of the member being ousted. Ideally, your operating agreement would include terms of a buy/sell agreement that can be used in this situation.
It’s also possible that, in your state, your only option would be to dissolve the LLC and start a new one with the members who still want to be in business together. If that’s the case, you’ll have to follow your operating agreement’s procedures and your state’s laws for LLC dissolution. These likely include paying remaining taxes and other debts, filing Articles of Dissolution, and divvying up the LLC’s assets among the members.
A detailed and thorough operating agreement will spell out the different protocols to follow in a variety of scenarios. You may need to remove a member due to wrongful conduct, a member may voluntarily withdraw, or you may have an involuntary removal of a member. The process in the LLC operating agreement to go through removal may include a buyout agreement, majority vote, or steps for judicial dissolution.
The formal process to legally remove a member from your LLC will vary by state and your operating agreement. The operating agreement will need to be changed to reflect the new ownership and ownership percentages of each member, along with any other information that needs to be updated, such as voting rights and how profit sharing will be adjusted in the absence of the departing member.
In order for a member to request removal, also known as voluntary dissociation, they’ll likely need to submit a formal letter withdrawing from the LLC membership. Some LLC operating agreements don’t allow LLC members to voluntarily withdraw and require them to go through dissolution.
After the member has been removed, there are a few additional steps that must be taken. First, you must file an Articles of Amendment updating the information in the LLC’s original Articles of Organization or other LLC formation documents.
Next, the LLC operating agreement must be updated to reflect current ownership rights, processes, voting rights, how profits will be divided among the remaining members, and other details.
We can help you start your LLC today with the help of our experts to ensure smooth business operations down the line. If you’re currently a single-member LLC that needs to add members or a multi-member LLC that needs to remove members, you’ll need to file Articles of Amendment and get a new operating agreement, both of which we can help you with.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
You’ll need to follow the rules established in your LLC’s operating agreement for removing members. In the absence of that, you’ll need to comply with your state’s LLC laws for removing members. The IRS will need to be notified so they can update your tax information. Your Secretary of State will need to be notified of any changes to your LLC’s membership by filing Articles of Amendment showing the removal of a member. Those changes will also need to be reflected in your LLC’s annual or biennial report. Your operating agreement will also need to be updated to accommodate the new membership. A business attorney can provide guidance for the entire process.
Consult your operating agreement about the procedures for a member wanting to voluntarily leave the LLC. It should also specify what happens to the departing member’s ownership interest in the company; usually, the remaining members would purchase the member’s ownership interest with a buyout agreement. If there’s no operating agreement, you’ll need to follow your state’s LLC laws for a member that wants to leave the business.
If a member doesn’t want to withdraw from the LLC voluntarily, consult your operating agreement for the procedures you need to follow in such a scenario. If there’s no written procedure listed, you must follow the state’s default laws for removing a member.
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