It is almost always the case for a multi-member limited liability company when there is a need to remove a member, a co-owner, or an organizer. Some of the common reasons for such removals are retirement, death, and disputes arising from the business.
The removal procedure mainly depends upon the article of the organization or operating agreement of the company. If these cover the process comprehensively, the removal becomes a lot easier and straightforward.
How to remove a member from an LLC
These are the steps to be followed to remove a member from an LLC:
- Determine if the LLC’s governing documents have set out a formal removal procedure
It is the first step that initiates the removal of a member from an LLC. Start by looking at the LLC’s or operating agreement or articles of organization to see if they have already set up a proper procedure for removing members.
Governing documents include both articles of organization and operating agreement of the LLC, as per states laws. Suppose the LLC owners have set out specific provisions for removing a member from an LLC in either of the documents mentioned earlier. In that case, LLC has no other option but to comply with the governing documents. Frequently, the governing documents have a provision that asks for a vote for the addition or removal of members from an LLC, but it is not always the case.
However, if there is no such provision in the governing documents, an LLC must follow the procedure set out by the state. The LLC laws of Washington DC and all other 50 states are founded on the Uniform Limited Liability Company Act (ULLCA). The procedure outlined in the ULLCA for removing members becomes the default procedure if there is no such provision in the LLC’s governing documents.
- Implementation of formal procedure
Members of an LLC must follow the prescribed voting procedure outlined in the operating agreement or article of the organization, and if none, then under the rules of ULLCA. If there is no such procedure in place that manages the involuntary withdrawal of a member, the default state rules do not offer any such provisions, either.
- Have the former member submit a notice of withdrawal
The member removed from an LLC is bound to submit information of withdrawal in writing. If they are willing to do this, they’ll be entitled to a share of the LLC profits.
However, if the member is not willing for this, the remaining members can develop a buyout in exchange for the former member’s interest in the LLC. It is important to remember that there are no provisions described in the ULLCA governing involuntary withdrawal. So, if the member is not ready for an involuntary withdrawal, the only option left is going to court.
- File for a judicial dissolution
In the event discussed above, where the LLC member is unwilling to take a buyout, and involuntary withdraw, the remaining LLC members can go to the court for the LLC’s judicial dissolution. If the court concurs and decides that it has become impractical to continue the business, the next step should be the LLC’s dissolution.
In all the scenarios, one of the easiest ways to remove a member or any stakeholder from an LLC is to write up LLC’s procedures for doing so. It is as easy as formally voting to remove the member.
It is critical to write down the addition and removal procedure of members in the LLC’s governing documents. The primary advantage of such a written procedure is that it helps you avoid the provisions outlined in ULLCA. Their conditions don’t provide flexibility, which is often needed to keep the business running smoothly.
How to remove an organizer from an LLC
An organizer is just a straw man who is responsible for all the documentation of an LLC. Since the organizer has no rights in the LLC, there is no procedure needed to remove an organizer, as you can have your organizer resign from the position.
How to remove a partner from an LLC
Removing a partner from an LLC is not a simple procedure like removing a member from it. It is also not always the case where other partners want to remove one partner from an LLC.
The procedure of removal of a partner from an LLC is expressly stipulated under the provisions of articles 245, 249 and 250 of the Commercial Companies Act. If an LLC’s manager is not appointed under its memorandum of association per the provisions of articles 235 and 236 of the same Law, then it is permissible to remove him.
It is made possible under a resolution that has to be passed by the company’s general meeting and under the approval of at least 75% of the shareholders unless a higher majority is expressly stated in its governing documents. The subjected partner-manager is not allowed to vote on the resolution of removal, hence making his vote null and void.
However, it should be noted that it is not removing a problematic partner, but what will come after this procedure. Businesses should realize that there would be practical issues that will arise upon terminating a partner from an LLC.
In scenarios where a partner is removed from an LLC, if the business has a payable debt, all the owners may hold personal guarantees for the debt. The creditors will be more than reluctant to release one of the owners.
There are also tax consequences that come with the removal of an owner from an LLC. It is always adequate to be preemptive in working out such problems and detailing all the exit strategies in governing documents. Well-drafted governing documents work well to avoid time drain and high legal costs in the future.
How do I change the members of my LLC?
Changing members of an LLC requires amending formation documents of the LLC. To add or remove an LLC member, the LLC’s operating agreement must be altered and amended accordingly.
However, apart from amending the documents, intimating the relevant government agencies is also required. So, you should check your state’s reporting requirements to see what kind of notifications you will need.
FREQUENTLY ASKED QUESTIONS
Here are some of the frequently asked questions answered under the context of adding and removing people in an LLC:
- Can a member leave an LLC?
It is typically spelt out in the LLC’s operating agreement that a member can leave an LLC under certain conditions. Generally, an LLC’s governing documents either allow an involuntary withdrawal of a member or by transferring their interest in the LLC to another member.
- What happens if a member leaves an LLC?
Unless the LLC’s governing documents state otherwise, when a member leaves an LLC, his/her interest in the company is divided evenly between the remaining members of the LLC.
