Many limited liability companies (LLCs) reach a point where the owners (or “members") can't or don't want to work together anymore. Usually, a member can leave an LLC voluntarily by following a few simple procedures. But involuntarily removing a member from an LLC can be complicated and contentious.
Here are general guidelines for removing an LLC member. The exact procedures you'll follow depend on your LLC's operating agreement and your state's LLC laws.
Follow Your Operating Agreement
An operating agreement is a blueprint for how your LLC will run, and it's usually created at the time an LLC is formed. Review your agreement to see whether it explains how to remove someone from your LLC. It may cover voluntary resignation, involuntary removals, or both. The agreement may explain the procedure for resigning, grounds for ousting a member, and the way removal must be voted on.
You'll also need to buy out the departing member's interest in the company. The operating agreement may explain how to do this. Owner buyouts may also be addressed in a separate document such as a buy/sell agreement.
If your operating agreement and other internal agreements cover your situation, follow the procedures outlined. Be sure to document your actions with resolutions, letters of resignation, valuations, or other appropriate documents and retain them in your company records.
Try to Negotiate a Deal
It's not unusual for operating agreements to be silent on the subject of involuntary member removals. Most LLC owners don't envision having to remove a partner from an LLC against the person's will. And even with a process in place, there's no guarantee the departing member will cooperate.
Since the next step likely involves going to court, it's worth trying to negotiate a deal to buy out the interest of the partner you want to remove. This may save you time and money in the long run. If you do reach a buyout agreement, be sure to put it in writing and follow your operating agreement's procedure for voluntary departures.
Refer to State LLC Law
When the operating agreement doesn't include a procedure for involuntary removal of a member and you can't reach an agreement, you'll need to turn to state law. Although state LLC laws vary, many are based on the Revised Uniform Limited Liability Company Act.
Under this act, a court can involuntarily remove a member from an LLC for three reasons:
- Misconduct that “adversely and materially" affects the company's business
- Willful and persistent breach of the operating agreement or the person's duties as an LLC member or manager
- That it's not reasonably practical to carry out the business with the person involved
Going to court to remove an LLC member can be a long, expensive, and emotionally draining process. In some states, your only option is to dissolve the LLC and form a new one if you want to continue in business. Before you file any legal action, get advice from a business lawyer who's familiar with your state's LLC laws.
After a Member Is Removed
If the removed member was an LLC officer or manager, you'll need to appoint someone new to carry out the former member's duties. If the member had authority to sign documents or conduct business on the LLC's behalf, notify financial institutions and others you do business with that the member is no longer affiliated with your company.
Check with your state to see whether you need to file any documents in light of the ownership change. And if your operating agreement doesn't adequately cover involuntary removal of a partner, consult a business lawyer about preparing a new operating agreement.