Contributed by Miller Butler.
The owners of a limited liability company (LLC) are called members. At some point, an LLC member may find that they want or need to withdraw from the LLC. That member, as well as the other owners of the LLC, may wonder how to accomplish this. To properly withdraw from an LLC, there are a few key questions that the member and owners must ask.
1. What does the operating agreement say? The operating agreement is typically the most important document to refer to when a member wants to leave an LLC. Well-drafted operating agreements contemplate the potential departure of a member and outline the steps required. Departing LLC members may find that there are more significant restrictions regarding how to exit an LLC compared to other business entities. Although LLCs may be formed for complex organizations with complicated organizational schemes, many LLCs are designed for simple businesses co-owned by family and friends. As a result, operating agreements crafted for these organizations place restrictions on the entry and exit of LLC members.
A well-drafted operating agreement will describe how the departing member’s interest must be treated. In some cases, it may call for the LLC to repurchase the interest. In other cases, it may allow the member to sell the interest to a third party. It may state that the departing member must offer their interest to the remaining LLC members before offering it to any outside parties.
2. What happens if there is no operating agreement? Sometimes, an LLC does not have an operating agreement. In that case, state law will dictate the proper steps to take. States differ in how their laws handle departing LLC members. Some states have default rules that prohibit the exit of existing members. The only way to avoid this problem is to create an operating agreement that supersedes the default state laws. Your state’s default rules may outline a specific buyout procedure to follow. These default rules may also define the assets and interest due to the departing LLC member. Ultimately, relying on the state’s default laws can be precarious because they are not tailored to meet the unique needs of your LLC and its members.
3. Is the departure harmonious? Another question to explore is whether or not the departure of the LLC member will benefit the LLC. Members depart from LLCs for a variety of reasons, including but not limited to death, disability, or change in life circumstances. However, there are times when a member wants to leave due to significant breakdowns in the relationships of the owners. In those cases, implementing the departure may prove to be more difficult than in other circumstances. The remaining LLC members might not cooperate with the member’s preferred method of departure. Once again, the provisions in the operating agreement and the jurisdiction’s laws will impact the steps required.
4. How should this departure be documented? As the company implements this transition, it is critical to correctly note the changes that are occurring. This documentation may require the creation of new documents, revisions of old documents, and the filing of updated documents. Here are a few documents to note:
a. Separation agreement. A separation agreement can outline the terms agreed upon by the LLC and the departing member, such as buyout price, date of termination, and how the departing member’s LLC assets will be treated.
b. Operating agreement. The operating agreement should be updated to reflect the changes in ownership.
c. Annual filings and tax documents. Be sure to file updated documents with your state’s secretary of state. Additionally, update the contact name for the LLC’s federal tax identification number if the original responsible party is the departing member.
We Can Help
The departure of an LLC member is often more complicated than anticipated. If you are considering leaving a multimember LLC or are aware that another member is contemplating an exit, you do not have to figure things out on your own. Our team of experienced business law attorneys can help you assess your options and navigate a member’s exit. Call our office today to set up a consultation
