How to Remove a Member From an LLC

As with a marriage, when you go into business with partners, you hope everything will go smoothly, and the partnership lasts forever. But that, sadly, is not always the case. And when it comes to a limited liability company (LLC), removing an owner, also known as a member, can be a simple affair. 

But it can also be as complicated as divorce. The process involves the federal Uniform Limited Liability Act (ULLC), the value of an excellent operating agreement, and much more. Read on to learn all you need to know about LLC member removal. 

Reasons for Member Removal

If a member wants to withdraw voluntarily, for retirement, or whatever reason, it’s a reasonably straightforward process. Much more complicated is involuntary member removal, which happens for various reasons. 

The most common are:

• The member had repeated disputes with other members
• The member breached the operating agreement
• The member engaged in misconduct that could hurt the company

Keep in mind that whether the removal is voluntary or involuntary, the federal ULLCA prohibits LLCs from simply voting out a member if the business has no operating agreement or its operating agreement fails to outline the process for removal. So that route is not a possibility, either way. 

Voluntary Removal Process

If properly drafted, the operating agreement should explain the process for voluntary member removal. For example, it may require that the member submit a resignation letter or “a notice of express will.” Afterward, the operating agreement will need to be amended to define the new ownership structure. 

Usually, the member’s ownership interest will be equally distributed to the remaining members, and the departing member will receive a buyout agreement.

If no operating agreement exists or the existing one fails to detail the procedure, state laws apply. For example, some states require that the operating agreement be amended, while some require that the LLC be dissolved and a new one formed.

Involuntary Removal Process

Again, the operating agreement is your first stop. In a best-case scenario, it will define the procedures for involuntary removal, which often requires a vote by the other members.

If no operating agreement exists or does not contain member removal specifications, state laws, again, will apply. In some states, a court order will be required, which can be challenging to obtain if the member is removed objects. 

The remaining members will need to be able to prove cause for removal. The court will also need to decide whether the departing member is entitled to a buyout agreement or a payout of LLC proceeds if it grants the removal order. 

In some states, the LLC must be dissolved and a new one formed to remove a member involuntarily while the departing member receives a buyout agreement or a payout.

If no operating agreement outlining removal procedures exists, you’re likely in for tough negotiations or a court battle. 

The Removed Member’s Financial Interests

Once again, the operating agreement in a best-case scenario will specify what happens to the removed member’s financial interests. It usually involves a buyout agreement. Other possible outcomes include:

• Removed member keeps their equity and receives distributions
• Removed member receives no compensation
• Removed member’s financial interests transferred to another member or members
• Removed member sells their interests & other members may have the right of first refusal
• Remaining members retain the removed member’s interests in alignment with their equity

If there are no specifications in the operating agreement, state laws again will apply, or the courts will decide.

What If a Member Dies?

It sounds like a broken record, but the operating agreement should specify what happens when a member dies. If not, things can get complicated because the member’s heirs may get involved. Once again, state laws will apply, or the courts will decide.

Possible outcomes, whether specified in the operating agreement or decided otherwise, include:

• Surviving members must buy deceased member’s shares from heirs
• Heirs inherit member’s financial interests but not a management role
• LLC will be dissolved, and the deceased member’s assets will be distributed to heirs
• Deceased member’s interests transferred to a specified person or entity

Whatever the outcome, the operating agreement must be amended to define the LLC’s new ownership structure.