A limited liability company, or LLC, can function like a partnership. The partners, known as members, must agree amongst themselves how to buy and sell ownership interest in the company. Since this matter can be contentious if decided when the issue arises, it may be prudent to adopt an operating agreement at the outset of the business to establish the method of a member's withdrawal. Without an operating agreement, the LLC is subject to the default provisions of state law, which may force a sale of the company to establish a value for a withdrawing member's interest.
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Check the provisions of the company's operating agreement. An operating agreement usually specifies the terms of a member's withdrawal. The operating agreement has the force of a contract between the members. Follow the procedure established by the operating agreement, if one exists.
Determine the value of the member's share if there is no operating agreement. The valuation can be formal or informal, by hiring a professional to do a valuation or by reaching an agreement amongst the members regarding the value of the withdrawing member's interest. The members must agree on whatever price is set. The remaining members cannot force the withdrawing member to accept a certain price, absent an operating agreement that sets the price or a method of determining the value of the interest in advance. Many states provide that a withdrawing member can force a sale of the company if the members are deadlocked.
Vote regarding how the company will pay for the withdrawing member's interest. If the company has enough liquidity, it may buy back the withdrawing member's interest by writing a check to the member. If the company does not have enough liquidity, the remaining members may be required to add capital to the company to keep it solvent and enable it to meet this obligation. The amount of money each remaining member contributes is in proportion to his ownership percentage.
Execute a member interest sales agreement in writing for the company records. The contract for sale of the withdrawing member's interest should detail the terms and any continuing obligations, and be signed by the withdrawing member and a representative of the company.
Adjust the capital accounts of the remaining members. The withdrawing member's ownership percentage should be redistributed equally amongst the remaining members. Alternatively, if there's an operating agreement, it could provide for the sale of the interest to any one member, in which case the member buying the interest would have his capital account adjusted upwards, and the other members' accounts would be adjusted downwards.
Amend state filings, if needed. Ordinarily, the list of LLC owners is internal information that can be changed at any time without notice. Some states, however, require that an LLC's articles of organization provide a current list of company members. Other states require an annual filing to update an LLC's member list. Check with your state's business registry to determine if you have to update any of the company's official filings.
References & Resources
- Business.gov: Limited Liability Company
- FindLaw: Making LLC Operating Agreements
- FindLaw: Owner Buyout Agreements
- Citizen Media Law Project: Operating Agreement
- Uniform Limited Liability Company Act
- SCORE: Business Tools
- U.S. Small Business Administration: Small Business Planner
- ABA Family Legal Guide: Forming and Operating a Small Business
- The 'Lectric Law Library: Business Entity Forms
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