Since business relationships don’t always work out as planned, it may become necessary to terminate certain relationships. In a limited liability company, or LLC, the owners, known as members, may change periodically. When one of those members wants to leave the LLC, doesn’t live up to his responsibilities or passes away, the other members may remove him from membership by following the LLC’s operating agreement.
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An LLC is a business entity that must register with the state in which it operates. This registration process typically involves filing articles of organization, sometimes called articles of formation or a certificate of formation, with the Secretary of State or similar state office. Articles of organization typically include basic information about the business, such as its name, registered agent and the name and address of the person organizing the LLC. Some states require more information. For example, Oregon requires a list of the owners and, if applicable, managers. In contrast, New York does not require any of this information on its articles of organization form.
Because an LLC’s articles of organization tend to be very basic, most LLCs create an operating agreement, similar to corporate bylaws, to govern their business. Typically, states do not require that operating agreements be formally filed, and they are rarely required by state law. But operating agreements are essential for LLCs to operate effectively because they describe the rules for the LLC’s ownership and operation of the business, including information about each member’s share of the business, rights and responsibilities of the members, how the LLC will be managed and buy-sell provisions that determine what happens when a member wants to sell his share. If an LLC chooses not to create an operating agreement, the LLC’s operation is governed by state law.
Omitting a Member
An LLC’s members should review their operating agreement before attempting to remove or omit a member because their operating agreement likely describes the procedure they must follow. For example, the operating agreement likely provides details about the transfer of that member’s share in the company, including time limits on the transfer. The operating agreement may also describe whether the member who leaves will have any other responsibilities in the company. If some of the LLC’s members want to remove another member involuntarily, the operating agreement may also address the procedure for removal when a member does not want to leave the company.
Changes After Removal
When a member leaves, the remaining members may need to adjust the operating agreement to address the change in value of the remaining members’ capital interests in the company. Also, the LLC might need to amend its articles of organization on file with the state. While most states do not require a listing of an LLC’s members in the articles, some states do. For example, Arizona requires an update to the state filings under certain circumstances when a member leaves or is added. Additionally, if omitting a member changes the management arrangements of the LLC, the LLC may need to file an amendment with the state, but this requirement also varies by state.