What to Do When One Member Leaves an LLC?

by Brian Richards

Different business entities have different names for the owners of the business, such as corporations that refer to their owners as shareholders. A limited liability company’s owner is called a member. When an LLC member leaves, the remaining members must follow certain steps to ensure that they continue to operate according to the laws of their state and the rules of their operating agreement.

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Operating Agreement

Consult your LLC’s operating agreement to find a provision detailing what to do when a member decides to leave. Not all states require LLCs to have an operating agreement, but many LLCs have one nonetheless. Though you will likely face no administrative penalties from the state for failing to follow the guidelines of your operating agreement, the outgoing member may be able to sue your LLC if you do not comply with its provisions.

Notification

It is probably not necessary to notify the Secretary of State when a member leaves your LLC. The only exception may be if the member was one of the principal filing members of the LLC, in which case the state may need notice to stop sending official communications to the member. This is especially true if the outgoing member is the LLC’s registered agent and no longer wishes to serve in this capacity, in which case you must submit a form to the state appointing a new registered agent.

Buyout

Your operating agreement may have specific guidelines for how to buyout the member’s ownership interest in your LLC, but absent any specific provision, you will have to comply with the state’s laws. In general, you must provide the outgoing member with his fair share of the LLC’s assets. This is not always an equal share in the company; LLCs have few restrictions on ownership shares, and the outgoing member may have an ownership interest larger or smaller than his personal financial investment in the company. Discuss the outgoing member’s expectations and consult any documentation that may outline what percentage of the LLC each member owns. Provide the member a reasonable share of the LLC’s assets, or have an existing member personally compensate the outgoing member in exchange for his ownership interests.

New Member

Consult your operating agreement to see if there is any explicit requirement for the number of members your LLC will have. There is no state requirement on the quantity of members, and you may continue to operate with only one member if you choose. However, your operating agreement may provide that your LLC must carry a specific number of members. If this is the case, be prepared to bring a new member into the company. The new member may buyout the leaving member’s share of the LLC, or he may have his own unique ownership interest in the LLC.