As a limited liability company grows, the members may find the organization’s needs change as well. Re-evaluating the structure and function of the LLC can lead to disputes among members over where the LLC is heading and sometimes results in a desire to change the current membership. Removing an individual from an LLC is not as easy as simply firing an employee -- the remaining members must agree to the removal and follow specific protocol to prevent future litigation or court-ordered dissolution. Assuming the exit is not amicable, you must take care to organize the removal correctly to avoid potential trouble.
Fit your business needs with the right LLC package
Review your current operating agreement and determine if you have legitimate standing for removing the individual as a member of the LLC. If your operating agreement does not outline any specific reasons, review your state’s business code for statutory grounds for removing a member. Remember that the operating agreement supersedes legal recourse, so any statutory grounds for removing a member are void if the operating agreement expressly prohibits removal for these reasons.
Call a meeting of all current members, including the member in question (unless your operating agreement explicitly permits otherwise), and conduct a vote for the formal removal of the member. Depending on your operating agreement, you will either need to reach universal agreement, wherein all members must agree to remove the member, or majority approval. If you cannot obtain the requisite approval, you cannot remove the individual from the LLC.
Pay out all final dividends on any shares the member owns, in addition to any further money to which the member is entitled under your current operating agreement. Be aware that if your operating agreement does not define guidelines for paying out a former member, state law may require you to “buy out” the member at the time of removal, although you may consider bringing in a new member to buy in and cover the costs of the payout.
Draft a new operating agreement that excludes the name, title, powers and responsibilities of the individual you are removing. Divide these responsibilities among the current members or appoint a new member to assume these responsibilities; ensure your operating agreement reflects these changes. Sign the bottom of the document and provide all members of the LLC with a copy of the new operating agreement. Be sure to make an additional copy to retain for your LLC’s records.
Revise your current certificate of organization to reflect the change by removing the former member’s name from the certificate. You may need to obtain a new form from your state corporate agency and redraft the entire certificate without the former member’s information to do this. Make a copy of the new certificate to retain for your LLC’s records.
File the original, signed copy of your new operating agreement and new certificate of organization with the secretary of state. Depending on your state’s guidelines, you may need to pay the original filing fee -- on average, between $100 and $500 -- to update your LLC’s agreement and certificate.
Revise your federal tax classification only if removing the member altered your election eligibility. If you were previously a two-member LLC and removing a member leaves you an individually owned LLC, you are no longer eligible to be taxed as a partnership or corporation. Complete and file IRS Form 8832 to elect “Single-Member LLC” status; otherwise, the IRS will consider you a sole proprietorship and tax you as a “disregarded entity.”
Tips & Warnings
- You will need to revise and file a certificate of organization with every state under which you formed as an LLC. Otherwise, the former member may be able to exercise certain rights in states where you fail to update your certificate.
References & Resources
- "Business Structures"; David G. Epstein; 2006
- "Limited Liability Companies: Formation, Operation & Conversion"; Robert W. Wood, Esq. et al.; 2006
- "Partnerships and LLC Taxation"; Jerold A. Friedland; 2002
- IRS.gov: IRS Form 8832
- LawHub: Sample Article of Organization
- IRS.gov: Limited Liability Company (LLC)
- IRS.gov: Single Member Limited Liability Companies