It may sometimes become necessary to remove an owner of an LLC, particularly if the management of the LLC has irretrievably broken down. However, the default provisions of the Uniform Limited Liability Company Act, or ULLCA, on which the LLC acts of all 50 states and the District of Columbia are based, does not allow LLC members to vote out other LLC members. Unless the LLC's articles of organization or the operating agreement allows members to vote out members, an LLC member may only be removed if he submits written notice of withdrawal to the LLC.
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Determine if there’s a procedure for involuntarily withdrawing members contained in the LLC’s articles of organization or operating agreement. An articles of organization are the documents filed with a state agency that permit the creation of an LLC. An operating agreement is a written contract that sets forth procedures to govern the LLC. Either document may contain provisions that provide for the involuntary withdrawal of an LLC member. A member who withdraws from an LLC, either voluntarily or involuntarily, is entitled to a distribution of LLC proceeds commensurate with her ownership stake in the LLC.
Utilize the voting procedure contained in the articles of organization or operating agreement. If there is a procedure for forcing LLC members to withdraw from an LLC, follow this procedure. If there is no such procedure, the default provisions of the ULLCA do not provide a voting procedure for forcing members to withdraw.
Arrange to have the member submit written notice of resignation to the LLC. If the member is willing to withdraw from the LLC, her written notice of withdrawal still entitles the member to a share of profits and assets earned by the LLC prior to her withdrawal.
Offer a buyout if the member is unwilling to withdraw and there is no procedure for removing a member. The provisions of the ULLCA allow a member to assign his interest in the LLC to another individual or business. In the case of a member unwilling to withdraw, it may be possible to provide payment to the member in exchange for the assignment of his interest.
Petition for judicial dissolution of the LLC if a member is unwilling to withdraw and management of the LLC has become impossible. The ULLCA allows a member of the LLC to petition a court for judicial dissolution if it is not reasonably practical to carry on the business operations of the LLC. A breakdown and stalemate between LLC members can be an event sufficient to frustrate the business purposes of the LLC. If granted, the LLC will be wound up. Winding up requires the LLC to not enter into new contractual agreements and work to satisfy existing contractual agreements. After this has happened, the assets of the LLC are distributed among its members and the business is terminated. While this is happening, it may be possible for the other members to start a new LLC and conduct business operations.
Tips & Warnings
You may want to retain an attorney if the LLC's owners are unable to cooperate and do not withdraw from the LLC.