How Do I Remove an Individual From an LLC?

By Laura Payet

How Do I Remove an Individual From an LLC?

By Laura Payet

A limited liability company (LLC) is a popular business entity because it's easy to set up and it protects its owners, known as members, from personal liability for the professional debts. But one of the drawbacks of one with multiple owners is that removing one of them can be complicated and contentious.

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If, over time, you find that your company cannot continue with its current membership, your options are to follow your operating agreement's provisions for removing someone, or, in the worst case, to dissolve the business completely and start over.

1. Review the company's formation documents.

When you and the other members created your LLC, you filed articles of organization with the appropriate state agency, usually the Secretary of State's office. You probably also prepared an operating agreement, which functions as a contract that lays out each one's share of the company and responsibilities, as well as describing how it will be managed and run. Your first step towards removing someone is to consult these documents to see what they say about how to proceed. Most likely, your agreement will contain a removal procedure, which you must follow. If the documents are silent on this topic, look to state law for guidance. Unfortunately, many states lack specific provisions about expelling a member.

2. Follow the operating agreement.

Assuming your operating agreement contains a removal procedure, your next step is to follow this procedure precisely. If the departing person is leaving voluntarily, it may be sufficient to have him submit a letter to the others announcing his withdrawal. For an involuntary departure, most likely a vote of the other owners will be required. Depending on the operating agreement's provisions, you will need either unanimous agreement or a vote of the majority for removal.

Whether or not the departing person chooses to leave willingly, she is entitled to a payout equal to her share of the profits and assets, less her share of any debts and obligations. The operating agreement may specify how to calculate this payment. If it does not, you need to negotiate an amount with the outgoing member.

3. Update the company records.

Once you have settled the former owner's departure, you'll need to update the records. First, prepare a new operating agreement reflecting the change and have all the remaining members sign it. You should also revise the articles of organization to list the current ownership structure. Some states require you to file the updated articles with the same state agency where you submitted the original articles.

4. File a petition for judicial dissolution.

If neither your operating agreement nor your state's law describes a procedure for removing someone and you are unable to reach a satisfactory agreement with the person you want to dismiss, your last resort is to file a petition for judicial dissolution in state court. This petition asks the court to order your LLC dissolved. You must then begin the process of winding up, paying off debts, terminating contracts and licenses, and distributing any remaining assets to the owners. You and the more agreeable members can then form a new company and resume business.

When you are ready to remove someone from your business, follow these steps and ensure that all parties are on the same page. Abide by your applicate state laws, as well as the company documentation that was drafted at the time of formation.

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