A limited liability company (LLC) is a popular form of business entity that provides its owners with the liability protection of a corporation without all of the required corporate formalities. An LLC's owners, called members, typically create an LLC by filing articles of organization with the appropriate state office—often with the help of an online service provider. An operating agreement, which serves as a contract among the members laying out the specifics of how they will run the business, governs an LLC's actual day-to-day operations.
If you are an LLC member and want to leave the company, the operating agreement should spell out the procedure that you must follow. However, if your LLC lacks an operating agreement or that agreement is silent on the topic, state statutes generally provide a default framework. Typically, a member leaves an LLC by voluntarily withdrawing or by transferring their interest in the company to another person or entity.
Consult your operating agreement to determine the procedure for withdrawing. Generally, you must give written notice to the other members, and sometimes this is all that is necessary. The operating agreement or state statutes may also require that the other members consent to your leaving. Alternatively, the operating agreement may obligate the other members to buy out your share of the company at a set price.
Upon your departure, you are entitled to compensation for your share of the LLC's assets and income, usually commensurate with your investment in the company. If the operating agreement does not specify how to determine the amount of compensation, you may need to hire an expert to evaluate the company and your share in it. You may also want to consult an attorney to protect your interests during this process, particularly if you and the other members can't agree on the numbers. Be aware that if you leave the LLC without following the steps in the operating agreement, you are in breach of that agreement and can be liable to the other members for damages.
Transfer or Assignment of Interest
Another way to leave an LLC is to transfer or assign your financial interest to someone else. Again, the operating agreement should explain how to take this step. That agreement may require you to give the other members the right of first refusal—that is, you may have to offer the other members the opportunity to buy your interest before you can transfer it to a nonmember. The operating agreement may also prohibit you from transferring your interest without the other members' consent.
Other Ways to Leave an LLC
Under the operating agreement or state law, bankruptcy may terminate an individual or business entity's membership in an LLC or require the LLC to dissolve. Bankruptcy law is complicated, however, and a thorough examination of its effects on an LLC is beyond this article's scope. Additionally, if a business entity is a member of an LLC and it dissolves, its membership in the LLC terminates. Similarly, when an individual member of an LLC dies or is declared incompetent, his membership ends unless the operating agreement says otherwise.
Reporting Changes in the LLC's Membership
Note that some states require an LLC to report changes in its membership to the appropriate state office. Typically, that office is the one with which the LLC filed its original articles of incorporation or where it files annual reports.
Leaving an LLC is often more complicated than starting one, especially if relationships among the members are contentious. It is usually advisable to consult an attorney during this process to make sure you take all of the necessary steps to sever your relationship with the company and prevent any further legal obligations or liabilities.
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