How to Release a Member From an LLC

By Larissa Bodniowycz, J.D.

How to Release a Member From an LLC

By Larissa Bodniowycz, J.D.

It's not uncommon for one of a limited liability company's (LLC) owners, or members, to want to leave the company. This person might want to pursue a different career, a conflict might arise among the owners, or one of them might be ready to retire.

Coworkers standing around a laptop

If your business faces this situation, you can usually release an individual without having to dissolve the LLC. The following steps represent a typical procedure for the removal of a member.

1. Consult governing documents.

When you created your LLC, you or your attorney probably created an operating agreement. An operating agreement governs the financial and working relationships between you and the other members and outlines ownership and owner duties.

This document may contain rules for when someone can withdraw and procedures that you must follow if someone chooses to do so. If it does, you must follow these rules. There may also be a buyout clause that indicates how much compensation the departing individual should receive for their membership interest. If it does, you must pay them in accordance with the clause.

Even if there is no buyout clause, your LLC may have a separate agreement, such as a buy-sell agreement or a membership agreement, that has rules for buying the interests of a departing individual.

If your company does not have an operating agreement, buyout agreement, or other documents for guidance, you should consult the business code for your state to determine the default rules.

2. Redistribute membership interests.

Once you determine which procedures you need to follow and how the buyout will work, you must execute it and redistribute membership interests.

For example, imagine that Six Figures, LLC, is worth $100,000. Person A owns 40 percent, Person B owns 30 percent, and Person C owns 30 percent. Person A wants to leave the company.

  • Scenario 1. Six Figures pays Person A $40,000 (40 percent of the assets). The current remaining owners, B and C, can decide how to divide the 40 percent interest between the two of them.
  • Scenario 2. A current owner can buy out the interest of the departing individual. Person B directly pays Person A $40,000 for A's ownership interest. B now owns 70 percent of the business, and C still owns the remaining 30 percent.
  • Scenario 3. A new member purchases the interest of the person leaving. A fourth person purchases Person A's ownership interest for $40,000. With a 40 percent interest, this person takes the place of Person A as the third member of the business.

These are common scenarios that may not translate to your company's situation. You must redistribute the interests in your LLC in accordance with the rules set forth in your company's governing documents and those provided by state law.

3. Balance capital accounts.

A capital account keeps track of an individual's investment. It tracks any loans the individual made to the LLC and any loans given to them by the company. When an owner departs, you must balance their capital account. This process involves settling any remaining debts between the business and the departing owner.

4. Remove the departing member's authority.

To ensure that the departing owner can no longer act for the business, you should take steps to remove their legal authority to act for the company. Remove their name from all accounts, including bank accounts, credit cards, and loans. You should also provide notice of their departure to clients and others that the departing owner regularly interacts with on behalf of the company so that they know that they no longer have authority to act for the LLC.

5. Put it in writing.

It's not a required step, but you should prepare a separation agreement between the business and the person departing. This legal contract states the terms of the departure. It helps avoid future disputes regarding agreements made between both parties.

6. Prepare tax filings.

As a final step, you or your accountant should prepare a Partner's Share of Income, Deductions, Credits, etc. (Form 1065, Schedule K-1) for the departing member and prepare any other required state and federal tax filings. The former owner must pay taxes on the income they received during their last year with the business.

In most cases, these are the primary steps to release a member from an LLC. However, each case presents a unique situation, and what your entity should do may vary slightly. It is advisable to consult with a small business attorney and your tax advisors to determine a path that protects the company and the departing member and avoids disputes.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.