What to Do When One Member Leaves an LLC?

By Ari Mushell, J.D.

What to Do When One Member Leaves an LLC?

By Ari Mushell, J.D.

A limited liability company (LLC) can have one or more owners, referred to as members, who share the responsibilities of running the business. These members undoubtedly choose to form LLCs (rather than partnerships or corporations) because of the entity's inherent advantages: protection from liability, flexibility of ownership and management, and pass-through taxation.

Businesspeople talking around conference table

When compared with other more complex structures, LLCs are pretty easy to run. However, unexpected events do occur, such as a member announcing their withdrawal from the company; leaving the other members wondering what to do next. When a member decides to leave an LLC, the company must turn to the documents it filed during organization.

Consult the operating agreement.

The first item to consider when a member decides to withdraw is the LLC's operating agreement. Some states require LLCs to file operating agreements when they organize. Regardless of state law, LLCs almost always draft them to prevent confusion and legal issues. A well-drafted agreement details member responsibilities, distribution of profits and losses, and a succession plan. A succession plan should cover scenarios such as replacing a member who resigns, dismissing a member, the death of a member, and the sale of part or all of the LLC.

When a member resigns, the company should follow the process outlined in the operating agreement's succession plan. It may require the other members to purchase that member's stake in the company, or it may give the other members the right to dismiss the resigning member without compensation.

In the absence of a plan, a departing member's shares might automatically go to the remaining members. If your LLC doesn't have an operating agreement, or if your agreement doesn't contain a succession plan, check your state's laws regarding succession. Some states have a “poison pill" law that mandates dissolution of an LLC when a member leaves and the company does not have a succession process. When this occurs, the state of incorporation will have a process for winding up the business.

Consider a buyout.

Some states require the remaining members to buy out the resigning member. For instance, if the resigning member owns a 25 percent share in the LLC, the buyout would be 25 percent of the current market value of the company.

Such valuations can be tricky. Unlike other business forms, an LLC is not required to distribute profits based on a prorated share; instead, members can negotiate a scheme in which the LLC distributes profits disproportionate to ownership. A member with a 25 percent share can negotiate a scheme in which the company pays him 50 percent of the profit. In such an instance, the member's stake in the LLC is higher than 25 percent. When a member resigns with disproportionate profit distributions, experts may be necessary to evaluate and determine that member's share in the company.

Notify the secretary of state.

When a member leaves an LLC and it's still operational, the company must amend the articles of organization to reflect the new ownership structure. When initially filing forms to create an LLC, the individual or group forming the company must submit articles of organization with the Secretary of State. Because the articles of organization list the members holding stakes in the company, the document must reflect the changes.

Generally, an operating agreement guides an LLC in the event a member withdraws. Without an operating agreement, state law determines whether the the remaining members split or purchase the departing member's share or the company automatically dissolves. The members may be required to notify the Secretary of State.

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.