What Is Needed to Be Done When a Partner Leaves a Corporation or an LLC?

By Jeff Franco J.D./M.A./M.B.A.

Business entities that are structured as a corporation or limited liability company don’t have partners – only partnerships have partners. Instead, owners of a corporation are known as shareholders, while owners of an LLC are referred to as members. Despite the terminology, there are in fact some things that need to be done when a member leaves an LLC and, in some cases, when a shareholder leaves a corporation.

Selling Public Company Shares

One of the principal reasons why business owners choose the corporate entity is the ease with which ownership interests in the corporation can be transferred. For large companies that have shares trading on a public stock exchange, stock changes hands every day without any disruption to the business or the need for formal procedures. As a result, nothing needs to be done by the corporation or the shareholder, other than properly executing the trade with their broker.

Private Corporation Shareholders

For private corporations, especially those that have only a few shareholders who manage the business, there may be some restrictions placed on a shareholder’s ability to sell her stock and leave the corporation. Any restrictions will be documented in the corporate formation documents, bylaws or in a separate agreement between shareholders. Restrictions commonly require the departing shareholder to give the remaining shareholders an opportunity to purchase the shares before looking elsewhere for a buyer. In some cases, a shareholder may need to obtain approval from all other shareholders to sell the stock or the stock may need to be sold to designated individuals or shareholders.

Ready to start your LLC? Start an LLC Online Now

LLC Member Interests

Unlike corporations, there’s usually more that needs to be done when an LLC member decides to leave the business, but it depends on the terms of the LLC’s operating agreement. In some cases, the operating agreement may allow a member to sell his financial interest, but not his management rights in the business to a third party, which requires that the member locate an investor who is willing to accept a passive investment. The agreement may instead require the departing member to sell their ownership interest to existing members, in which case, negotiations as to the price of the member’s interest and valuation estimates may need to be performed prior to the sale.

Member Can Dissociate

There is no requirement that members must sell their interests in order to leave an LLC. An LLC member can retain her financial interest in the LLC and still dissociate from the business. Dissociation means that the member gives up her right to participate in the business, regardless of whether she chooses to sell or retain their financial interests. Members who dissociate must provide the other members with notice of their intention to dissociate before it’s effective. And unless the departing member is essential to continuing the business, the LLC carries on as normal.

Ready to start your LLC? Start an LLC Online Now
How to Release a Member From an LLC


Related articles

Can You Fill Out a 2553 Before the Articles of Incorporation?

A business entity that wishes to become an S corporation must file Form 2553 with the IRS. However, before a business can submit this form, it must first qualify for S corporation status and must file articles of incorporation with the state to incorporate the business.

Corporation vs. Officer vs. Owner

A business that operates as a corporation generally drafts bylaws – a document that governs all aspects of the company. Commonly, the bylaws will provide the limitations on the type of transactions the corporation can engage in, the rights of owners, the role of the board of directors and how the business will be managed by officers.

What Belongs in the Bylaws?

Bylaws set forth the internal rules and procedures for running your corporation. There is no set form that bylaws must take under federal or state law, and you need not file these documents with any government office. However, there are several issues that should be addressed in your bylaws to ensure that your corporation operates effectively.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Dissolve a Business Partner From a Corporation

When you start your corporation, you and your business partners probably get along well enough to work together, but ...

LLC Problems With a Minority Shareholder

A limited liability company is a business entity designed to combine the tax advantages of a partnership with the ...

When Is it Better to Form an LLC Instead of a Corporation?

LLCs and corporations are similar in a number of ways, but LLCs feature distinct advantages and limitations that make ...

How to Transfer Ownership of an LLC to a Corporation

Limited liability companies and corporations are both governed by state law. LLCs have members who own the company and ...

Browse by category
Ready to Begin? GET STARTED