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.

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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.

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LLC Problems With a Minority Shareholder
 

References

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