How to Release a Member From an LLC

By John Cromwell

While a limited liability company might share some common characteristics with a corporation, the process of exiting from an LLC is much more difficult than leaving a corporation. Since LLCs are privately held businesses, establishing the value of the departing member’s share in the business can be quite difficult. Since the owners of an LLC are responsible for paying taxes on their share of the business’s income, there are tax reporting issues that arise from a buyout as well.

Step 1

Refer to the LLC’s operating agreement. An LLC operating agreement is the set of rules agreed to by the members at the outset of the business, and it defines how the organization is to operate and how the members interact with each other. If the operating agreement specifies how the LLC should act when a member leaves, that will govern how the transaction will take place.

Step 2

See if a buyout agreement exists, if the operating agreement does not discuss what to do when a member leaves. A buyout agreement is a document separate from the operating agreement that dictates the rights and obligations of the LLC and its members when one person chooses to leave the business. If a buyout agreement exists and the operating agreement does not comment on buyouts, the buyout agreement will govern how the transaction takes place.

Ready to start your LLC? Start an LLC Online Now

Step 3

Balance the member’s capital account. A capital account keeps track of a member’s contributions to the LLC as well as any distributions made by the LLC to the member. It also tracks any loans the member made to the LLC as well as any loans given to the member by the LLC. If the either side owes the other money, make sure that those debts are settled before attempting to execute the buyout.

Step 4

Calculate the value of the departing member’s interest in the business. Generally the operating agreement or buyout agreement will provide either a price or a means of arriving at a price for a member’s interest in the business. If there is no prior agreed-to means for valuing a member’s share, consider hiring a third-party professional to help you value the business and the member’s share of it.

Step 5

Draft a purchase agreement. The purchase agreement is a legal contract stating the terms of the transaction. The purchase agreement should conform with any prior terms that are in the operating or buyout agreement. In addition, consider adding provisions such as a confidentiality or noncompete clause to protect your business’s competitive advantage.

Step 6

Execute the purchase agreement. Have both parties review the document and sign it. The person who signs for the LLC must have the authority to do so. Depending on how the LLC is structured, either a member of the LLC or a person who was specifically chosen to represent the LLC in legal matters must sign the agreement.

Step 7

Adjust capital accounts. Distribute the former member’s ownership percentage among the remaining owners subject to the terms of the operating agreement. If the operating agreement does not state how to distribute the departing member’s share, divide the amount equally among the remaining members’ capital accounts.

Step 8

Deliver the final K-1 to the departing member. He is responsible to pay taxes on his share of the LLC’s income earned while he was still with the business. K-1s are reports prepared by the LLC that inform a member how much of the business's income and losses must be included on her personal tax return. Prepare a K-1 for the departing shareholder detailing his share of the business’s financial activity for her last year. Check the "Final K-1" box at the top of the form."

Ready to start your LLC? Start an LLC Online Now
How to Remove a Shareholder From an S-corp



Related articles

How to Set Up a Silent Partner for a Corporation

The appeal of the corporation is that it is structured to promote investment. Formed by filing articles of incorporation with the state where it is headquartered, a corporation allows shareholders to participate in the business and claim a portion of business income without being personally liable for the business’s debts and liabilities. A silent partner is someone who invests in a business and has right to dividends but does not participate in business management. Corporations can issue different types of stock with different voting rights, allowing for silent partners.

Advantages & Disadvantages of a Single-Member LLC

An LLC enjoys the limited liability of a corporation, and the potential tax benefits of a disregarded entity. State law regulates LLCs and determines whether single-member LLCs are allowed. Single-member LLCs may enjoy tax benefits, and they offer owners a great deal of control. On the other hand, the informality of an LLC may create difficulties when establishing credit. A single-member LLC has the choice to be taxed as a sole proprietorship or corporation.

How to Buy a Membership Interest in an Existing LLC

A limited liability company is owned by its members. The unique business structure allows the owners to keep their personal assets from actions by creditors of the LLC. If you want to become part-owner of an existing LLC and share in its profits, you'll need to buy a membership interest. You'll need consent from the current members to buy an interest, and your control over the business might be limited.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

How to Sell a Percentage of an LLC

A limited liability company is owned and run by its members, and it operates according to the terms of its operating ...

Accounting for an S Corporation Shareholder Buyout

An S Corporation is a small business that generally protects its 100 or fewer shareholders from the business’s ...

How to Buy a Partner's Shares of LLC

A limited liability company, or LLC, can function like a partnership. The partners, known as members, must agree ...

How do I Get Out of an LLC Partnership?

A limited liability company, or LLC, is a form of business entity created by state LLC statutes. An LLC combines the ...

Browse by category
Ready to Begin? GET STARTED