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 Sell a Percentage of an LLC

References

Resources

Related articles

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.

How to Add Capital Contributions to an LLC

An LLC, or limited liability company, is a business vehicle structured as a hybrid between a partnership and a corporation. State LLC laws are designed to meet the needs of small businesses by allowing LLCs to operate with considerably more flexibility than a corporation. LLCs obtain the money they need to operate through capital contributions.

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

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.

LLCs, Corporations, Patents, Attorney Help

Related articles

What Constitutes a Legally Binding Business Partnership?

A partnership is a common legal structure that two or more people can use to manage a business together. The business ...

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 ...

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 ...

How to Add a Member to an Existing LLC

An LLC is a flexible business entity that has almost unlimited ability to organize its ownership under an operating ...

Browse by category
Ready to Begin? GET STARTED