How to Remove a Member From Your LLC (Steps & Process Guide)
If you are a small business owner, the chances are that there will be a need to remove one of the members at some point in time. This can be for many reasons, but most states' processes are somewhat complicated.
Drawing on my experience in accounting and legal education, I'll provide a step-by-step approach to navigating the legalities and strategic considerations involved in removing an LLC member, ensuring your business's integrity and compliance.
Quick Summary
- Removing a member from an LLC involves understanding and following the specific procedures outlined in the LLC's operating agreement and state laws.
- The process typically includes a formal vote by the remaining members, adherence to the operating agreement's provisions, and possibly negotiating a buyout.
- With a 42% increase in new businesses since pre-pandemic levels, LLC dynamics are shifting, making it crucial for owners to understand the complexities of member removal as per state regulations and operating agreements.
- In my opinion, the ability to navigate member removal effectively is a testament to a well-structured and resilient LLC.
How to Remove a Member from an LLC
From my experience, removing an LLC member can be a difficult process, depending on the specific legal entity and the state in which your company is registered.
Apart from the different LLC operating agreements of various business entities, most states have specific procedures that must be followed. If these are not adhered to, it could result in serious legal consequences.
Therefore, you must understand what needs to be done before starting this process. Below, we will outline the steps generally required to remove a member from an LLC.
Step 1: Determine Whether Your Operating Agreement Set Out Formal Procedures.
From my experience, the first step always involves a deep dive into the operating agreement.
The company's operating agreement governs how the LLC is run and outlines the rules and the company's own procedures for adding and removing LLC members.
In most cases, it will be up to the remaining members of the LLC to decide how a member can be removed.
Step 2. Implement the Formal Procedure
Next, you should implement the formal procedure outlined in the LLC's articles within the operating agreement. This usually starts with a formal vote to determine whether an LLC member can be removed.
The vote should require some form of consensus, and there must be no dissenting voices in this process.
It is also recommended that LLC's members sign an addendum or amendment to the LLC operating agreement, which states why they want to remove the member, what will happen to their interest in the company, and what part of the LLC's profits or LLC's assets belongs to them.
This document can help prove that all LLC members were on board with the decision and help to avoid any potential legal issues down the road.
Step 3. Have the Former Member Submit a Written Notice of Withdrawal
Once the LLC operating agreement has been consulted and the formal procedure implemented, it will likely be necessary to either have the former member submit a written notice of withdrawal or the company should provide a written notice to the departing member.
This notice should include the reasons for removal and specify a date by which the member must vacate their position in the company.
Step 4. File a Petition for Judicial Dissolution if the Stalemate Arises.
If the stalemate arises and LLC members cannot agree on how to remove a member from an LLC, you will need to file a petition for judicial dissolution.
"Dissolution of an LLC, often considered a last resort, requires the payment of multiple fees and a compelling justification for the entity's termination, only after all other options have been exhausted."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
As such, it is best to speak with a business attorney before filing this petition. They can help you understand the process and determine whether or not your company qualifies for dissolution under state law.
Additional Ways of Member Removal
There are some additional ways worth noting for removing a member from a Limited Liability Company.
Voluntary Withdrawal
Some states will allow members to voluntarily withdraw from an LLC without considering it a breach of the operating agreement or their fiduciary duties as an LLC member.
This process is called "voluntary withdrawal," and you can complete it under state law by filing certain paperwork with your Secretary of State.
Negotiating a Deal
Another way of removing a member from an LLC is by negotiating a "buyout." This occurs when one member buys the departing member's interest, which can be done through a buyout agreement or even a court order.
Referring to State LLC Laws
If the member does not voluntarily leave the company, the next step I advise my clients to take is to commence legal proceedings to remove them. This process is usually done with a law firm and requires legal representation for both sides.
Since this process can be lengthy and expensive, it is often preferable for both parties to try and come to a resolution outside of court.
Consulting with a company attorney is essential when considering the removal of an LLC member, not only to comply with legal standards but also to manage internal conflicts efficiently.
This is crucial, as the Harvard Business Review highlights that conflict can consume up to 40% of a manager's time, emphasizing the need for professional guidance in these situations [1].
Removing a Member From an LLC With the IRS
From my experience, dealing with the IRS in the context of removing an LLC member is an aspect many don't initially consider.
This process is known as an "involuntary termination" and is used when a member violates the terms of their operating agreement or engages in some form of illegal activity.
You should discuss each of these methods with an attorney who can give you legal advice and help you understand the specific requirements that must be met for your situation.
Also, keep in mind there are tax implications when removing a member from your LLC. The removal of a member might affect the LLC's federal tax obligations and the necessity for proper documentation and reporting to the IRS [2].
As you can see, there are many steps and procedures involved in removing a member from an LLC. It is important to be aware of these and take the necessary actions to protect your company.
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What Happens After the Member Is Removed?
After the removal of a member is done, a few things need to happen.
First, remaining LLC members should update any records or legal documents that reflect the membership or business structure change. This includes drafting a new operating agreement and bylaws or revising both the articles of organization and membership lists.
Since the individual members have limited personal liability, the company needs to protect itself.
Second, other members should notify any third-party organizations or individuals who may be affected by the change in membership. This includes banks, credit unions, and the IRS.
Finally, the remaining members should take steps to ensure that the departing member does not continue to impact the business. This may include changing passwords or canceling any accounts opened in their name.
FAQs
How Do I Remove Someone From My Ein?
To remove someone from your EIN, you will need to file Form 8822-B with the IRS. This form is used to notify the IRS of any changes in your business ownership or structure.
What Happens to the Member's Economic Interest in the Company?
After a member is removed from an LLC, his economic interest in the company is terminated. This means that he no longer has any ownership or financial stake in the company. The remaining members will then be responsible for managing the Limited Liability Company and its assets.
Can the Remaining Members of an LLC Vote to Remove a Member?
Whether the remaining members of an LLC can vote to remove a member depends on the provisions outlined in the LLC's operating agreement. The operating agreement governs the internal affairs of the LLC and typically addresses member removal procedures and voting rights.
References:
- https://hbr.org/2022/05/conflict-is-not-always-bad-but-you-should-know-how-to-manage-it
- https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-possible-repercussions
We faced a stalemate during a member’s removal, and filing for judicial dissolution felt like the only way out. If we’d known more about buyout options beforehand, it could have saved a lot of time and stress.