Key Takeaways:

  • Changing LLC Membership: Requires amending the Operating Agreement and notifying institutions like the IRS, banks, and the state.
  • Ownership Transfer: Can be done through a buy-sell agreement, which outlines procedures for selling ownership stakes.
  • Amending Documents: The Operating Agreement and Articles of Organization must be updated when changing members.
  • IRS Notification: Use Form 8822-B to update the Responsible Party and consider tax implications when switching between single-member and multi-member LLCs.
  • Foreign LLC Compliance: States like Florida, Illinois, and Texas require updated membership lists to maintain foreign LLC qualification.
  • Legal Complexities: Removing a member can be complicated, especially if they do not consent. State laws and the LLC Operating Agreement dictate the process.
  • Court-Ordered Removal: Some states allow for involuntary removal through legal action if a member breaches their fiduciary duty or other obligations.
  • Dissolution and Reformation: If an agreement cannot be reached, dissolving the LLC and forming a new one may be an alternative.
  • Legal Assistance: Given the legal and tax implications, consulting a lawyer is recommended.

Changing Members of an LLC: Change in Ownership

A change in ownership will be based on if you are transferring partial ownership or selling the entire business. A buy-sell agreement allows the business owners or partners to sell their stake in the business. A buy-sell agreement is a document included in the Operating Agreement, which lays out the steps for purchasing a member’s interest in the LLC. It will also help address any future problems if either one is deceased or disabled. If you want to add or remove a member of your LLC, you will need to notify certain institutions:

  • Banks
  • IRS
  • Foreign LLC
  • Registered Agent
  • Other Third Parties involved

For instance, your company's bank likely keeps a list of your members, and if you add or remove a member, you will need to alert your bank so that they can update their records. For an ownership change, the first step would be to amend the LLC’s membership records.

Understanding Voluntary and Involuntary LLC Member Removal

The process of removing a member from an LLC can be voluntary or involuntary:

  • Voluntary Removal: If a member wants to leave, they should follow the procedure outlined in the Operating Agreement. Typically, they submit a resignation notice, and the LLC will buy out their share according to the agreement’s terms.

  • Involuntary Removal: If a member refuses to leave or breaches their obligations, the LLC may have legal grounds for removal. Common reasons include:

    • Violating the Operating Agreement.
    • Misappropriation of LLC funds or fraud.
    • Inability to contribute required capital.
    • Engaging in conduct that is harmful to the business.

    If the Operating Agreement does not specify a removal process, state law will govern the procedure. Some states require unanimous consent of the other members, while others allow removal through a court order.

Amending LLC Operating Agreement to Change Members

When you first registered your LLC, your members likely created two important documents: an Operating Agreement and Articles of Organization. If you make a change to your LLC, such as adding or removing a member, you must amend both documents. Knowing when and how to amend these documents is an important part of running your LLC and complying with state laws.

One reason you would need to amend your LLC's documents is if you want to change the name of your company. You first need to register this new name with your state by filing an Articles of Amendment, and then wait for approval before you can start using the name. When changing the name of your LLC, you also need to alert the IRS of your name change.

Changing members of an LLC is another event that requires amending your company's formation documents. To add or remove an LLC member, you must amend your Operating Agreement.

Although you can amend your Operating Agreement internally, you will also need to alert the appropriate government agencies. Check your state's reporting requirements to see if you need to provide notification when changing LLC members. Most states also require that LLCs provide notification if there is a significant transfer of ownership percentage.

You must amend your LLC's Articles of Organization if you appoint a new Registered Agent or change the address of your company. Changing the management or financial structure of your LLC requires amending your Operating Agreement.

In addition to knowing when to amend your formation documents, it's also important to know when an amendment is not necessary. For instance, when an LLC member dies, most people assume that amending the Operating Agreement would be necessary, even though this isn't the case. In some cases, the will of the deceased member will specify how their ownership stake transfer should occur. However, the Operating Agreement usually contains a protocol for handling the ownership stake of a deceased member.

Steps to Remove an LLC Member

If you need to remove a member from an LLC, follow these steps:

  1. Review the Operating Agreement – Determine if there are provisions for member removal, including buyout terms.
  2. Negotiate a Buyout Agreement – If the member agrees to leave, create a written agreement outlining the terms of the buyout.
  3. Hold a Vote for Removal – If applicable, hold a vote according to the LLC’s governance structure.
  4. Amend the Operating Agreement and Articles of Organization – Update the ownership structure and file any required amendments with the state.
  5. Notify the IRS and Other Institutions – File IRS Form 8822-B to change the Responsible Party and update state business records.
  6. Address Tax and Financial Implications – Determine if changes affect the LLC’s tax classification or financial obligations.

If the member refuses to leave and no voluntary buyout can be reached, legal action may be necessary to pursue an involuntary removal.

How to Change Members of an LLC with the IRS?

To do business, your LLC must have an Employer Identification Number (EIN) issued by the IRS. Before the IRS issues your EIN, you must provide the contact information of an LLC Responsible Party. If the member you are removing is also your Responsible Party, you will need to name a new Responsible Party and file the correct form with the IRS.

The form you will use to change your Responsible Party is Form 8822-B, and you will need to file this form within 60 days of the membership change. You will also need to consider whether adding or removing a member will turn your company from a single-member LLC to a multi-member LLC or vice versa.

The number of members there is in your LLC has tax implications that you must consider. For instance, the IRS treats single-member LLCs as a disregarded entity. Multi-member LLCs incur taxes as a partnership. If you are converting your company to a single member LLC, you will need to submit IRS Form 8832.

IRS Tax Implications of Membership Changes

Changing LLC members can impact the business’s tax status:

  • Single-Member to Multi-Member LLC: If a new member is added, the IRS will treat the LLC as a partnership unless an election is made to be taxed as a corporation.
  • Multi-Member to Single-Member LLC: If a member leaves, the LLC may become a disregarded entity for tax purposes, unless it elects corporate taxation.
  • Dissolution Triggers: Some LLCs are automatically dissolved if a member departs, depending on the Operating Agreement and state law. If this happens, a new EIN may be required.

It’s important to consult a tax professional to ensure compliance with IRS regulations.

Changing Members of a Foreign LLC

Certain states require that you provide a full list of your LLC members and their contact information before you can register your company as a foreign LLC. States with this requirement include:

  • Florida
  • Illinois
  • Texas

It will be your responsibility to make sure the information in your member list is up to date. Failing to keep this information current may cause you to lose your foreign LLC qualification. Usually, you can update your member list in your LLC's required Annual Report. You can also amend your foreign LLC qualification if you need to update your member list sooner.

Maintaining Compliance After Membership Changes

For LLCs operating in multiple states, membership changes must be reported to maintain compliance. Requirements vary by state, but common obligations include:

  • Annual Reports: Some states require a list of current members in annual filings.
  • Foreign Qualification Updates: If a foreign LLC is registered in multiple states, each state may require notification of member changes.
  • Registered Agent Updates: If a removed member served as the registered agent, the LLC must designate a new agent immediately.

Failure to update membership records in a timely manner could result in penalties or loss of good standing in the state.

Legal Support for Changing Members of an LLC

If you need help with changing members of an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

When to Consider Legal Action for Member Removal

In some cases, legal action may be necessary to remove an LLC member. Situations that may warrant court intervention include:

  • A member engaging in fraudulent or illegal activity.
  • A member refusing to honor contractual agreements.
  • Irreconcilable disputes that prevent the LLC from operating effectively.

Some states allow LLC members to petition the court for judicial dissolution if a deadlock occurs. If the LLC must dissolve, members may need to form a new business entity to continue operations.

For assistance with complex LLC member removal issues, consulting a business attorney is advisable.

Frequently Asked Questions:

  1. What is an LLC member removal form?
    An LLC member removal form is a document used to officially record the departure of a member. It may be required for state filings, updating the Operating Agreement, or amending tax records.
  2. Can you remove a member from an LLC without their consent?
    This depends on the Operating Agreement and state law. Some states allow forced removal under certain conditions, while others require a court order.
  3. Do I need to notify the IRS if I remove a member from my LLC?
    Yes, if the departing member was the LLC's Responsible Party, you must file Form 8822-B with the IRS to update records.
  4. What happens if an LLC member refuses to leave?
    If a member refuses to leave, the LLC may need to pursue a buyout, vote for removal (if allowed by the Operating Agreement), or seek court intervention.
  5. How do I update state records after removing an LLC member?
    You may need to file an amendment to your Articles of Organization and update your state’s business entity records. Some states also require updates in the annual report.