How to Remove a Managing Member From an LLC

Key Takeaways

• A managing member can be removed from a New Jersey LLC for misconduct, breach of the operating agreement, or when continuing with the member is no longer practicable.
• The LLC’s operating agreement should always be reviewed first, as it dictates removal procedures.
• If internal remedies fail, court action under the Revised Uniform Limited Liability Company Act (RULLCA) may be necessary.
• After removal, a member becomes a transferee with financial but no management rights.
• Buyout terms may be required by the agreement or ordered by a court, especially when no clear provisions exist.

Knowing how to remove a member from an LLC in NJ is important when you operate a company. According to the Limited Liability Company Act in New Jersey, a member can be removed from an LLC in certain situations.

Wrongful Conduct

One reason a member can be removed from an LLC is if they engage in wrongful conduct that materially and adversely affects the business of the limited liability company. The scope of conduct must be included when the case is being reviewed, such as misappropriation of opportunities or assets, a breach of duties, or competition within the company. This could also include a transaction that's one-sided and favors a controlling manager or member. It may also include proprietary information being misused.

The main issue is that wrongful conduct would lead to dissociation is the manager or member had control over the welfare or interests of others. Members who are in a manager-managed LLC, such as shareholders in a corporation, will then have the right to participate in daily activities and discussions of the company.

Only when the owners are in charge of management is it mandatory for them to look after the interest of others. This means when a member has a fiduciary responsibility to other members or the company, their wrongful conduct can be cause for dismissal.

The modern presumption for an LLC is that if the business has managers who are in charge of business decisions, the members then have the legal rights to not get involved in the interest of the additional owners. An LLC is based on a contract, so it can't be assumed that the parties in that contract owe each other anything other than fulfilling the obligations they originally agreed to.

Under Which Circumstances Do the New Jersey LLC Laws Apply?

A member can be removed if they persistently or willfully performed a material breach against the operating agreement. One of the main principles of LLC law is that members of the company must be able to attend to their affairs as they see appropriate. Whatever agreement they come to must be put into the written contract.

That said, it's not surprising that a breach of the contract, whether in the past or present, is grounds for expulsion for the offending member. Another reason for removal is if the member participated in conduct where it doesn't make sense for them to continue business with the company.

When Court Intervention May Be Necessary

If the LLC’s operating agreement lacks a removal clause or if there’s internal deadlock among members, court intervention may be the only solution. Under the Revised Uniform Limited Liability Company Act (RULLCA), a court may order the expulsion of a managing member if:

• The member has committed wrongful acts or breached the operating agreement;
• The member's conduct makes it unreasonable for the company to continue operating with them;
• It is no longer practicable to carry on the business with the member involved.

This legal route often involves submitting a formal petition and proving that removal is essential to protect the company’s interests.

After Dissociation, What Are the Former Member's Rights?

When a member gets dissociated, that doesn't automatically give them the right to sell their shares. Unless it's ordered otherwise by a court, the member will become a transferee under the Revised Uniform Limited Liability Company Act (RULLCA). That means the former member can maintain their interest and get distributions when they're paid out. As a transferee, they have none of the following:

• Management rights
• Rights to get information
• Rights to object to any changes in the agreement that would dilute their interest

Buyout Provisions and Transfer of Interest

Although a removed managing member loses management rights, they may retain a financial interest in the LLC. Whether or not they are entitled to a buyout depends on the terms of the operating agreement or a court order. If the agreement is silent on this matter, state law may not require a mandatory buyout unless litigation is pursued.

Key points regarding ownership interest:

• The member becomes a transferee, entitled only to distributions.
• They cannot vote or participate in management decisions.
• In absence of a buyout clause, the member’s interest remains until transferred or redeemed by agreement.

Clear valuation methods in the operating agreement can help prevent disputes during this phase.

Steps to Remove a Member of an LLC

To remove a member from an LLC, you'll want to look at your current operating agreement to see if there are legitimate reasons to do so. If there are no particular reasons listed in the operating agreement, look at the state's business code to see what the statutory grounds are for removing a member. Keep in mind that the operating agreement replaces legal recourse, so any reason for removing a member is void if it's stated otherwise in the operating agreement.

After a meeting is called consisting of all the members, a vote should be cast to remove the member. You may need to reach a universal agreement, where all members agree on removing the member or get majority approval. If you can't get the requisite approval, the member cannot be removed from the LLC.

All the dividends must be paid out on the shares the member owns, as well as any money in the future that the member is entitled to according to the operating agreement. If your agreement doesn't define guidelines for how to pay out a former member, state law may require you to buy them out.

How to Remove a Managing Member From an LLC

Removing a managing member typically involves the following steps:

1. Review the Operating Agreement:
   Confirm whether the agreement outlines grounds and procedures for removal, including notice requirements and voting thresholds.
2. Hold a Member Vote:
   Convene a meeting and follow the voting process outlined in the agreement. In many cases, a majority or unanimous vote is required.
3. Provide Written Notice:
   Notify the managing member in writing of their removal, detailing the reasons and legal basis for the decision.
4. File an Amendment (if necessary):
   If the removed member was listed in state filings (e.g., as a manager or registered agent), update the Certificate of Formation or other records with the New Jersey Division of Revenue.
5. Resolve Buyout Terms:
   Settle financial obligations, including distributions or buyout terms per the operating agreement or court ruling.
6. Document the Process:
   Maintain written records of the decision, votes, and communications for legal and administrative purposes.

Frequently Asked Questions

• Can a managing member be removed without a vote?
  Not typically. Unless the operating agreement provides for automatic removal under certain conditions, a member vote is generally required.
• What if the operating agreement is silent on removal?
  You must follow New Jersey state law under RULLCA, which may involve court proceedings.
• Does a removed member keep any rights in the LLC?
  Yes, they retain the right to receive distributions as a transferee but lose all management rights.
• How is a managing member’s ownership interest valued for a buyout?
  Valuation is usually determined by the operating agreement or, if disputed, through court-ordered appraisal.
• Is court involvement always necessary?
  No, but it may be required if members can’t agree on removal or if the operating agreement lacks removal procedures.

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