KEY TAKEAWAYS

  • Refer to the operating agreement when you need to remove a member from an LLC if one exists.

  • If there is no agreement in place, defer to the laws of the state .

  • Removing a member may require amending several internal and external documents, such as the Articles of Organization or IRS Form 2553.

How to Remove A Member From LLC  

If you are trying to navigate the process of removing a member from your LLC, you must adhere to legal requirements. To start the process, you can begin by thoroughly reviewing your LLC's operating agreement. An operating agreement is like a prenuptial agreement for your business. Like a prenuptial agreement, it is drafted before you start your business. It outlines how your business will operate and also includes the process of removing a member. This section is generally called the standards for member removal, but your agreement may have it listed under another name. Your operating agreement should include:

  • How someone can leave on their own

  • How to remove someone 

  • How to vote on removing someone

  • The process of defending against a removal

Reasons for Removing a Member from an LLC 

There are several common reasons why an LLC might need to remove a member. You may remove a member for one or more reasons listed below, or your company may have its reason. 

Reason for Removal 

Explanation

Breach of Operating Agreement

An operating agreement is a legally binding document that outlines each member's roles and responsibilities; if a member does not adhere to the agreement, it is grounds for removal.

Failing to Meet Performance Benchmarks

Removal may be necessary if a member fails to fulfill their responsibilities within the company. This could be anything from missing sales targets or failing to meet deadlines.

Criminal Activity

Engaging in unlawful actions that could harm the LLC's reputation or operations is often grounds for removal.

Financial Troubles

Removal may be considered if a member experiences personal bankruptcy or significant financial issues that could negatively affect the business.

Conflict of Interest

Removal may be appropriate if a member engages in a competing venture or starts using their position within the LLC to benefit themselves personally to the detriment of other members.

Incapacity

If a member becomes physically or mentally incapacitated and can no longer contribute to the company's operations, removal may be necessary.

Voluntary Withdrawal

Sometimes, a member may choose to leave the LLC voluntarily, which still requires following proper procedures.

Unethical behavior

Sometimes a member may opt to leave the LLC voluntarily, but proper procedures must still be followed.

Embroiled in Litigation

Removal may be warranted if a member's involvement in litigation threatens the company's finances or reputation.

Check the LLC Operating Agreement 

Your Operating Agreement lays out the procedures for removing a member. It is a legal document that must be adhered to. Once you have reviewed your operating agreement and determined that there are grounds for removal, you’ll need to follow the following formalities.

  1. Have members vote on the removal.

  2. Approve the removal

  3. Issue a Notice of Removal

  4. Serve the Notice of Removal

  5. Hold a Hearing

  6. Remove the member

  7. Transfer, buy, or forfeit removed member’s interest

What if No Operating Agreement Exists? 

Removing a member from an LLC is more complex without an operating agreement. However, options still exist.

Negotiation

If you don't have an operating agreement, try to negotiate with the member in question. Start by trying to reach an agreement with the member you want to remove. This can involve purchasing their interest or persuading them to depart willingly.

Apply State Law

If the negotiation fails, you will use your state's removal process. You may be able to remove a member if there are legal grounds, such as breach of fiduciary duty or misconduct. Some states may allow a member's removal by majority vote. Others may require a court's help if there's a dispute. If you find yourself in this situation, working with an attorney who specializes in business law may be your best bet.

Voting to Remove a Member from an LLC

When no operating agreement is in place, holding a vote among the remaining members becomes crucial. The voting process and requirements can differ based on state laws, with some requiring a majority vote while others may demand unanimity. Understanding your state's specific regulations is essential for a legally sound removal process.

Legal Documentation & Filing Requirements

Removing a member from an LLC  typically involves submitting state and federal foiling. You may need to change the Operating Agreement, modify the Articles of Organization, or update IRS Form 2553 if your LLC is taxed as an S corporation. You may also need to change your documents at the bank or any other financial institution where the member has signatory authority.

When removing a member from your LLC, it's important to thoroughly research and adhere to state and federal regulations. If you're uncertain about which regulations are relevant in your situation, it's advisable to consult with an attorney for guidance on ensuring compliance. 

Handling Member Financial and Ownership Interests

Dealing with the implications of removing a member is a multi-step process. It involves deciding how to manage the departing member's portion of earnings as well as the assets and debts associated with it.This often entails buying out the member's stake. It is essential to negotiate and record the terms of this buyout meticulously to prevent any disagreements in the future. 

Tax Implications of Member Removal

Removing a member can significantly affect taxes for the member and the LLC. The remaining LLC members often must determine the value of the questioned member's interest in the company. A formal valuation may be necessary to make this determination.

You’ll also have to consider capital gains, income recognition, and LLC tax status changes. Consulting with a tax attorney is advisable to navigate these complexities and ensure compliance with tax laws.

Dealing with Disputes During Removal

Removing a member from your company is never easy. Depending on the nature of the business relationship, tensions can arise. However, having a clear strategy and a game plan will help minimize business disruptions. This is where having a well-drafted operating agreement comes into play. The operating agreement may often specify that disputes are settled through a meeting between members, a formal mediation, or arbitration.

Legal and Professional Support

Given the complexities involved in removing an LLC member, especially without an operating agreement, seeking professional guidance is highly recommended. Consulting with a business attorney or other competent advisor is highly recommended.

Conclusion

Removing a member from an LLC can be a process, especially if no operating agreement exists. However, if your company has one, you should always reference this important legal document. Your company’s Operating Agreement is a legal document that outlines the rights and responsibilities of employees and the process for removing individuals from your company. If you need assistance with the process, engaging with a business attorney is crucial for ensuring compliance with the law and safeguarding everyone involved.

Frequently Asked Questions (FAQs)

Can you edit members in an LLC?

Yes, you can edit members in an LLC. Follow your operating agreement or, if none exists, defer to state laws. This typically involves filing an amendment with the state to update the Articles of Organization and revising internal agreements.

How do I change my LLC from multi-member to single-member?

To change your LLC from multi-member to single-member, you must remove the other members. You can do this by buying them out or by their withdrawal. Then, file an amendment with the state to update the LLC's structure and update tax records with the IRS.

How do I disassociate myself from an LLC?

To leave an LLC, check your operating agreement or state law. Then, submit a formal notice of withdrawal. You may need to negotiate a buyout of your ownership interest and file necessary state forms reflecting your departure.