It is possible that at some point in the future, you might have to remove a member from your LLC. While you should do everything you can to avoid this situation, there’s always a chance that it can happen.
In this guide, I will discuss how to remove a member from an LLC member so that if it ever happens to you, you will be ready.
Common Reasons for Member Removal
What are the reasons to remove a member of an LLC? Let's look at some of the most common ones.
The removal of a member may be due to resignation, wrongful conduct, or a member's death.
The person is no longer available or reliable
A member who is no longer available or reliable can be a major inconvenience and liability to the company. They will be unable to perform their duties as they used to, and they will be no longer reliable.
For example, if a guy has started using drugs and alcohol, this will affect his productivity as a member of your team.
He/she is engaged in illegal activities.
If you find out that one of your members is making use of your business for any illegal activities or has been dishonest about something, then you can remove him from the business.
This is for two reasons: first, it will protect your LLC from any legal liability that could arise from his actions, and second, it will protect your company from any negative publicity that could damage its reputation.
The Person Has Breached the Agreement
You can remove a member if they have breached their agreement with you or violated the rules of membership. You should go through your LLC operating agreement and make sure that there are provisions in place for removing members due to this type of situation.
When LLC members die, their ownership interest passes to their heirs or other beneficiaries named in their will. Those people inherit their rights as owners unless otherwise stated in the operating agreement. They do not automatically become members unless they're already listed as members.
A person can voluntarily resign from membership in an LLC by giving written notice to the other members. The operating agreement usually specifies procedures for resignation and how long it takes before it's effective.
What are the steps for terminating a member from an LLC?
Here are the steps you need to take when terminating a member from an LLC.
Determine whether the LLC Operating Agreement set out formal procedures
It’s important to operate your LLC intelligently from the beginning. That’s why you should prepare an operating agreement for your LLC.
An operating agreement like this is a legal document that outlines how the LLC will be run, who the managers and members are and what their responsibilities are, how profits will be distributed, etc.
Among other things, the operating agreement should include a clause that explains how to remove an LLC member. For example, it might say that any member can be removed by a 2/3rds vote of the existing members. It can also include provisions that protect minority owners in case the majority wants to kick them out without a good reason.
Involuntary Removal or When the LLC Wants to Expel a Member
Give The Member Notice
In most cases, you must give the member written notice of his or her removal from the company. The notice must include details about the meeting where you'll discuss the member removal and any other relevant information about how he or she can appeal the decision or raise objections.
Hold a meeting with other members if you need to forcibly remove a member who isn't willing to go voluntarily. Draft a proposal outlining why you want to remove him and vote on it.
The other important step to take when removing an unwilling member is to check the LLC's operating agreement. It should contain provisions detailing how an unwilling member should be expelled or removed. If this document does not exist, then default state law will apply.
Offer a Buyout
Offer to buy out the LLC member if he or she is not willing to depart. If he or she agrees, have a buyout agreement that should specify how much the departing member is being paid for his share and how long he has to leave the company before his interest ends officially. Both parties should sign the agreement and have it notarized for legal purposes.
If the member does not want a buyout and is still unwilling to leave, the LLC will have no other option except to vote him out or go to court. Some states allow expulsion of members, and others require the matter to be handled in court.
Voting LLC Members Out
LLC members can vote to remove one of their members as long as it is allowed in their state. The value of this arrangement is that it makes it possible to get rid of members who are no longer a good fit for the business.
In other words, if you have a member who is not pulling his weight or behaving in a manner that damages the LLC, you can remove him as a member with the approval of the majority of your members.
You should never do that unless there is a clear reason for doing so, though.
File A Petition for Judicial Dissolution
File for dissolution of the LLC in your state if one or more members does not agree to be terminated from the LLC.
This process varies according to state laws but often involves filing paperwork with an agency such as the Secretary of State office in your state and paying a fee for doing so. Some states require you to publish notice of dissolution in local newspapers as well.
Voluntary LLC Member Removal
If the member wants to leave the limited liability company voluntarily, they can.
Depending on when they started and what the operating agreement says, they may even be entitled to a full return of their contributions. The member should also sign an official document releasing the LLC's members.
A voluntary withdrawal does not affect the remaining members' ownership interests or management rights, nor does it affect the operations of the business. The withdrawing member also remains liable for any debts or liabilities incurred by the business prior to his withdrawal date, even though he is no longer involved in its operations.
1. The limited liability company operating agreement or bylaws will specify the steps necessary for a member to voluntarily remove themselves. Generally, it requires a written notice to the other members of the intent to leave. Upon receipt of this notice, the remaining members will elect a new member (or decide on how they will manage without one).
2. Determine the best way to buy out the member’s interest by checking your operating agreement. If there are no instructions for formalizing a buyout, check with your state statute.
3. Negotiate a purchase price for the departing member’s interest and sign a written agreement to sell that interest back to the company or to another person who will become a new member (like a spouse). Set up any installment payments and sign a promissory note or some other document outlining those terms.
4. Update the membership ledger with each change in ownership percentage and include signatures from both members (the one is selling his or her interest and the one buying it).
5. File any required documents with your state agency (usually the Secretary of State), like articles of amendment if you increase your membership by adding someone new or articles of dissolution
Please Note: most states permit members to resign from a limited liability company under certain conditions; however, many states do not allow voluntary resignation in situations where the company is insolvent or being sued.
How do I remove a Manager from my LLC?
If you have a written operating agreement, that agreement might outline the process for removing a manager. If you do not have a written company's operating, or if it does not address this question, then you may be able to remove a manager by a majority vote of the members.
If your state does not permit voting out a manager from an LLC (and many states do not), then you will require to go to court or request for judicial dissolution.
What Happens If I Remove a Member from an LLC?
The LLC operating agreement will typically have a provision that states which party or parties are authorized to act on behalf of the company. When you remove a member from an LLC, he is no longer authorized to act as the company's agent. But the company can continue to operate without him.
Compensate the Member
If a member of an LLC voluntarily withdraws or is kicked out, the company must compensate him for his share of the company. The buyout price is determined by the company's operating agreement, and if it's not specified in the agreement, the member can sue for damages.
How Long Does It Take to Remove a Member From an LLC?
In some states, it takes about 60 days for a member to be officially removed from an LLC after filing the appropriate paperwork with the Secretary of State (or whatever state agency handles business filings). It takes less or more time in other states to remove a member of an LLC.
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