The owners of a limited liability company (LLC) are called members. At some point, an LLC member may find they want, or need, to withdraw from the LLC. That member, and the other members of the LLC, may wonder how to accomplish this. To properly withdraw from an LLC, there are key questions that the members must ask.
- What does the operating agreement say? The operating agreement is typically the most important document to refer to when a member wants to leave an LLC. Well-drafted operating agreements contemplate the potential departure of a member and outline the steps required. Departing LLC members may find there are more significant restrictions regarding how to exit an LLC compared to other business entities. Although LLCs may be formed for complex organizations with complicated organizational schemes, many LLCs are designed for much less complicated businesses that are co-owned by family and friends. For the smaller business operating as an LLC, its operating agreement may place restrictions on the entry and exit of the LLC’s members.
A proper operating agreement will describe how a departing member’s interest must be treated. Sometimes, it may call for the LLC to repurchase the interest. In other cases, it may allow the member to sell the interest to a third party. Perhaps the departing member must offer their interest to the remaining LLC members before offering it to any outside parties.
- What happens if there is no operating agreement? Sometimes, an LLC does not have an operating agreement. If the LLC does not have an operating Agreement, state law will dictate the proper steps to take. States differ in how their laws handle departing LLC members. Some states have rules that prohibit the exit of existing members. The only way to avoid this problem is to create an operating agreement that supersedes the state’s law. Your state’s laws may outline a specific buyout procedure to follow. These state laws may also define the assets and interest due to the departing LLC member. Relying on your state’s law to answer questions that arise when an LLC member wants to depart can be precarious. The state’s laws are not tailored to meet the unique needs of your LLC and its members.
- Is the departure harmonious? Another question to explore is whether the departure of the LLC member will benefit the LLC. Members depart from LLCs for a variety of reasons, such as death, physical or mental disability, or a change in life circumstances. However, sometimes, a member wants to leave due to significant breakdown in their relationship with the other member(s). In those cases, implementing the departure may prove more difficult than in other circumstances. The remaining LLC members might not cooperate with the member’s preferred method of departure. Once again, the provisions in the operating agreement and the state’s laws will affect the steps required.
- How should this departure be documented? As your company implements this transition, it is vital to accurately document the changes that are occurring. This documentation may require the creation of new documents, revisions of old documents, and filing updated documents with the state agency that works with LLCs. In Florida, that is the Secretary of State’s Division of Corporations office. Here are a few documents to note:
- Separation agreement. A separation agreement can outline the terms agreed upon by the LLC and the departing member, such as buyout price, date of termination, and how the departing member’s LLC assets will be treated.
- Operating agreement. The operating agreement should be updated to reflect the changes in ownership.
- Annual filings and tax documents. Updated documents should be filed with your state’s secretary of state. The contact name for the LLC’s federal tax identification number, if the original responsible party is the departing member, should also be updated.
We Can Help
The departure of an LLC member is often more complicated than anticipated. If a member of your LLC is considering leaving, figuring things out on your own is a bad idea. With a phone call to our office – 813-852-6500 – one of our business attorneys will talk with you to see how we may help you assess your options and navigate the member’s exit. We look forward to talking with you.