In today's Freedom Friday blog and email newsletter, I want to talk about a topic that comes up with a lot of my LLC restructuring clients, and that's how someone can leave his or her LLC, especially if it's a multi-member LLC. This can be a problematic issue, especially if the LLC operating agreement does not allow for voluntary withdrawal or has no withdrawal provision at all. Either the client wants to leave the LLC, or they are contacting me to help facilitate someone else leaving, even voluntarily, there are a lot of questions and issues with leaving an LLC. So, in today's Freedom Friday blog and email newsletter, I'm answering the question, “How can I leave my multi-member LLC?”
The first thing I will tell everyone, especially prospective clients, is you need to look at your LLC's operating agreement and do what it says. Hopefully the prospective client has an LLC operating agreement for me to review and explain to them the process. In some cases, they do not have an operating agreement, so that's an easy fix. I will work with the LLC members to create an operating agreement, and part of it will allow the member wishing to withdraw (or needing to withdraw) to leave the LLC. If there is an operating agreement, there is usually some provision about the transfer of a member's interest in the LLC, or a process a member must go through in order to leave. Some LLC operating agreements require the unanimous consent of the remaining members to approval the withdrawal of a departing member. This is unfair, but if unanimous consent can be given, then I will work to draft the different documents required in order to facilitate the wishes of the departing members.
Sometimes, there is no need for unanimous consent, but there already is some agreement between the members. In some instances, the member with the largest membership interest in the LLC simply plans to buy out or acquire the membership interest of the withdrawing member, and that can also be easily facilitated. Overall, there are three (3) ways a member can withdraw from an LLC, so long as withdrawal is permitted in the operating agreement:
Transfer of Membership Interest
The first way a member can withdraw from an LLC, if the operating agreement allows it, is for the member to transfer their membership interest to a third party. This may be someone who is a current member of the LLC, or someone else who might join the LLC. Again, this must be allowed by the operating agreement in order to be lawful.
Selling a Membership Interest
The second way a member can withdraw from an LLC, if the operating agreement allows it, is for the member to sell their membership interest. This is very similar to transferring the membership interest, but this transaction involves the exchange of funds for someone to actually buy the membership interest in the LLC. Often times when an operating agreement allows this option, the departing member must offer his or her membership interest first to the remaining members as they have the right of first refusal. If they all refuse, then the membership interest can be sold to someone outside the LLC.
Death or Incapacitation
The third way a member can withdraw from an LLC is through death or incapacitation. Again, the operating agreement needs to address this issue. However, if an LLC member is a member of a multi-member LLC, then the default is that if the member passes away, his or her membership will pass to his estate. Incapacity is something different, and that must be handled through the operating agreement. If the operating agreement says otherwise, then an LLC member who passes away may have his or her membership interest be divested to the remaining members. But if the operating agreement fails to address these issues, then the LLC membership interest would pass to the member's estate.
If you or another member of an LLC need to leave the LLC, and the operating agreement either prohibits withdrawal, or requires unanimous consent, but the remaining member(s) fail to give that, you do have one more option. That option, which honestly should be a last resort option, is to file a lawsuit to dissolve the LLC through the courts. Again, this is a last resort option, and you need to consult an attorney regarding this process, but if you are being held hostage by your LLC, a dissolution lawsuit may be your answer.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/