It is common for ownership structures in LLCs to change. Members retire, disputes arise, partners move on, or circumstances force a departure. Exactly how member removal works depends on the operating agreement. With an operating agreement, the process is relatively straightforward. Without one, serious complications can arise.
Learn more about voluntary and involuntary member removal and the role of the operating agreement. Much depends on the laws of the state in which the LLC was formed. After a member leaves, the LLC must make further changes, which are part of maintaining your LLC.
Can a member of an LLC be removed?
The simple answer about whether a member of an LLC can be removed is yes. However, how that happens depends on the LLC operating agreement and state law. Based on the operating agreement, the removal can be smooth or rocky.
Keep in mind there is a key distinction between removing a member’s right to participate in managing the LLC and their economic interest in receiving distributions. These are separate issues. Removing membership rights does not necessarily affect their financial interest in the business.
There are two types of member removal.
- Voluntary. The member agrees to leave. This is the simplest scenario, typically handled through a buyout and amendment to the operating agreement.
- Involuntary. The member does not agree to leave. This quickly becomes complicated and often requires legal processes.
An LLC should never attempt an involuntary removal without consulting a business attorney. A DIY approach can have serious consequences.
| Removal route | When it applies | Cost and time |
|---|---|---|
| Voluntary buyout | The member agrees to leave | Lowest; mainly valuation and documents |
| Vote under the operating agreement | The agreement allows removal by vote, usually for set grounds | Moderate; follow the agreement exactly |
| Buy-sell provision | The agreement sets a trigger and a price method | Moderate; the buyout terms are already agreed |
| Mediation or arbitration | Members disagree but want to avoid court | Moderate |
| Judicial removal | No agreement route works and state law allows expulsion | Highest |
| Dissolution | Last resort when the members can’t continue together | High; the LLC ends |
Why the operating agreement is everything
An LLC operating agreement defines exactly how the business operates. Along with protecting LLC members, the operating agreement clarifies members’ rights and responsibilities. A well-drafted operating agreement should also cover membership removal, including the grounds for removal, the vote required, how the departing member’s interest is valued, and how the buyout is structured.
These are common grounds for removal in operating agreements.
- Breach of the operating agreement
- Failure to make required capital contributions
- Prohibited transfer of membership interest
- Vote by remaining members above a specific threshold
If your operating agreement currently does not address removal, remedy that by updating the agreement before a dispute occurs. Always have your attorney draft or review removal provisions.
When an LLC does not have an operating agreement or removal provisions, it is governed by your state’s default rules. Such rules seldom include a straightforward removal mechanism.
Voluntary removal: when a member agrees to leave
If a member is willing to depart, the process is much easier. The most common mechanism is a buyout in which the remaining members or the LLC purchase the departing member’s interest at an agreed-upon price. If the departing member is selling to an outside buyer instead, see transferring LLC ownership.
It is wise to hire a business attorney to handle the documentation for any membership transfer. The attorney can handle the following steps.
- Reviewing the operating agreement. The document may specify certain procedures or valuation methods.
- Agreeing on the buyout price. The operating agreement may specify a valuation method, or the parties can negotiate one. A professional business valuation helps establish a fair price and avoid later disputes.
- Documenting the agreement in writing. This requires a formal purchase agreement or membership interest transfer agreement.
- Amending the operating agreement to reflect the change in ownership.
- Filing any required state or federal updates. If your state lists members or managers in your articles of organization, that means filing Articles of Amendment with the Secretary of State. The IRS also needs to see the change on the LLC’s next tax return.
Involuntary removal: when a member won’t leave
Involuntary removal of an LLC member is contentious and complicated. Here are the mechanisms to deal with a member who will not leave of their own volition and must be removed involuntarily.
Vote by remaining members
Depending on the operating agreement, remaining members may vote to remove a member. This usually requires a specified majority or unanimous consent.
Most operating agreements do not include outright removal by vote, because such a provision is easily abused. Instead, well-drafted agreements tie removal to specific grounds and require a simultaneous buyout.
Buy-sell provision
A buy-sell provision sets out when a member’s interest must be bought out, who buys it, and how the price is calculated. Some agreements use a “shotgun” clause: one member names a price, and the other must either buy at that price or sell at that price. This encourages fair pricing because the member making the offer doesn’t know which side of the deal they’ll end up on.
For fairness and practicality, a buy-sell provision is often the best way to force a parting of ways without litigation.
Judicial removal
Judicial removal is expensive and time-consuming. It should only be considered when the operating agreement has no removal mechanism and negotiations for a voluntary departure have proven ineffective. Always try mediation or arbitration first before petitioning a court, and hire a business attorney.
Depending on your state, courts may order member expulsion under specific circumstances. That is generally when the member has done one of the following.
- Engaged in wrongful conduct that materially harms the LLC
- Persistently breached the operating agreement
- Made it “not reasonably practicable” to carry on the business with them as a member
Even if the state allows courts to expel a member, that does not necessarily end the former member’s economic interest. In some states, the removed member may still be entitled to distributions. Some states permit courts to order the sale of the departing member’s financial interest.
Dissolving the LLC as an alternative
When it is clear that removing the member is not going to happen without spending large sums on legal fees, dissolving the LLC is sometimes the last resort. Since dissolution has significant legal and financial implications, a business attorney should always advise you before proceeding.
A dissolution terminates the LLC. Assets are distributed, creditors are paid, and members who want to continue can form a new LLC under agreed-upon terms.
How to remove a member from an LLC: step by step
Below are the steps, in order, to remove an LLC member.
Step 1: Review the operating agreement
Identify any removal provisions in the agreement. Note required vote thresholds, acceptable valuation methods, and buyout procedures.
If there is no operating agreement or removal provision, consult a business attorney before proceeding.
Step 2: Document the decision
For voluntary removal, get the departure agreement in writing and have all parties sign it.
For involuntary removal, document the vote and grounds for removal per the operating agreement’s requirements, for example in meeting minutes or a written consent.
Step 3: Agree on a buyout
Determine the value of the departing member’s interest, using the method specified in the operating agreement. If there is no specification in the operating agreement, negotiate a method before proceeding. Then draft a membership interest purchase agreement.
Step 4: Amend the operating agreement
Update the operating agreement to reflect the new ownership structure. Remove the departing member and adjust the remaining members’ percentages accordingly.
Tailor Brands supports LLC formation and compliance, and getting the operating agreement right from the start is the foundation for handling membership changes cleanly when they arise.
Step 5: File state amendments
If your state lists members or managers on the public record, file an amendment with the Secretary of State or update your next annual report. Requirements vary by state, as do filing fees.
Step 6: Notify the IRS and other parties
How the IRS learns of the change depends on how the LLC is taxed. In a multi-member LLC taxed as a partnership, the departing member gets a final Schedule K-1 on the LLC’s Form 1065. If only one member remains, the LLC becomes a disregarded entity and files a final partnership return for that year. The single-member vs. multi-member LLC guide explains the difference.
A new EIN generally isn’t needed just because a member leaves a multi-member LLC that still has two or more members. If the departing member was the LLC’s responsible party, update the IRS using Form 8822-B within 60 days. The IRS explains when a new EIN is needed.
Update banks, insurance providers, vendors, and any other parties whose agreements reference membership, including signers on your business bank account.
What to do if your operating agreement doesn’t address removal
The bad news is that many LLC operating agreements do not address member removal. If this is your situation, there are options. The first is to negotiate a voluntary buyout. It avoids taking the matter to court and saves time and money.
The best time to plan for member removal is before it is needed. Head off potential membership removal disputes by amending the operating agreement now. Always have an attorney review and amend the document. An operating agreement with clear removal provisions is far easier and cheaper than resolving disputes after the fact.
If the dispute is already brewing, pursue mediation or arbitration. Both are faster and less expensive than litigation. If that does not work, consult a business attorney about judicial removal options under state law.
Plan ahead for member changes
Removing a member from an LLC is manageable when the operating agreement addresses it. When it does not, expect difficulties. Voluntary removal is always preferable to involuntary, and a business attorney should be involved in any removal process.
Be proactive and create or add removal provisions in the operating agreement so that the process is as straightforward as possible should the need occur. The same agreement should also cover adding members, so every ownership change follows clear rules.
FAQ
Yes, but how it happens depends on the operating agreement and state law, and the process can be smooth or complicated depending on documentation.
Voluntary removal happens when a member agrees to leave, typically through a buyout, while involuntary removal happens without their consent and often requires legal processes.
It’s a clause that sets when a member’s interest must be bought out, who buys it, and how the price is calculated, so departures don’t turn into disputes.
Not necessarily. Management rights and the economic interest in distributions are separate, so a removed member may keep a right to distributions unless their interest is bought out.
Options include negotiating a voluntary buyout, pursuing mediation or arbitration, or in difficult cases, seeking judicial removal through the courts.
Usually not, as long as two or more members remain. If only one member is left, the LLC becomes a disregarded entity, so check the IRS rules on whether a new EIN is needed.