If you are a member of a limited liability company and wish to leave the membership voluntarily, you cannot simply walk away.
There are procedures to follow that include methods of notification of the remaining membership, how assets are handled, and what the provisions of withdrawal are for each LLC.
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The Purpose of an LLC
An LLC is a specific type of business organization in which all members, also called shareholders, have limited liability for the company’s debts and obligations.
Members can be:
- Individuals
- Corporations
- Partnerships
There is a caveat: loans and debts personally guaranteed by one of more members are not protected by the LLC.
LLC’s are created and governed by state statutes, which differ among the states. Most allow the members to draft an operating agreement for their LLC and it should include procedures for voluntary withdrawal as well as other forms of separation. The rules of an operating agreement supersede the statute.
However, if no withdrawal provision has been placed in the operating agreement, some states provide a default process the LLC can follow. In certain instances, it is possible the LLC will be required to dissolve and re-form if a member leaves, but the typical default is for the LLC to maintain its status.
Methods of Withdrawing From an LLC
Leaving an LLC is called “withdrawal” rather than resignation or “removing your name.”
To determine how a withdrawal is handled for your LLC membership, consult your operating agreement for language pertaining to membership withdrawal and how to handle your shares. If the operating agreement does not contain language or provisions for withdrawal, you can ask the membership to make an amendment to the operating agreement or follow the state default procedure.
There are three methods of withdrawing membership:
- Transfer your membership
- Sell your membership
- What to do in case of death or incapacitation of a member
Membership Transfer
If the operating agreement allows it and contains the procedure to do so, you may be able to transfer all or a portion of your membership to another individual, partnership, or corporation.
Selling a Membership
If the operating agreement states it as a possibility, you may be able to sell your member shares. Typically, you must offer them to the remaining members for the right of first refusal before offering them outside of the LLC membership. Generally, all members must agree you may sell your shares.
Death or Incapacitation
Every operating agreement should take into account the potential for a member to die or become incapacitated. There should be language to govern how the member’s shares are distributed or whether the shares and membership may be inherited through the deceased member’s estate.
Depending on the state, the LLC may be required to report a membership change to the state business licensing entity in the articles of organization. Another possibility is that the state tax agency must be notified in the LLC’s annual report.
What Happens to Your Shares?
Your shares may be treated similarly to your membership. You can:
- Withdraw them in the form of assets and/or income
- Sell the shares
- Transfer the shares to another individual, partnership, or corporation
Again, consult your operating agreement for your options. If your preferred option is not available, ask the other members to unanimously vote an amendment to be signed by all parties to add the option.
For both membership withdrawal and handling shares, you may only be required to provide a written notice of your intentions. On the other hand, the operating agreement may limit your ability to withdraw. However, if you withdraw in violation of the agreement, you are in breach of the operating agreement and may be forced to pay damages resulting from your withdrawal.
When you receive your share of the assets and/or income due you, they may be offset by damages if you have left in breach of agreement. If the operating agreement contains no guidance for handling the shares of a withdrawing member, the state may have a default procedure.
State LLC laws generally grant an LLC member a share in the assets and income commensurate with the withdrawing member’s ownership interest.
If you are a member of an LLC, you cannot leave the membership on a whim. There are procedures to follow that should be spelled out in the operating agreement or governed by state statute.
If you are contemplating forming an LLC, make sure the operating agreement contains language stating how membership withdrawals, voluntary as well as through death or incapacitation, should be handled. Make provisions for the transfer, sale, or other distribution of each member’s shares that is agreeable to all members.
Finally, check the statutes of the state in which your LLC was formed to any notification requirements to state tax or business licensing agencies.
As with any business organization, you want to be transparent in your actions towards your LLC membership and follow the written operating agreement or state regulations for all your business activities.