Checklist for Removing a Member from Your LLC:
Limited Liability Companies (LLCs) come with various advantages such as flexibility and the shielding of personal assets, and the ability to have multiple owners or members organized in a simple structure. That said, there are issues when a member wishes to leave, or when a member must be removed for personal reasons, disputes, or a business’s change in direction. Removing a member from your LLC may appear simple; however, there are a host of legal, financial, and operational issues that must be addressed to enable the business to continue without interruption.
This checklist will help illustrate the various key tasks which will enable you to remove a member from your LLC.
1. Review Your Operating Agreement:
The first and most important task will be to review your LLC’s operating agreement. It should detail the procedures that will govern the membership changes, record the procedures for resignations and buyouts, and note the protocols for a forced removal. Some agreements will set out a voting arrangement and others will provide a buyout provision for a member who wishes to leave. If your LLC does not have an operating agreement, the process of changing membership will generally be governed by state law.
2. Comprehend State Guidelines:
Each state has its own distinct laws governing the conduct of limited liability companies and the removal of their members. Some jurisdictions permit the removal of members with a simple majority while others necessitate a unanimous decision. Understanding these regulations is necessary to avoid noncompliance. Consulting with a qualified attorney is generally a good idea to ensure that all state-specific needs are satisfied.Â
3. Conduct an Official Vote:
Typically, an official vote is required to remove a member. Even if the operating agreement doesn’t require it, the company should record the vote and the results. Maintaining these records is a precaution and promotes transparency to the remaining members.
4. Draft a Buyout Agreement:
A buyout agreement defines the terms of separation and describes how the business will compensate the former member for their ownership stake. This agreement should define the business valuation, payment structure, and any future engagement limitations.Â
5. Amend Legal and Financial Records:
Once the buyout is completed, update your LLC’s legal and financial records to encompass the changes in membership. This includes revising your operating agreement, modifying ownership shares, and updating any contracts or agreements where the previous member is assigned.Â
6. Notify the State:
In most cases, LLCs are required to either amend their Articles of Organization or submit an amendment once a member is removed. Timely submit any required paperwork to your state Secretary of State or equivalent agency. Having paperwork out of date or missing can lead to issues or penalties.Â
7. Adjust Tax Records and Bank Information
Tax records and bank account details must reflect the adjusted ownership. Inform the IRS, update your Employer Identification Number (EIN) account, and adjust bank signatory records to remove the exited member so they can no longer monitor or access outside accounts.Â
8. Inform Internal and External Stakeholders:
At last, having completed all legal and financial actions required, formally inform your employees, partners, and stakeholders of the change. Effective communication preserves trust and enables all members to grasp the new organizational framework of your LLC.Â
Final Thoughts:
Carefully planning and executing the removal of a member from your LLC is a necessary step. Your checklist identifies how to minimize business disruption and protect it, including reviewing your operating agreement, understanding the relevant state laws, documenting your votes, crafting a buyout agreement, and revising all legal and financial documentation.
At Logicwell Technologies, it is important to understand that the combination of seamless procedures and appropriate record keeping will sustain positive business expansion. Just as careful planning is important for changes in your business structure, other business functions, such as the protection and management of your digital property, must be equally well safeguarded. For further reading in this area, see our blog on safeguarding your e-commerce site.Â
