What are the Recent Approaches to Member Removal from Limited Liability Company (LLC) in Alaska?
When an Alaska LLC has to remove a member, the biggest challenge is to comply with Alaska Revised Limited Liability Company Act (Title 10, Chapter 50). Navigating both the statutory default rules and the operating agreement of the member is equally important.
1. What Alaska Statutes Allow (Default Law)?
As stated in Alaska Stat. § 10.50.205 (2024), the process of LLC member removal is very restrictive:
- Removal cannot be granted through a termination unless one of two conditions is met.
- Example 1: A member sells all of their membership interest. If a majority of the remaining non assigning members approve removal, it can be granted.
- Example 2: A removal can take place if an agreement is reached (with or without cause) as long as it is done in adherence to the operating agreement, which has provisions on removal and is enforced.
2. Composition of the Agreement on Operations:
An agreement on operations has to be structured in a way that there are provisions for removal clauses. This has the potential to grant removal for a defined cause:
- This can be defined as the ability to remove an individual for a reason or without reason if the defined procedure is adhered to.
- The agreements also suggest specific conditions (exceeding a defined vote or notice period), buy out or notice and cure rights. These clauses, if correctly structured, take precedence over default rules.
In the absence of explicit provisions, Alaska’s default statutes will apply, which are quite restrictive and usually necessitate the assignment of interest and a majority consent from non-assignors.
3. Voluntary Resignation by Member:
In this case, an Alaska member may not cease participation at will prior to the winding up of the LLC, unless the operating agreement permits voluntary resignation (Sec. 10.50.185).
Any breach of resignation would result in the LLC claiming damages and adjusting any equilibrium buyout payment against the member’s distributions to non-consensual resignation.
4. Other Statutory Termination Events:
Alaska statutes also describe other events which membership may cease to exist, unless an operating agreement overrides (AS 10.50.225). These events are:
- Assignment for the benefit of creditors
- Bankruptcy filings
- Appointment of a trustee, receiver, or liquidator
- Uncontested, or prolonged insolvency proceedings (more than 120 days unresolved)
These events are unilateral termination events. They are usually are triggered by some legal failing or by financial distress.
5. Manager Removal (If the LLC Has Managers):
Alaska statutes also deal with the removal of managers (AS 10.50.115). Unless otherwise provided for in the operating agreement, removal or appointment of a manager is a reserved matter for which more than 50% of all members must consent.
It is important to distinguish removal of a manager from termination of membership which is more pronounced in LLCs that are managed by a manager.
Operational Guidelines for LLCs Based in Alaska:
To remain compliant and mitigate the risk of legal complications, Alaska LLCs should implement the following steps:
- Go Over the Operating Agreement
What clauses or provisions are within the agreement? Is there a removal clause and does it allow removal with or without cause? What is the governing voting threshold for notice periods?
- Abide by Statutory Defaults in Absence of an Agreement:
In the event your operating agreement is silent, then removal can only take place when a member who is interested in active participation assigns all of their interests and a majority of the remaining members agree.
- Evaluate Resignation Against Removal:
Resignation, in this instance is a voluntary act, and can lead to alleged breach of contract under the operating agreement in addition to incurring liability for the debts of the LLC. - Comprehensive Record Keeping:
Members who grant written consent for authorizations should be documented. Documents should include the signed, dated authorizations, formal records, and grant of interest records. - Amend Official Documents:
Amend the operating agreement, file a Change of Officials (Form 08 491) or wait to reflect changes in your next Biennial Report to the Alaska Corporations Division.
If a responsible party or the entity’s tax classification changes, notify the IRS (Forms 8822 B or 8832 may apply).
Implications for LLCs Registered in Alaska:
Alaska LLCs have an additional challenge due to the statutes that limit involuntary removal without due process and proper documentary evidencing.
Operating agreements provide legal protection against exit management and can be drafted to enable loss prevention.
Legal best practices provide orderly mechanisms that curb the likelihood of legal conflict and protect the organization’s structure while safeguarding every involved entity during change.
LogicWell Technologies can assist with customized removal clause drafting and compliant alteration of member structure for startups or growing enterprises during change management phases.
Sample Removal Clause (Illustrative):
“Members with 75% or more of the company’s membership interests (excluding the member in question) have the right to determine and remove members with or without cause by issuing written notice. The member that is removed is required to assign all of their ownership interest and the company shall buy the interest at fair market value within 60 days. The removed member shall have 15 days to contest the valuation.”
To Conclude:
The Alaska statutes provide no person can be involuntarily removed unless they have given up all interest and the majority consents or there is an operating agreement that stipulates different pathways for removal.
There is a clear need for operating agreements to stipulate the removal, resignation and the creation of defaults.
- Proper documentation and filing systems are in place are particular steps that need to be done after a member exits.
- Effective operating agreements and careful procedures can result in a well-structured and equitable process to remove an LLC member within Alaska.
LogicWell Technologies is ready to aid in developing operating agreements that defend the interests of the owners, facilitate advancement, and comply within the statutes of Alaska.
