What happens if one partner wants to leave an LLC?

QUESTION:

We’re a California LLC. Both of us own half the company. We have no other agreement in place. What happens if one partner wants to leave the LLC? What rights does that partner have after leaving?

ANSWER:

by Geraldine Zaroukian at Zarig

Regarding Legal matters:  Usually an LLC is governed by an Operating Agreement.  An Operating Agreement is not required by the government or by law; however, in some states such as California, LLCs are required under state law to have an Operating Agreement. Whether required or not by state law, Operating Agreements are not filed with the government nor the state. That said, an Operating Agreement is a very helpful and important document for members of an LLC. (Owners of an LLC are called members.)

  • In general, membership interest in an LLC is not freely transferable.
  • The Operating Agreement sets forth the rules, duties and compensation of the members of the LLC.
  • The Operating Agreement covers how a member can exit the business.

For example, the other members may have to buy the membership interests of the outgoing member at a preset percentage of the business’ fair market value.

In situations where an operating agreement does not exist or does not cover these matters, then state laws regarding LLC/partnerships will apply.

For instance, in some states the death or departure of a member forces an automatic dissolution and wind down of the LLC.

In California, all LLC’s are required under state law to have a Limited Liability Company Operating Agreement.

I suggest you review your LLC’s operating agreement. It should contain the procedure on how to deal with an outgoing member.

If you do not have an Operating Agreement, then depending on state laws you might have to buy out your partner’s membership interest or might have to dissolve the LLC. Make sure that you consult an attorney and that the buyout is complete and everything is done properly. If not, the outgoing member could come back later on and sue you and the LLC.

In California, you may buyout your partner’s interest in the LLC. If you cannot come to an agreement on the fair market price and on the terms of payment, then because your partner owns 50% of the LLC, he/she can legally force the LLC to dissolve.

If you wish to continue the LLC but cannot come to an agreement on the fair market value of the outgoing member’s interest, you can post bond to cover court expenses and attorney fees and go to court. The courts will appoint independent estimators who will appraise the fair market value of the outgoing member’s interest in the LLC.

If you pay the fair market value (decided by the courts) on time and in full for the outgoing member’s interest in the LLC then the LLC can continue to operate and exist. If not the LLC, dissolves and winds down and once all liabilities of the LLC are paid off, each member gets their percentage of the remaining assets.

Regarding taxes:

Once your partner leaves the LLC, the LLC becomes a single member LLC. An LLC that was previously treated as a partnership for tax purposes becomes a disregarded entity for federal tax purposes once it becomes a single member LLC (meaning the income of the LLC is included directly on your individual tax return Form 1040).

Other administrative matters:

Once your partner leaves, you want to be sure to remove his/her access to bank accounts, company credit cards, etc…

Not having enough detail on the particulars of your situation, if the separation is mutual then you can always create an agreement and go from there, otherwise if the decision is not mutual then consulting with a lawyer would be your best route.

Good luck.


Comments & Advice:
  1. You are in a tough situation for reasons I will explain below.

    If 50% ownership were sufficient to dissolve the LLC, it is quite possible that one of the two members would proceed with dissolution.

    Unfortunately, while 50% ownership suffices to dissolve a corporation, a *majority* vote is required to dissolve an LLC. (Please see “How to Kill Your Company when that’s the Only Choice” at http://dana.sh/cWmMNR.)

    This means that, one way or another, you and the other member will need to come to some sort of agreement – dissolution, buy-out, or something else. (There is no way you can justify the expense of litigating this matter.)

  2. Linda says:

    I have a new situation. What if I (the native U.S. Citizen) wish to leave the LLC and give my rights to my partner who is an international citizen, does that work?

  3. Lasse says:

    I have a peculiar albeit probably not uncommon situation. I have been forced to leave the partnership, but instead of offering me a fair price for my 44% I’m being threatened with lawsuits and they even tried to buy me out for $100. I was ready to hand over my share in a sign of good faith provided they would compensate me for my contribution in the form of custom built software and brand identity that we would otherwise have had to out source to agencies. The partners were just not healthy for me to continue working with, but I still want them to make me a fair offer. The company is not making any money and is not beyond seed stage. Any advice?

  4. Allen says:

    My question: my 2 partners and I have an LLC in Texas. We each own 33% of the LLC. One partner is now leaving.

    We have no clause in the Operating Agreement that governs what to do with his share.

    Logically, I would expect that we just split his share up equally btwn the remaining 2 partners, but we don’t agree on that solution yet.

    Does anyone here know if Texas has a governing rule or law about how to handle the distribution of the departing partner’s shares?

  5. Lyn says:

    I joined a 5 person LLC in January 2013. In May one member left, signed a letter stating he wanted nothing except to be removed. The CEO (managing partner) STILL has not filed paperwork to offically remove him. It is now September.

    I have also elected to leave the LLC and want nothing in return.

    The CEO never filed an operating agreement, but led us to believe he had. He claims to have nothing in writing.

    I do not want to be tied to the business at all. I invested no money and want no financial obligations. I have not allowed my name or credentials to be used on any financial applications.

    Is he legally required to remove us from the LLC? Can I have myself removed without his filing?

  6. Debra Hamm says:

    Do I need to do anything to let the IRS know that my LLC has been converted to a single member? Is there a form that needs to be filed?

    Thank you

  7. Watson says:

    I am leaving a three person LLC. I initially contributed $450 in cash and have paid for web domain, web hosting and online store for a few months. I also did 99% of the graphic design work. I am willing to walk away for zero money just to get out of the situation. The situation is that one majority partner is making all financial and other every day decisions without consulting me and the other partner. He makes poor decisions and I just want to walk away. My concern is taxes. We never had any other paperwork drawn up or even submitted to the IRS or state other than the LLC paperwork. Will I be able to walk away and not worry about any of the taxes if I get the other majority partner to sign paperwork stating he has always made all decisions and ran the company? This is a company in Alabama and we are able to amend the LLC and not required to dissolve it. However, if the other partners make a big enough deal, I will inquire to have it dissolved and not amended. but I really don’t see that happening. I want out ASAP and any help/advice would be greatly appreciated!!!

  8. Alexis K aiser says:

    My boyfriend’s partner misrepresented himself as the managing partner of their LLC (they are the only managers and are 50/50) and reassigned the trademark and intellectual property of their LLC to his own corporation. I am under suspicion that that my boyfriend’s partner could have misrepresented himself in this fashion to the state in order to dissolve the LLC. Is this possible? The LLC is registered in California. What charges can be brought against this man for this type of misrepresentation and essentially stealing the company?

  9. Joe D. says:

    I am managing member of a Florida LLC and 50% owner. My partner wants to be bought out and be replaced by my wife. We have come to a cash agreement. We do not have any buyout agreement. We both agree to the buyout terms of a one time cash buyout. What type of contract do we need to proceed. I have been unsuccessful at finding one online.

  10. Kim says:

    My question is if one LLC member leaves the LLC who takes possession of all previous year tax documents? the person still running the business or the person who left the business?

  11. Neman says:

    My partner did all llc paper work in his name but made me file 50%member taxes for 2 years now he wants me to walk away at 0

  12. Neman says:

    I was on every year since open in we loss money on paper but I in truth it’s worth $ plus we both invested a bunch he is running it want to pay me pennies

  13. Newman says:

    He wants to say I was stealing more than he was !!!!!! So I walk away from a pot o gold Broke

  14. Business partners always seem to turn against you.

  15. Linda says:

    Is there any paperwork needed for a member to leave an LLC and does not want payment

  16. KSE says:

    I need help. I brought my best friend into a allready formed general contracting llc and made him 50% owner. I had all the equipment tools truck office yard etc. I brought him on because I was diognosed with luikemia which I have been fighting for the last 5 years. This type of cancer has me having to be on mild chemo for the rest of my life and because of this I am sick a lot. We never formed an agreement but basically he was supposed to run things to make up for all the money I had invested and I would do bidding and whatever else I could. This lasted 2 years and we ended up having his wife do the books. We started to get a lot of work but because the bookkeeper was his wife she hid how bad we where getting into debt with our suppliers. Basically we where using money that should have gone to them for payrol including both of there’s and for fixing up his house. I was really going through a hard spell with being sick, excruciating pain in my organs, liver and kidney failure. Because of this I never paid attention to the books and we ended up with $250k in debt and no money to pay. Because of this he decides to take off to Texas to build storage units for a good amount of money. He tells me that he will cover half when he gets the bug check when the project is complete. A few months after he left being the stat agent I received a letter in the mail from the AZ corporation commission with a check from the new company that he is working for and paperwork taking him off the llc. He wrote the wrong amount on the check so they declined him. I have never told him this because I want to keep him on until he pays his portion of the debt. Well his first project finished last week and out of the $10 k a month he gets paid and the $100k he makes each project he sends me $5000.00. It’s been almost 9 months since he left and I have my whole side of my debt paid off. What I am wanting to know is if there is any way to keep him on the llc until I get paid or we go bankrupt? The llc was formed in AZ

  17. harry says:

    My partner in llc florida is attempting to dissolve the company without giving me notice. I only found out through 3rd party. Can they dissolve the company without my agreement or involvement?. We both own 50%. And once dissolved can I reinstate the sane company name

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