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?
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.
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.