When it comes to the removal or expulsion of a member from a Limited Liability Company (LLC), the operating agreement typically details the necessary steps involved. However, depending on the jurisdiction, a member of an LLC can be removed by court order for cause through a process of involuntary dissociation.
Removing an LLC through a court order can be a lengthy and contentious process. That is why it is important to clearly spell out under which circumstances a member may be removed by way of a withdrawal or expulsion clause in an operating agreement or business contract.
Generally speaking, if there is no operating agreement, then the only way to remove an LLC member is through court order or by dissolving the LLC and starting anew.
A limited liability company (LLC) refers to a United States business structure that protects its owners from personal responsibility for any liabilities or debts. An LLC is the most popular business structure for small businesses.
An LLC is made up of units or membership interests. Depending on how the operating agreement is structured, profits and losses can be allocated to members in a number of different ways.
They can be allocated pro rata or according to the specific terms of the operating agreement. However, overall, each member of an LLC contributes and shares in the profits and losses of a business entity.
LLCs offer the flexibility of a partnership and the limited liability of a corporation. LLCs have only one class of members, referred to as “members.” Members can be individuals or entities.
To open an LLC in NY, there are many legal requirements that must be abided by. The regulations that govern LLC ownership, working structure, and regulations vary from state to state. In NY, all LLCs must file Articles of Organization with the NY Department of State.
The ownership structure for an LLC is outlined in Operating Agreements. LLC ownership is divided into ownership percentages which are allocated to each member. The ownership structure will define the rights and responsibilities of each member.
The formation and structuring of an LLC is the first step towards successfully and effectively running a business. There are a number of documents that must be created and have to be signed by all members when setting up an LLC. The documents should include the operating agreement, Articles of Organization, and other agreements as applicable. These will determine the rights and responsibilities of each member, how the LLC will be managed, how to remove a partner from an LLC, and other information.
It is important to understand the rules and regulations governing LLCs before forming or managing one.
Different LLCs can have different procedures for removing a member. In most cases, common steps include:
In some cases, a court may choose to expel a member from an LLC. This is called ‘dissociation’ according to RULLCA (the Revised Uniform Limited Liability Company Act). This law states that there are certain reasons that permit expulsion:
A member that has been dissociated will not have any voting rights.
When a member leaves, the LLC should take certain steps to adjust the ownership structure. These steps may include changing the LLC’s Operating Agreement, making a buy-out agreement among members, or restructuring the LLC’s capitalization tables.
To dissolve the LLC, the members need to get the approval of all the owners of the LLC. The members should also agree on a plan to distribute company assets, including any remaining profits or losses. The owners must then file articles of dissolution with the NY Secretary of State to officially dissolve the LLC.
After dissolution, the company’s liabilities and obligations are extinguished. The LLC should continue to comply with all regulations, like filing taxes and making sure all debts are paid off, prior to dissolution.
It is important to notify creditors of the LLC’s dissolution so they can make arrangements to get their money back. All creditors should be given notice of the LLC’s dissolution and a copy of the articles of dissolution should be sent to them.
When an LLC dissolves, it cannot enter into any new agreements or contracts. The LLC should also make sure to wind down any existing contracts or agreements. All assets of the LLC should be properly distributed, and all members must be given their share of the funds.
If you still have questions on how to draft an operating agreement or how to remove an LLC member, you can consult a lawyer. A startup lawyer with experience in corporate and business law will be able to help you understand the situation and point you in the right direction.
Schedule a free consultation or call us at 323-300-5431 today to get started. Our business lawyers have the experience and knowledge to help steer your LLC toward success.
