A limited liability company (LLC) is a type of business entity that is owned by its members. The members are typically insulated from the debts and liabilities of the business. Members may actively manage an LLC or may assume passive roles in the company. Ownership of an LLC can change by removing or adding members. Generally, members can voluntarily relinquish their interests or they may be removed involuntarily under certain circumstances. The rules for changing LLC ownership interests are governed by state law, which varies from one state to another.
An operating agreement is usually prepared when a limited liability company is formed. In the operating agreement, members outline the terms for future changes in company ownership. The operating agreement should be carefully reviewed and followed when changing LLC members. For example, the document will often stipulate that before a member can sell his ownership interest in the LLC, he must give other members the first option to buy. Changing ownership in violation of an operating agreement can result in unnecessary litigation and costs.
Read More: Do LLC's Have Bylaws or Operating Agreements?
State laws describe events that may trigger the involuntarily removal of an LLC member. For example, New Mexico law states if a member claims bankruptcy, that individual's membership in the LLC is automatically terminated. If a member makes significant financial assignments to creditors, this may also be grounds for loss of membership. Operating agreements may be drafted to override certain trigger events set in state law. For this reason, operating agreements and state law should be read in conjunction with one another.
Death of Members
Ownership of an LLC can be inherited by a deceased member's heirs. It may also be transferred to the beneficiary of a deceased member's trust. If a member dies without a will or trust, the law distributes a member's ownership interest through the state's intestate succession laws. Generally, a deceased member's spouse and children would take his intestate interests. If no spouse or children survive the deceased member, LLC ownership rights would pass to the member's next closest blood relatives.
Documents and Filings
Generally, adding or removing an LLC member is evidenced by a written instrument and signed by its members. Even if an operating agreement or state law does not require that a particular ownership change be in writing, it is wise to do so, as it offers clarity and proof of the change. Some states, such as Arizona, require forms to be filed with the state when certain members are removed or added. The particular requirements of when forms must be filed vary and should be researched on a case-by-case basis to ensure compliance with your state law.
- Internal Revenue Service: Limited Liability Company
- State of California Franchise Tax Board: Limited Liability Company
- State of New Mexico: Limited Liability Company Act
- State of Michigan: Corporation Division Forms and Publications
- State of Utah: Preparing Articles of Organization for a Limited Liability Company
Maggie Lourdes is a full-time attorney in southeast Michigan. She teaches law at Cleary University in Ann Arbor and online for National University in San Diego. Her writing has been featured in "Realtor Magazine," the N.Y. State Bar's "Health Law Journal," "Oakland County Legal News," "Michigan Probate & Estate Planning Journal," "Eye Spy Magazine" and "Surplus Today" magazine.