Removing a member of a limited liability company can be difficult if the member is unwilling to leave or doesn't accept a buyout offer. If the LLC's operating agreement includes removal and buyout procedures, it can make the process somewhat easier.
Removal Under Terms of Contract
Most LLCs have operating agreements that spell out how and under what conditions the LLC can remove a member. These agreements are contracts binding on all members.
If the removal is by the mutual agreement of all members including the departing member, removal becomes simply a matter of carrying out the procedures and payments mandated in the operating agreement.
If the unsatisfactory member resists removal, getting him out without a court battle may be difficult even with an operating agreement that covers the conditions for removal. In states, such as Illinois, that have statutory procedures for removing a member for cause, litigation may still be necessary because forcible removal requires court approval. In other states, such as Delaware, which has no removal provisions, courts are often reluctant to intervene.
Another issue complicating the removal of a member is the value of the member's interest. If the departing member feels the value stipulated in the operating agreement is too low, that member always has the option of calling for judicial dissolution -- a sale of the LLC's assets under the supervision of the state court. In fact, if the member won't leave voluntarily and threatens to sue if involuntarily ousted, involuntary, or judicial, dissolution may be the only remaining solution.
When Removal Isn't Covered in the Operating Agreement
When the operating agreement doesn't cover the terms and methods for removing a member, removal becomes even more difficult. Sometimes the best solution is for all the parties to sit down together and negotiate the terms of a member's buyout. However, feelings can run so high that reasonable discussion becomes unlikely.
Unless the parties can negotiate a settlement, the only other available solutions are often to drop the attempt to remove the member or to call for judicial dissolution. Although dissolution statutes vary somewhat from state to state, they generally align with California's statutes, which call for judicial dissolution whenever the members are deadlocked or mired in internal dissension.
Accomplishing judicial dissolution, however, is never cheap or easy. The supervising judge may begin by appointing forensic CPAs to value the members' interests. Parties to the issue typically retain attorneys, and either side might request a trial before a jury. The dispute itself almost inevitably lowers the value of the LLC's assets. The prospect of escalating trial costs and the declining valuation of the company's assets, however, may provide the motivation for a negotiated removal.
Read More: Can an LLC Operating Agreement Be Amended?
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.