Removing a business partner from an LLC is one of the toughest situations a small company can face. Fortunately, most companies avoid legal battles by following proper procedures from the start.
It’s best not to skip steps or take an informal attitude toward the removal, however, since it may increase the risk of disputes or legal challenges. This guide walks you through the general process. We’ll cover everything from starting the buyout conversation to filing the final paperwork with the state.
A voluntary exit is often a practical place to start. It's far less complicated than forcing someone out. Legal disputes can become very costly depending on complexity and how they are resolved.
It’s recommended to start the conversation early and to keep it professional. You may bring a clear proposal to the table that covers:
Your LLC’s operating agreement is custom to your business. Review yours carefully to make sure you know the rules that apply to removing a partner.
Once you agree on terms, put everything in writing. Here are some of the documents you might use to complete the buyout:
Ask a lawyer about how to create important legal documents, and have them review anything in writing before you sign it.
If you can’t complete a voluntary buyout, then here are the basic steps to a forced buyout of an LLC Member.
Your LLC operating agreement acts as your business's rulebook. Before taking any formal steps to remove a member, read it closely. If your agreement covers member removal, you’ll follow those rules. If not, you'll need to rely on your state's default LLC laws.
Pull up your agreement and look for these specific sections:
If your LLC operating agreement doesn't cover these topics, your state's default LLC laws may apply instead. Some states follow frameworks such as the Revised Uniform Limited Liability Company Act (RULLCA). That's a law that provides a basic framework for removing a member when your agreement lacks details.
It’s important not to cut corners and follow the required procedures on the voting rules when resolving business disputes. That may give the removed member grounds to challenge the decision in court.
Your operating agreement should have specific requirements about how a meeting of the members can be called. Follow these rules closely. When you have a meeting, record the vote in written form.
Voting thresholds depend on your operating agreement and state law. Some states default to a simple majority, while others may differ. Many agreements require a supermajority, which is defined as a percentage of membership interest.
Your LLC operating agreement may specify a particular valuation method. One common method is using the fair market value (FMV) of the business. FMV means the price a willing buyer would pay a willing seller when neither party faces pressure to complete the deal. The company may need to hire a certified appraiser to determine the business's FMV.
Accurately valuing the ownership interest can help reduce the risk of disputes or challenges. Underpaying or delaying payment gives the partner grounds to challenge the removal in court.
If your LLC operating agreement does not specify your valuation method or amount, a professional appraiser can consider your business's earnings and assets. They can also consider comparable sales.
Once you agree on the value, follow these steps to complete the buyout:
● If not set out in the operating agreement, document the payment terms (whether a lump sum or scheduled payments) in a written agreement
● Sign the contracts
● Make the agreed payment
Keep records of every step. Clean documentation protects all LLC members if the removal is later challenged in court.
Now that your LLC membership has changed, you may have some additional steps to complete. Let’s discuss those now.
In some states, the removal is not considered fully effective until you notify the state. Filing articles of amendment with your Secretary of State updates the public record to reflect the change in LLC membership.
The filing process is straightforward. Most states let you file online through the Secretary of State's website. You usually need to include:
States use different names for this form, for example, "Certificate of Amendment", “Articles of Amendment” or "Statement of Change." Check your state's Secretary of State website to confirm the correct form and current fee. Understanding the steps to start an LLC in your state, from formation through major changes, helps you stay compliant at every stage.
Once the steps are done, update your business records. If a departing partner still has access to your bank accounts, licenses, or business systems, it may create operational or security concerns. Before removing a member, it’s a good idea to think about any impact to banking or licensing that will occur if a member is removed. Then, after the removal, go through this checklist to clean up your business records:
Banking and finances
IRS and tax records
Licenses, permits, and insurance
Internal documents and digital access
Sometimes, a partner refuses to leave even after a valid vote. When that happens, court involvement may become necessary. This is the most expensive and time-consuming path, but it is a real option when everything else fails. If your dispute reaches this stage, you’ll need help from a lawyer.
This is especially true if you’re trying to remove someone who has an equal share. If you co-own a business with one other person and split ownership 50-50, it’s incredibly difficult to remove them against their will. If you don’t have a very explicit and well-crafted Operating Agreement, it gets even harder.
Courts may, in certain circumstances, order a partner's removal on several grounds, including:
If you need to file a case, you'll submit a petition in state court and provide evidence supporting your grounds. Courts generally prefer to order a buyout rather than dissolve the business when it remains viable.
Sometimes, removing a partner is not possible or practical. When that happens, dissolving the LLC is a legitimate alternative. Dissolution may be considered in situations such as:
Dissolving an LLC means winding down the business entirely. You settle outstanding debts and fulfill existing contracts. Then the company distributes remaining assets to members based on ownership percentages. Finally, you’ll file articles of dissolution with your Secretary of State.
Removing a partner from an LLC involves complex legal and financial considerations that vary by state and operating agreement. While LegalShield® Small Business Plans don't cover LLC member disputes directly, having a lawyer review your operating agreement or business contracts before disputes arise can help you understand your options and obligations. A LegalShield Small Business Plan connects you with a provider law firm that can help with everyday business legal needs so that you're not starting from scratch when legal questions come up.
In some cases, a partner may be removed without their consent, depending on the operating agreement and state law. Look at your operating agreement or consult your state's legal rules with a lawyer regarding removal rules. You need a formal member vote with proper notice and written documentation. If the partner contests the removal, you may need to file a court petition.
No. Removal and dissolution are two separate processes. Most LLCs can remove a member without dissolving, provided the operating agreement or state law allows it. Dissolution ends the LLC as a registered entity with the state. Removal changes the membership structure.
Costs vary depending on how the removal unfolds. Voluntary buyouts include filing and legal fees, as well as paying out a share to the person being removed. If there’s a conflict, the expenses can increase considerably.
Pre-Paid Legal Services, Inc. (“LegalShield”) provides access to legal services offered by a network of provider law firms to LegalShield members through membership-based participation. Neither LegalShield nor its officers, employees or sales associates directly or indirectly provide legal services, representation, or advice. Small Business Legal Plans and certain benefits are not available in all states. See a Small Business Legal Plan contract for a specific state for complete terms, coverage, amounts, and conditions. The information made available in this blog is meant to provide general information and is not intended to provide legal advice, render an opinion, or provide a recommendation as to a specific matter. The blog post is not a substitute for competent legal counsel from a licensed professional lawyer in the state or province where your legal issues exist, and you should seek legal counsel for your specific legal matter. Information contained in the blog may be provided by authors who could be a third-party paid contributor. All information by authors is accepted in good faith, however, LegalShield makes no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of such information.
Content Specialist at LegalShield, creating educational resources about legal and consumer protection topics. She focuses on making complex legal and financial concepts accessible to readers and has contributed to various educational articles on consumer rights and protections.
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