How to Get Out of LLC Partnership? (Process & Steps Guide)
At some point, a member of a limited liability company partnership may opt to get out of the entity for personal reasons. There are corresponding steps to be taken by the withdrawing member for the process to be legal and fair to all concerned.
As a business consultant specializing in limited liability companies, I gained over a decade of experience addressing client's concerns about the addition and withdrawal of LLC members.
I’ll provide a comprehensive guide on how you could get out of a limited liability company partnership agreement, backed by in-depth research and legal advice from our panel of attorneys.
Quick Summary
- To get out of an LLC, you have to follow the provisions indicated in the operating agreement. In the absence of one, state laws apply.
- Methods of withdrawing from a business entity include membership transfer, selling of membership interest, and death or incapacitation.
- Approximately 70% of business partnerships ultimately fail, underscoring the importance of understanding exit strategies from an LLC partnership.
- Before formally withdrawing from your limited liability company, protect yourself from liability, resolve all issues, and determine the value of your shares.
How to Withdraw from an LLC Partnership?
To withdraw from an LLC partnership, consult your operating agreement, provide written notice, transfer your shares, and notify the state of your withdrawal.
Step 1: Consult Your Operating Agreement
Your operating agreement is a contract between the members of your business organization that outlines company rules, including the ones regarding a leaving member.
For a voluntary withdrawal, determine the steps outlined in the operating agreement.
In the absence of the document, the withdrawal procedure will automatically follow state rules.
Step 2: Follow the Steps Indicated in Your Operating Agreement
The LLC operating agreement would facilitate a systematic procedure to enable you to withdraw from an LLC partnership expeditiously.
Step 3: Provide a Written Notice
Withdrawing members will also need to provide notice to the other partners of their intention to leave the company.
According to the Internal Revenue Service (IRS), there were over 4 million partnerships in 2021, 9.9% of which are limited partnership.
This would allow them to vote on your withdrawal and the distribution of your assets.
Step 4: Transfer Your Share of Assets and Income
Once your withdrawal is approved, you can receive the income and assets you are entitled to.
You may transfer your share of the LLC's assets and all income you earn after withdrawal into your personal account.
Step 5: Notify The State Of Your Withdrawal
The final step is to send a written notice by filing a Certificate of Withdrawal with the Secretary of State or its equivalent agency.
"Sometimes, business opportunities close because it's time to move forward. It simply means that other good things will happen in the future."
- Danya Shafkeh, Corporate Attorney & Writer of Venture Smarter
Methods of Withdrawing from an LLC
There are some additional methods for withdrawing from an LLC as per operating agreements.
1. Membership Transfer
If your LLC's operating agreement allows it and you have the procedure in place, you may be able to transfer all or a fraction of your membership to someone else [1].
2. Selling a Membership
A departing member can sell his interest in the LLC by selling it to another individual or the company.
3. Death or Incapacitation
In the case of death or incapacitation, a member may act as a successor to the position. The process is usually stipulated in the operating agreement.
Information to Gather Before Negotiations Begin
Although your share is determined by operating agreements, you need to know the fair market value of your equity in the company at the time of withdrawal.
You may employ an independent valuation done by a third party or use comparable sales within your industry as benchmarks.
Protecting Yourself from Liabilities
As an LLC member, it's important to protect yourself from any liabilities resulting from your withdrawal.
You have to provide notice before withdrawing from your LLC. Failure to do so may result in legal action.
In my experience as a business consultant, crafting a detailed "exit strategy" is crucial for any LLC partner considering departure. This plan should outline the exit process, timeline, and successor.
Additionally, ensure all financial obligations like debts and taxes are cleared before leaving to avoid legal complications and protect your liability.
If possible, try and get a written agreement from the other LLC members stating that they will not pursue any legal action against you as a withdrawing member and that they will indemnify you from any liabilities arising from the process.
What to do When Cooperation Issues Arise?
When cooperation issues arise, negotiation is the key first step.
Referencing the operating agreement often resolves issues, as it typically outlines procedures for such situations. Clear guidelines can streamline resolution and maintain business harmony.
What Happens to Your Shares?
Your shares will be determined based on the conditions contained in the separation agreement.
In the absence of an operating agreement, state LLC laws generally grant an LLC member a share in the assets and income commensurate with the withdrawing member's ownership interest.
Related Articles:
- What’s The Difference Between an LLC and a Partnership
- What Is a Disregarded Entity LLC
- Should I Fire My Business Partner
FAQs
How Do You Buy Out a Partner in an LLC?
You can buy out a partner in an LLC either by buying their shares of the company or by negotiating a buyout agreement with them. Provisions for this process should be outlined in the LLC operating agreements.
How Do I Force My Partner Out of Business?
You can force your partner out of a business by filing a lawsuit. However, you can consider negotiating with the individual to resolve the problem.
How Do You Split Ownership of an LLC?
To split ownership of an LLC, determine the capital contribution of each member and divide assets and losses equitably. Typically, the owners will need to draft and file an operating agreement detailing how to divide a company.
References:
- https://www.sec.gov/Archives/edgar/data/735780/000095013404007752/c85469exv10w58.htm
