How to Release a Member From an LLC

A member of an LLC has a percentage of ownership interest in the company and certain rights, as set by the operating agreement and state law. When a member is leaving, the remaining members have to adjust the business ownership percentages and document the departure in writing. Failure to handle the exit correctly might result in the member taking legal action against the company later.

Your LLC's operation agreement might contain specific procedures and requirements for releasing a member. For example, the agreement may call for a written and notarized letter of resignation from the member. You have to follow the rules and process outlined in the agreement for releasing a member. Consult the state laws for LLCs in your area if your agreement doesn't cover release of a member.

You'll need an accurate picture of the leaving member's account to proceed with the release. Balance his capital account with the LLC and confirm you have documentation of all transactions so you know what he has and whether he owes other members money or vice versa. You should arrange for debt settlement before he's released.

Your operating agreement may cover how to buy the released member out. You and the other members must come together and decide how to handle the departing member's buyout if it doesn't. You'll need to assign a value to his share in the LLC. Your operating agreement may provide the value or the method for calculating it. Get a third party involved to professionally value the business if your agreement is silent on it and the members can't agree on a figure.

You'll have forms to complete, sign and keep regarding the member's release, but what you'll need depends on your state's and the operating agreement's requirements. A purchase or buyout agreement is often used to finalize the buying of the leaving member's share. The purchase agreement outlines the terms of the deal, including the share's value and the responsibilities of everyone involved. Speak to an LLC attorney to confirm you've done everything correctly prior to executing the final papers.

You'll need to allocate the leaving member's share of ownership to the remaining members of the LLC. Your operating agreement should state how the percentage is divided among members. Defer to state law if the agreement doesn't cover it. Prepare the departed member's final Schedule K-1 tax statement and deliver it to him so he knows what he needs to report on his tax return regarding the LLC's profits and losses in his final year.

You might have to report the member's departure and provide an updated list of your members to your state's business department by filing the proper forms. What forms you need to use depends on your state. Check with your state's business department to confirm the procedures for removing a member from your LLC's official record with the department.