How to Remove a Partner From an LLC and Protect Your Business

A Forbes report shows that 65% of businesses fail due to founder conflict. What was once a shared business vision falls apart, leading to situations where you have to let go of your company partner, perhaps due to disagreements over business direction, money, management styles, or personal issues.

Whatever the reason, you should understand how to remove a partner from an LLC to plan carefully and adhere to specific legal procedures. That way, you can ensure a smooth, compliant exit process that protects your investment, your business operations, and all parties involved.

This guide explains what it means to remove a partner, when you may need to remove them, how to go about it, the costs involved, how long it might take, and common mistakes to avoid during the process.

TL;DR: How to Remove a Partner From an LLC

In a rush?

Here are the 9 steps to legally remove a partner from an LLC:

1. Review the operating agreement.
2. Issue a proper notice.
3. Hold a membership meeting and vote (only if the partnership involves more members).
4. Communicate with your partner.
5. Negotiate the buyout and the exit terms.
6. Formalize the buyout agreement.
7. Update the operating agreement to reflect the new ownership structure.
8. File the required state documents.
9. Update the LLC documents, accounts, and IRS records.

We will discuss these in detail below.

What It Means to Remove a Partner From an LLC

Removing a member from an LLC occurs when they decide to leave the business or when unavoidable circumstances require a change of ownership.

Whatever the reason, you have to follow your operating agreement that sets out the terms agreed to by all members. Where your operating agreement does not cover an expulsion clause, you must consult the state law that governs your LLC permits.

Removing a member from an LLC has these consequences:

• They cannot carry out fiduciary duties.
• They lose their management and voting rights.
• They have the right to receive their share of distribution and profits unless the operating agreement states otherwise.

When You May Need to Remove a Partner From an LLC

Several behaviors can destroy a business partnership and compel you to remove your partner from an LLC.

Check out a list of the scenarios:

1. Violations of Agreement: If a partner fails to uphold the agreement, the other members can vote them out under an expulsion clause or another provision. In involuntary removal, you should have documented evidence of the legitimate grounds for dissociation.
2. Partnership Disputes: It is common for LLC members to disagree on several matters related to the business, such as operating procedures, the business strategy, and more. However, when the conflicts compromise decision-making and business operations, you may have to remove the conflicting partner.
3. Misuse of Company Funds: If there are proven cases of misappropriation of funds or fraudulent activities implicating the member. Any member who compromises a company’s financial stability poses a significant risk to its growth and deserves to be expelled.
4. Conflict of Interest: When a partner’s personal interests interfere with the company’s best interests. For instance, if they engage in a competing venture or use their position within the LLC for personal gain.
5. Criminal Misconduct: A member facing criminal charges for unlawful actions may threaten the company’s reputation and finances. This may include losing a professional license required to operate the LLC, or being charged with a felony, which is an automatic ground for expulsion.
6. Retirement or Death: The death of a partner triggers an automatic removal. The operating agreement stipulates how you should handle removal following the death of an LCC member. It also includes how to distribute the deceased’s shares to the heirs or allowing surviving members to buy out the deceased’s ownership from the heirs.

How to Remove a Partner From an LLC Step by Step

Removing your partner from an LLC involves several steps, often guided by your operating agreement or your state’s LLC statutes.

Let’s explore the steps to follow when releasing a partner from an LLC:

1. Review the Operating Agreement

Consult your LLC’s operating agreement to understand the specific procedures outlined for removing a partner.

Pay attention to provisions that stipulate buyout terms, valuation methods for determining departing members’ shares, grounds for involuntary removal, and required notice.

2. Issue a Proper Notice

Send a formal notice to your partner informing them of the proposed removal.

The notice should specify the reason for intended removal, referencing the relevant provisions in the operating agreement, your articles of organization, or the state’s limited liability act.

3. Hold Membership Meeting and Vote

If the agreement requires remaining members to vote to prove consensus, then formalize the process.

Call for a formal meeting, document the members’ attendance, the minutes, and record the voting results.

4. Communicate with Your Partner

One of the key principles of entrepreneurship is effective communication. Inform your partner of the agreed resolution.

If the removal is involuntary, ensure they understand the reason behind the decision. Aim for an amicable resolution.

5. Negotiate Buyout and the Exit Terms

Using the methods stipulated in the agreement (if any), determine a defensible fair value of the partner in question. If the operating agreement does not provide any valuation formula, negotiate and agree on a method to be used.

Consider a neutral third-party valuation. Also, document everything agreed upon to prevent future disputes.

6. Formalize the Buyout Agreement

Draft a detailed buyout agreement that clearly stipulates the amount to be paid to the departing partner, the payment schedule, and the payment terms.

Also include indemnity provisions, release-of-claims, non-compete, and confidentiality clauses.

7. Update the Operating Agreement

Prepare an amendment to reflect the new changes in the LLC ownership. Remove the outgoing member from the membership schedule.

Also, update the list and contact information for the remaining member(s) and adjust the new ownership percentage allocations.

8. File Required State Documents

Review your state’s laws to understand the paperwork required based on what the law stipulates and the outgoing member’s position in the LLC.

Common documents you may be required to file include: Articles of amendment, updated member information forms, and annual report updates.

9. Update the LLC Documents, Accounts, and IRS Records

Remove your outgoing partner’s details from business licenses, tax documents, bank accounts, and credit lines. Also, file Form 8822-B with the IRS to reflect the new changes in the business ownership.

Issue a final K-1 form to the outgoing partner for them to file their returns through the date of the buyout. Then file Form 1065, U.S. Return of Partnership Income for the period of the year that the LLC operated as a multi-member entity.

If you’re looking for advice on how to remove your partner without complications, I can help.

As a co-founder of FreeUp, scaling it to $12M in ARR in 4 years and successfully exiting in 2019, I have experience in situations like this. Together, we can decide on the best plan to remove your partner from an LLC without affecting your business’s trajectory.

Schedule a free call, and let’s figure out the best plan for your business.

Cost and Timeline of Removing a Partner From an LLC

Several factors dictate the cost and duration of removing a partner from an LLC:

Typical Removal Expenses

Some of the costs you’ll likely incur include:

• Buyout Costs: The amount you pay to buy out your outgoing partner. It is usually equivalent to their ownership and is influenced by the valuation method outlined in your operating agreement or the terms negotiated with your partner.
• State Filing Fees: Formalizing changes with your state by filing an article of amendment or other required forms often incurs a fee. This ranges from $25 to $150 depending on your state.
• Valuation Cost: You may need to hire a certified appraiser to determine the Fair Market Value (FMV) for the outgoing partner’s ownership percentage interest. This may cost you several thousand dollars.
• Legal Fees: Also consider the cost of an attorney to update the operating agreement, draft a legally binding buyout agreement, or handle litigation.

It is worth noting that departures involving legal battles can be more costly than those without disputes.

Typical Timeline

The duration it takes to remove your partner varies significantly depending on the terms you’ll use to terminate their partnership:

• Operating Agreement: In some states, the operating agreement requires you or the departing partner to give a 30-day notice before removal. After which, you can release them.
  The reality: Simple voluntary exits can take days or a few weeks to close, but involuntary departures involving complex disputes can take months or even years.
• State Laws: Where the agreement is silent, your state’s law is applied and does not follow any specific timeline. If your partner opts for a 30-day voluntary exit, they are required to give you a 30-day written notice. If the removal is by expulsion, they are removed via a judicial order.

Note that removal by unanimous consent applies to RULLA states and to LLCs with more than 2 members.

Common Mistakes to Avoid When Removing a Partner

On the verge of getting rid of a 50/50 business partner?

If you want to protect yourself and the business from costly liabilities, avoid these often overlooked mistakes:

Mistake	Explanation
Skipping the Operating Agreement	An LLC agreement establishes clear rules and structures for addressing issues regarding partner removal. Ignoring it can expose you to breach-of-contract claims.
Not Preparing Proper Documentation	Poor documentation of membership changes, including all the approvals, valuations, and decisions, can lead to costly legal disputes. The departing member might challenge removal decisions in court.
Failure to follow proper procedures	Following shortcuts when removing a member may trigger a court order. You might be required to dissolve the LLC, buy out the departing partner, or retain rights to profits, losses, and distributions of the departing members.
Overlooking Tax Implications	Filling wrong returns after the removal of a member or skipping it altogether can result in unfavorable tax treatment or legal disputes for both of you and the LLC. Also, without documented evidence of the ownership changes, the IRS may consider your partner as a member of your LLC, creating liability for the company.
Failing to Update the Operating Agreement	Failure to amend the operating agreement to reflect new membership changes may expose you to future liabilities. These risks are associated with the outgoing partner’s actions during their participation in the LLC.
Failing to Document the Valuation Methodology	An undocumented valuation process is a major cause of post-buyout litigation. If the business increases in value shortly after the change of ownership, the outgoing partner may file a claim alleging that you suppressed the company's value before their exit.

Frequently Asked Questions(FAQs)

Here are common questions that most LLC owners ask when planning to remove a partner:

Can a Member Be Forced Out of an LLC?

Yes, an LLC member can be involuntarily removed if the operating agreement provides for it or the court orders it.

Whatever the scenario, proper procedures must be followed to protect the LLC’s interest and those of both you and your outgoing partner.

What Happens to the LLC When a Partner Leaves?

What happens depends largely on the resolution arrived at when removing your partner.

• The company ownership may change.
• The operating agreement may be updated.
• The member ownership percentage allocation may be adjusted to match the new changes.
• Unless the court orders the LLC’s dissolution, the company usually implements scalable business ideas to continue its operations.

Does Removing a Partner Require a New EIN?

Yes, if removing your partner changes your LLC from a multi-member LLC to a single-member LLC. This automatically changes its tax classification, and it’s treated as a ‘disregarded entity.’

So, you should file Form SS-4 to obtain a new EIN and also file an S-Corp or C-Corp with the IRS to change the structure of your company to a corporation or partnership.

What If There Is No Operating Agreement?

If there is no operating agreement, you’ll have to base your partner removal on your state’s law.

Depending on your state, you may have to negotiate a buyout with your partner, and the court may issue a petition for the removal. Alternatively, you and any other members may be required to vote the partner out.

Conclusion

Removing your partner from an LLC is a legally complex process. Therefore, you should follow the right protocols to protect your business and ensure the removal process is handled fairly and legally.

Remember, a single misstep can disrupt your LLC’s operations, trigger lawsuits, lead to dissolution, or give leverage to the same partner you want out.

If you’re feeling overwhelmed by the steps of removing a partner from an LLC, consider partnering with me.

I’ve built and scaled businesses to $12M ARR, and I have the experience and skills to help you with every aspect of your LLC. We can discuss your situation, and I can share insights from my experience.

Reach out to me and get practical advice at every stage of the process.