The unfortunate reality is that many businesses may at some stage, need to rethink their partner or multiple partner options, and consider removing some or all of them for the benefit of the business. When this happens, the most important thing is to make a reasoned and well-informed decision, and if you need professional guidance and support, you can seek it from an entity management firm.
Different rules and guidelines exist for the process depending upon whether the business in question is a corporation, LLC or Partnership, so it’s always best to seek professional help to make sure you remove them appropriately, and legally.
The following information will give you a rough guide as to the steps you’ll need to take to remove a partner, member or shareholder successfully:
How to remove a member from an LLC
In many cases, an Operating Agreement and Articles of Organization will detail provisions for removing a member, and removal may be as simple as the member in question submitting a resignation letter. In such instances where the member isn’t willing to resign, the provisions may call for a vote to take place, but your legal representative can better advise you. Whatever the case, the member is still entitled to compensation for their interest in the LLC.
The operating agreement may include provisions for buying a member out, or there may be a separate agreement for this. If there are no provisions, then the relevant state may have statutory procedures for removal. In the event of no resignation and no provisions, the court may need to be petitioned for judicial dissolution of the LLC.
For any such complications, it’s always best to seek professional advice.
Removing a shareholder from a corporation
Check the Shareholders Agreement first, for any directions on buyout procedures of the removed shareholders ownership interest, and it may be that it can be sold at fair market value and the remaining shareholder capital accounts adjusted accordingly. Then, shareholders must draft a resolution for a vote of approval before either the board of directors, or designated shareholders.
Again, if there is no provision in the Shareholder Agreement, judicial action must be sought. In many states, minority shareholder interests are protected, and majority owners must deal with them honestly and fairly. In both majority and minority ownership disputes, much of the litigation involves reasonableness in salaries, distributions and decisions.
If a partner or shareholder won’t sell their interest, the relevant state may have provisions for ‘forcing’ a sale, or the courts may have to intervene.
Removing a business owner
This can be a particularly tricky process, and there are certain questions you must be able to answer before proceeding, such as:
- How will their removal impact your bank accounts?
- Who must you notify about this?
- In what way will this affect taxes for that year?
- What security measures will you need to take?
If wanting to remove a business owner, then you’d be advised to seek help from a professional entity management firm, who will be able to offer you advice, guidance and support.
Both legal and practical issues may arise as a result of this action, and if the business is carrying debt, both owners may hold personal guaranties, and the creditors may not be willing to release one of the owners. Keep in mind that there may also be tax consequences.
To help the process of removing a business partner, member or shareholder go as smoothly as possible, and to ensure that all necessary and appropriate action is taken, seek professional guidance from an entity management firm.