Updated: Sep 21
It may be impossible to predict if or when a business arrangement will break down. Businesses often run into problems. Getting out of an LLC is not always neat or easy. It can be costly and time consuming, and the result may be like a bad divorce. If you are in a bad business situation and need to get out, here are a few things to consider.
Why Might Someone Want to Leave a Business?
There are several reasons why you might want to remove yourself from an LLC:
1. You want to start your own business, perhaps a competing business. It may be a violation of your company’s operating agreement or the common law duty of loyalty that you owe to the company if you were to compete with your own LLC’s business. In any event, if you were to take a business opportunity that is otherwise consistent with your LLC’s business and benefit from it on your own, your business partners will likely be very upset with you.
2. You no longer want to work with your business partners. Maybe there’s a personality clash or your vision for the business is no longer a match.
3. You are moving away and will be unable to contribute to or manage the business.
4. You have accepted a job that prohibits you from working a side hustle or for a competing business.
5. You are retiring.
6. Your partners are unwilling to invest the time or money necessary to make the business a success.
How to Withdraw From Your LLC
Under Pennsylvania law, any person has the power to disassociate (withdraw) as a member of an LLC at any time. It can be done “rightfully" or "wrongfully." It is done “wrongfully” if it is a breach of an express provision in the operating agreement for the LLC. Most operating agreements include provisions prohibiting members from withdrawing. If the operating agreement says nothing about withdrawal, then you can withdraw “rightfully” in accordance with Pennsylvania law. In the event of a “wrongful” withdrawal, the withdrawing member can be liable to the LLC and its members for damages associated with the withdrawal. To withdraw, follow these steps:
1. Gather information.
Before you make your desire to withdraw known to your business partners, it is a good idea to gather information that you might need in the event of a dispute. You should pay particular attention to business liabilities that name you personally. These could be contracts, liens, commercial leases, promissory notes, lines of credit or any other document that has your name on it, that you signed or that you signed for as a guarantor. Consider also other forms of liability such as unpaid wages, money held in a trustee capacity that has yet to be paid to the obligor and outstanding tax liabilities. You will also want to identify anywhere your name appears in the LLC formation documents and determine whether your name was included on the IRS forms when the LLC’s tax identification or other tax documents were filed.
2. Determine whether the operating agreement for the company speaks to your right to withdraw and if so, a process for withdrawal.
If your operating agreement does not contain a procedure for withdrawal, you must follow the procedure laid out in your state laws. The procedure in your operating agreement always takes precedence over state procedures. Note that if your operating agreement places limits on your ability to withdraw, doing so could be a violation of the agreement, putting you in breach. If you are in breach, you may have to pay damages to the LLC for your withdrawal.
3. Protect Yourself from Liabilities.
If you have signed your name to any contracts or loans on behalf of the company, it is sometimes impossible to remove your name without causing your partner(s) significant disruption, work, and expense. The only way to ensure you are no longer liable will be to cancel the account or contract and have the company renegotiate it in a different name. If your partner(s) refuse to do this, you may still be liable, even if you properly notify the lender or contracting party that your name should be removed. For personal guarantees, you should advise the lender or vendor that your guarantee is invalid for any future advances or transactions on the guaranteed debt. You should do this in writing and mail it with some type of proof of mailing in the event you need to refer to it in future.
4. Follow the steps required by your operating agreement or state statutes.
The usual practice is to require the member who is withdrawing to give the LLC written notice of the withdrawal. The letter, stating you are withdrawing and requesting your share of assets and income, should be signed by you and sent to all the other members. In your letter, you can request a vote by the LLC, approving your withdrawal and payout (if you are entitled to one).
Suggest a Separation Agreement
In virtually all circumstances, we recommend that you prepare a separation agreement for execution by all partners or members. The agreement should address a number of questions:
What happens to the partnership’s assets? What happens to its liabilities?
How are you going to be compensated for your ownership interest? What is the method of payment?
How will your name be removed from any loans, contracts and other company obligations? If your name cannot be removed from all such documents, how will you be otherwise indemnified (protected in the event of a company default)?
How will material breaches of the separation agreement be addressed? If it includes a long-term commitment, such as money paid to you over time, how will that be enforced— for example, do you have a right to audit?
Ideally, the answers to many of these questions will be determined by the company’s operating agreement. It’s not guaranteed, however, because business associates often feel as if they do not have to have everything in writing. If your company used an online service to form your LLC, you probably have a very basic “cookie-cutter” operating agreement that does not address these complicated issues.
There is no guarantee that your withdraw will be smooth. In particular, the details of how you will be protected from future liability can be quite tricky, and frequently require legal counsel even in an amicable separation. But however difficult, securing such protection for yourself is of paramount importance.
The experienced business attorneys at Fiffik Law Group help members and shareholders of companies navigate the complex legal issues that arise in the event of business disputes or disagreements over the withdrawal of members. If you would like to speak with one of our attorneys, please contact us today.