Your North Carolina limited liability company’s membership can change over the course of its existence. An LLC member may choose to leave for personal reasons, like retirement or health issues, or be involuntarily removed because of legal issues or conflict with other members. No matter why someone must exit your North Carolina LLC’s membership rolls, actually removing them is a process that requires some extra work to accomplish. We’ll show you how to do it in this guide.
Consult Your LLC’s Operating Agreement
Your LLC’s operating agreement is the guide your company elects to follow for policies and procedures. While not technically required by North Carolina statute, an operating agreement is crucial for establishing how your LLC is run to the agreement of all members.
A good operating agreement should contain provisions for both how a member can leave the LLC voluntarily, and for how a member could trigger an involuntary removal—such as undermining business operations, filing for bankruptcy, or entering a conservatorship.
What to do with an ex-member’s interest?
The operating agreement should also address how to handle the interest of an exiting member. This includes the circumstances requiring a buyout, prices for shares and interest and how they can be purchased, as well as if any other situations can trigger a buyout.
North Carolina laws and LLC member removal
Without clear exit and removal policies outlined in an operating agreement, your LLC is at the mercy of North Carolina’s statutes governing LLC operations. Per NC Gen Stat § 57D-3-02 (a)(3) & (4), an LLC member in North Carolina can voluntarily end their membership in the company by transferring or abandoning their economic interest in the LLC, or by abandoning their rights of ownership.
However, the restrictions of NC Gen Stat § 57D-5-05 prevent a member from forcing the LLC to purchase their interest or end their ownership obligations. As a result, under statute, other LLC members will likely be required to vote to approve any resignation that comes with a purchase or transfer of interest.
For involuntary removal, North Carolina only provides limited options. Under these statutes, someone can cease to be a member in an LLC upon bankruptcy (or related actions for creditors and liquidators), or in the event of their being judged by a relevant court as incompetent to manage their property.
North Carolina doesn’t say much about involuntarily removing an LLC member under any other circumstances. So if your LLC has a member who needs to go but refuses to cooperate, you’ll need to appeal the situation in court—unless you have a clear justification under the terms of your LLC’s operating agreement.
Updating Your Information
You’ll need to update some paperwork after a member leaves your LLC. This is particularly important in the event that the outgoing member’s exit changes the LLC from a multi-member to a single-member LLC, but you’ll still need to update your LLC’s information with the Secretary of State even if your LLC’s status doesn’t change.
Operating Agreement
When a member leaves the LLC, the operating agreement should reflect the change, as it will also affect membership interest for one or more remaining LLC owners. If a new member is replacing the outgoing one, you’ll also need to indicate this in the operating agreement. The operating agreement should provide clear procedures for how it can be updated, so be certain to follow them.
Update the Secretary of State
Your Articles of Organization contain the names and addresses of your LLC’s members, so if one leaves the company, you will need to update the Secretary of State’s information. This can be done by filing an amendment to the Articles of Organization, which costs $50, or by indicating the change of membership on your Annual Report (which costs $202, but you’ll have to pay that anyway every year).
Notify the IRS
Lastly, if your company becomes a single-member LLC following a member’s departure, you’ll need to notify the Internal Revenue Service and update your LLC’s tax election. File Entity Classification Election Form 8832 to update your information with the IRS. If the departing member was listed as the Responsible Party when the LLC filed for an Employer Identification Number, you’ll also need to file Form 8822-B and list a different member as the Responsible Party.