Q: I need to amend my documents and take a member off my LLC, can you help?
Thank you to a customer from Texas for that great question! Northwest can absolutely help you take care of that. The procedure for an LLC to remove a member depends on whether or not conditions and policies for removal are outlined in the LLC’s operating agreement. Read on to find out what your LLC requires in these cases.
1. Consult your Texas LLC operating agreement
Your Texas LLC operating agreement should include provisions for dealing with the departure of an LLC member, such as:
- Conditions: The circumstances by which a member can voluntarily withdraw, or by which one can be removed (including voting procedures).
- Notice: The method a member must use to deliver their intent to withdraw or the means of notifying a member of your intent to remove them, as well as the amount of time they can take to respond.
- Interest: How the outgoing member’s ownership interest is determined, how they are to be compensated for that interest, or how remaining interest will be distributed.
What is a buyout provision?
An operating agreement may also contain a buyout provision, wherein a member who wishes to leave the LLC sells their interest to the remaining members. The buyout agreement should state:
- Capacity of an outgoing member to force a buyout, or not
- Circumstances that can trigger a buyout
- Value of member interest and the means of valuation
- Rights of remaining members to acquire the outgoing member’s shares or allow them to be sold to a third party
- Compensation of remaining members in the event of a third-party sale of outgoing interest
If the operating agreement does not have a buyout provision, one can be drafted as a secondary document and signed by all members. It should be negotiated before any membership changes.
What should be done if a member is incapacitated or deceased?
In the event of a member’s death, their interest is generally considered common property and passes to their spouse or other heirs. The inheritor, or transferee, gets the deceased member’s share of profits and benefits, but does not have a say in the LLC’s management. A buyout provision is frequently used to acquire interest belonging to the heir and redistribute it among the surviving members.
What if my LLC doesn’t have an operating agreement?
If you need to remove a member from your Texas LLC under expulsion or withdrawal, and your LLC operating agreement does not contain terms to do so (and no buyout provision was agreed to), you face a tough situation. Under Texas law Texas Business Organization Code § 101.107, a member of an LLC can not withdraw or be expelled from the company—membership is set in stone. As a result, you will likely have to dissolve the LLC and reform it without the member in question.
For more information about dissolution, check out our guide on How to Dissolve a Texas LLC.
Can a member facing involuntary removal prevent it?
If a member contests the circumstances of their removal (or the dissolution of the LLC with no operating agreement provisions), they may have the option of fighting the action by filing a civil lawsuit against the LLC.
2. Contact the Texas Secretary of State
If your LLC is member-managed, the Secretary of State requires member names and addresses to be updated. This can be done in two ways:
- Filing an amendment to the LLC’s Certificate of Organization
- Including the updated information in the Texas Franchise Tax Public Information Report filed annually with the Texas Comptroller of Public Accounts.
If your company is manager-managed, there is no requirement to report changes to the Secretary of State.
3. Contact the Internal Revenue Service
If removing an LLC member changes your LLC’s tax status—such as if your multi-member LLC suddenly becomes a single-member LLC–you’ll need to contact the IRS. In that case, your default tax status will become a “disregarded entity” instead of a “partnership,” and you’ll need a new EIN for your LLC.