Removing your partner’s name from the business may be relatively simple or somewhat complicated depending on how diligent you were when you first applied for LLC status. Your company’s operating agreement should outline the acceptable reasons for a member to leave the organization such as retirement and personal bankruptcy.
If, however, the separation was less than amicable and the founding partner was expelled by you and the other members for unethical behavior, you may be looking at a lengthy court battle to remove her name. Depending on what your operating agreement says about an involuntary separation, a legal battle could force the dissolution and liquidation of your business.
Assuming your partner left voluntarily, she may still have some legal ties to the company, specifically in the areas of financial compensation and tax liability.
Before going your separate ways, did your former partner get fair value for her interest in the LLC? The operating agreement should spell out how profits are disbursed to each member; your former associate or her estate is entitled to a fair and equitable share of the business at the time of separation. Until she has received all the compensation she’s entitled to, you may have trouble removing her name from the company.
You also have to account for any contributions she made to the LLC during her time with the company, including land, equipment or specialized technical skills. If, for instance, she contributed the building in which you operate the LLC, she deserves fair value for that property.
On the flip side, your ex-partner must pay taxes on any profits she made from the LLC during her last year with the company. Like a regular business partnership, the IRS considers a corporation to be a “pass-through” tax entity. In other words, your former partner has to report earned income from the LLC on her personal income tax return.
There also is a possibility that the partner who left is still personally responsible for some of your business obligations. Though a limited liability company does, as the name indicates, limit the financial responsibility of the members involved, she may have personally guaranteed a bank loan or other credit extension.
If her name appears on any loan agreement for the LLC, you will need to remove her name from these documents, too.
You also have to deal with the possibility that her departure from the business will force the liquidation of your LLC, even if she left on good terms. Page through your operating agreement and look once again at the paragraphs covering a member’s departure. In some cases, the agreement will say that an LLC must liquidate when one or more members leave the organization.
However, many states do allow the remaining LLC members to vote on whether to continue normal operations. In the event that you must liquidate the company, the state in which your business is incorporated may require you to file a document called an “articles of dissolution.” This document outlines how the LLC’s assets will be disbursed.
Because you are the resident agent for your LLC, all the legal documents for the corporation should be addressed to you, which should make removing her name from the business a little easier. You are the legal representative for the company in your state of incorporation, and also an active partner in the business, which should expedite any paperwork needed to remove her name completely from the LLC.
This article is intended for informational purposes only and is not a replacement for professional legal advice. Always consult an attorney prior to taking any kind of legal action.