Running a business as part of a Limited Liability Company (LLC) in Texas comes with its own challenges, and sometimes, changes in membership are inevitable. Whether due to disputes, a shift in priorities, or personal reasons, removing a member or withdrawing from an LLC can be complex.
This guide explains the legal processes and considerations involved in removing a member, addressing how to remove a partner from an LLC, and what happens if one member decides to leave.
Understanding LLC Membership in Texas
An LLC is a business structure that combines liability protection with management flexibility. Members of an LLC hold ownership interests and share in its profits, liabilities, and decision-making. The Texas Business Organizations Code (BOC) governs how LLCs operate, including the rules for membership changes.
To handle situations where a partner wants to leave or is removed, it’s critical to have an LLC dissolution agreement, operating agreement, or similar governing document in place. These documents often outline the procedures for adding or removing members and resolving disputes.
Can One Partner Dissolve a Partnership or LLC?
The short answer is no—one member cannot unilaterally dissolve an LLC in Texas unless specific provisions allow for it in the operating agreement. Without such provisions, dissolving an LLC requires a majority vote or unanimous consent, depending on the terms agreed upon by its members. If dissolution is necessary, the members must follow Texas laws and file the appropriate paperwork, such as a Certificate of Termination, with the Texas Secretary of State.
How to Remove a Partner from an LLC
Removing a partner from an LLC in Texas involves several steps, typically guided by the operating agreement. If no agreement exists, Texas law provides a default framework. Here’s a breakdown of the process:
1. Consult the Operating Agreement
Review the LLC’s operating agreement or partnership exit agreement for specific terms regarding membership changes. These documents often outline the conditions under which a member can be removed, such as failing to meet financial obligations or violating the agreement.
2. Hold a Membership Vote
Most LLCs require a vote by the remaining members to approve the removal. The required majority or unanimous consent will depend on the terms in the operating agreement.
3. Draft a Partnership Withdrawal Agreement
Prepare a written agreement to document the removal or withdrawal. This partnership separation agreement should address:
- The departing member’s share of profits and losses.
- The valuation and payment for their ownership interest.
- The transfer of liabilities or indemnification terms.
4. Notify State Authorities and Update Records
File an amended Certificate of Formation with the Texas Secretary of State to reflect the change in membership. Update the LLC’s tax identification and banking information if the removed member had signing authority.
What Happens When a Partner Leaves a Partnership?
When a partner exits an LLC, the business must determine how to handle their ownership interest and any financial obligations. The departing member may:
- Sell their interest back to the LLC or remaining members, as per the LLC member withdrawal agreement.
- Receive compensation for their ownership stake based on the business’s valuation.
- Remain partially liable for obligations unless indemnified or removed from all agreements.
The exact process depends on the terms of the exit agreement for partnership or operating agreement.
What Happens If One Partner Wants to Leave an LLC?
If a member wants to voluntarily leave, they should follow these steps:
1. Review the Operating Agreement
The operating agreement typically outlines the withdrawal process, including notice periods, valuation methods, and payment terms.
2. Draft a Withdrawal Agreement
A partnership withdrawal agreement documents the terms of departure. It should specify how the departing member will be compensated and indemnified from future liabilities.
3. File the Necessary Paperwork
The LLC should file any required amendments to its Certificate of Formation and notify relevant parties, such as creditors and clients, of the membership change.
4. Protect Personal Liabilities
To remove their name from contracts, loans, or leases tied to the LLC, the departing member may need the cooperation of remaining members. If removal isn’t possible, they should seek indemnification to limit liability.
When a Partner Leaves a Partnership
A partner’s departure can disrupt business operations if not managed properly. Key considerations include:
- Valuation: Determine the value of the departing member’s ownership interest.
- Liability Transfer: Ensure the departing member is no longer responsible for LLC obligations.
- Continuity: Decide how the business will continue without the partner and update governance documents accordingly.
Contested Membership Changes
Removing a member or exiting an LLC amicably is ideal, but disputes can arise. In cases of contested membership changes, the process may involve:
1. Negotiation and Mediation
Attempt to resolve disagreements through negotiation or mediation to avoid costly litigation.
2. Legal Remedies
If the operating agreement lacks clear guidance, Texas law may require a court to decide. Courts generally respect the terms of an LLC’s governing documents, so having a well-drafted agreement is critical.
3. Grounds for Involuntary Removal
Involuntary removal may be justified if a member violates the agreement, engages in misconduct, or causes harm to the LLC.
How to Protect Yourself During a Partnership Exit
Leaving a partnership or LLC without securing your financial and legal interests can have long-term consequences. Follow these steps to protect yourself:
- Identify Liabilities: Determine all debts, contracts, and obligations tied to your name.
- Remove Your Name: Ensure your name is removed from leases, loans, and other agreements. If removal isn’t possible, seek indemnification.
- Secure Compensation: Agree on a fair valuation for your ownership interest and document the payment terms.
- Draft a Comprehensive Separation Agreement: Address all potential liabilities and obligations in the agreement.
Drafting a Partnership Exit Agreement
A partnership exit agreement or LLC dissolution agreement should address:
- The distribution of assets and liabilities.
- How the departing member will be compensated.
- Indemnification terms to protect against future liabilities.
- Procedures for resolving disputes or breaches of the agreement.
How to Dissolve a Partnership LLC
If the LLC cannot continue after a member leaves, dissolution may be necessary. The steps include:
- Vote on Dissolution: Follow the procedures outlined in the operating agreement or Texas law.
- File for Dissolution: Submit a Certificate of Termination to the Texas Secretary of State.
- Settle Debts and Distribute Assets: Pay creditors and divide remaining assets among members.
- Notify Relevant Parties: Inform clients, vendors, and government agencies of the closure.
Why Legal Assistance Is Essential
Membership changes in an LLC can be legally and financially complex, especially if disputes arise. A poorly managed exit or removal can leave all parties vulnerable to liabilities or financial losses.
Having an experienced business attorney ensures that:
- All legal requirements are met.
- The separation agreement protects your interests.
- Future liabilities are minimized.
How a Dedicated Business Dissolution Attorney Can Help
Navigating membership changes in an LLC doesn’t have to be overwhelming. At Roquemore Skierski Business Lawyer, we specialize in handling LLC membership issues, including drafting partnership withdrawal agreements, resolving disputes, and ensuring compliance with Texas law. Whether you need help removing a partner, leaving an LLC, or dissolving a partnership, we’re here to guide you every step of the way.
Contact Roquemore Skierski Business Lawyer today to discuss your options and protect your business interests.
