Getting out of a limited liability company isn't always easy. When all else fails, a member can always invoke judicial dissolution, which distributes an LLC's assets under the supervision of the court.
Getting out of an LLC can be cost prohibitive, and the result may be akin to a bad divorce. Another complication in some states -- Delaware, for instance -- is that the courts may not readily grant dissolution.
Most LLC operating agreements include buyout provisions. The provisions of the agreement are contractually binding, both on the member leaving the partnership and those remaining. These provisions usually cover such essentials as share price and terms of sale. When the operating agreement contains adequate buyout provisions, the departing member invokes those provisions and asks for the remaining members to buy her interest.
When There Are No Buy-out Provisions
Infrequently, an LLC may exist without buyout provisions in the LLC's Operating Agreement. In states that don't require LLC's to have Operating Agreements, the informal verbal agreement among the members may be the only agreement that exists.
In cases where there are no legally binding provisions for buying out a member, state law generally applies. Generally, however, these laws are procedural and tend to emphasize voluntary dissolutions -- describing how the business assets are distributed, for example -- and may not cover situations where there is a dispute involving a departing member's share.
Unfortunately, the only available remedy may be a resolution in court. If ownership is an issue, the parties may present tax returns, loan applications signed by the member, materials advertising the members and emails among the parties. If the assets are in dispute, a forensic certified public accountant may be required to perform an audit and present her findings to the court.
When the Remaining Members Won't Cooperate
How disputes are handled depends on the applicable statutes in your state, but one well-known course of action to take when you want to leave the LLC and the members won't buy you out is sometimes called "the nuclear option." More formally, it is known as judicial dissolution, and it results in the involuntary dissolution of the LLC.
The requirements for judicial dissolution vary from state to state. In California, for example, dissolution proceedings may be initiated by any member or any manager. Grounds that California courts recognize include:
- No longer practicable to carry on the business
- Necessary for protection of interests of complaining member
- Management deadlocked or mired in internal dissension
- Fraud, mismanagement or abuse of authority.
Alternatives to Dissolution
Once the nuclear option is invoked, under California Law the members may avoid dissolution only by purchasing for cash and at fair market value the membership interests of the member who invoked the option.
When the share price is not specified in the operating agreement and the members cannot agree on a buyout price, under California law the court may then appoint three appraisers and award the price agreed upon by at least two of them.
Check with an attorney to determine how judicial dissolution works in your state.