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Q: Member Withdrawl from LLC ( Answered 5 out of 5 stars,   0 Comments )
Subject: Member Withdrawl from LLC
Category: Business and Money > Small Businesses
Asked by: edniso-ga
List Price: $20.00
Posted: 28 Feb 2006 13:16 PST
Expires: 30 Mar 2006 13:16 PST
Question ID: 702022
I would like to know how this works out. The situation is that and
another  started an LLC. When we filed for incorporation, both of our
social numbers are in the incorporation papers. We both own the
company. However, we never got around to write up and operating
agreement saying who should get how much of the profits. Right now, my
partner is not doing a good job and willingly he agreed to withdraw. I
went online and read that some states let members to withdraw and some
don't. And if they do, they have to write up a letter saying that they
want to withdraw and that takes effect like 30 days after the letter
is submitted. So I would like to know what I should do. Do I ask him
to write a letter? My company is incorporated in Maryland and is
operating under Maryland. Can you tell me what is my next step is and
what forms I need to fill out? Thanks.
Subject: Re: Member Withdrawl from LLC
Answered By: richard-ga on 28 Feb 2006 15:51 PST
Rated:5 out of 5 stars
Hello and thank you for your question.

You're right about the 30-day requirement, but it only applies if the
two of you don't agree differently:
 4A-605. Withdrawal of member.
 A member may withdraw by giving not less than 6 months' prior written
notice to the other members at their respective addresses as shown on
the books of the limited liability company, unless:
 (1) The operating agreement provides that the member does not have
the right or power to withdraw; or
 (2) The operating agreement specifies another time for or other
conditions of withdrawal.
[You'll need to put 4A-605 in the search window on that page]

So if you and your partner have agreed on the terms of his withdrawal
and you both want it to be effective immediately, you can write up a
mini-operating agreement (or really just a letter between you) stating
that as sole members of the LLC, you have agreed that withdrawal of a
member can be immediate if the member and the LLC agree to the terms
by which the withdrawing member will be paid.  And you go on to say
what terms you've agreed on (what he's being paid, etc.).

If you plan to keep the LLC in existence (as its sole owner once your
partner withdraws) you don't need to file any of this with the State.

Tax-wise, your LLC should have been filing Federal partnership tax
returns, Form 1065, and (since you haven't made any agreement to the
contrary), all items of profit and loss, etc. are listed in total on
that form, and divided 50-50 on the Forms K-1 that get attached to
that form showing each partner's tax share.

What he gets paid for his 50% of the LLC is whatever you've agreed to.
Technically, either you can buy his 50% (so he's selling to you), or
the LLC can redeem his 50% (so he's selling to the LLC).
I'd sugggest the former, since it's more simple.  Decide on a mutually
agreeable price, pay him, and you'll own it all - - He'll have gain or
loss on the sale depending on how his investment in the LLC compares
to what you've paid him.
Here's the IRS explanation:

Going forward, since you'll be the sole owner of the LLC, it will be a
"disregarded entity" for income tax purposes, so unless you take in a
new member you'll be able to stop filing future Forms 1065 and simply
pick up all of the entity's income, expenses, etc. on your personal
Here's the IRS again:
"An LLC with only one member and that is not required to file as a
corporation, will default to the disregarded entity status and be
required to file as a sole proprietor and complete the required
schedules as part of the single member owner?s 1040.",,id=137009,00.html

So again, the only letter that needs to be written is an agreement to
vary the 30-day period.  That's a letter between the two of you - -
the State doesn't need a copy.  The next time yo file your LLC's
annual report (the one that requires a $300 per year payment to keep
it in good standing)
You'll include yourself as the sole owner, etc.

Search terms used:
maryland statutes
maryland withdraw "limited liability company
1065 k-1
LLC "disregarded entity"
maryland certificate annual "limited liability company

Thanks again for bringing us your question.  If you require any
clarification of my answer, I would appreciate it if you would hold
off on rating my answer until I have a chance to reply.

Google Answers Researcher

Request for Answer Clarification by edniso-ga on 28 Feb 2006 21:38 PST
The thing is that I want to terminate it immediately. If you do have
to notify 6 months before, then how does writing up a mini-operating
agreement help? And I got somewhat confused on buying the 50% share.
Does this buying needs to be done to own the LLC myself? So in the
mini-operating agreement, I SHOULD state that my partner will be
withdrawing, I will be buying (or transfering) the 50%, and that he
will be paid so and so?

Clarification of Answer by richard-ga on 01 Mar 2006 07:11 PST
Including in your agreement that the termination of his interest will
be immediate helps because the State law (quoted in my answer) allows
an exception to the 6 month rule if
"The operating agreement specifies another time for or other
conditions of withdrawal."
So the "other time" that you'll agree to will be "immediately," and
the withdrawing member's notice of withdrawal will not need to be
given 6 months before.

You have the choice of having the LLC pay him for his 50% interest, or
you can buy his 50% interest from him.  Since you'll be the sole
remaining member it shouldn't matter which you choose.  So if can pay
him out of your own funds, do that.  Or if you have a bank account in
the name of the LLC, it can pay him for his 50%.  Either way will
leave you as the 100% owner of the LLC.

So in the mini-operating agreement, really just a letter agreement
between the two of you, should state
--that he's withdrawing as a member
--that you both agree to waive the 30 day notice of withdrawal
--that he is being paid $____ [by you in purchase of his interest][by
the LLC in redemption of his interest], and
--henceforth you will be the sole member of the LLC.
edniso-ga rated this answer:5 out of 5 stars and gave an additional tip of: $5.00
Really helpful. Not only he did answer my question, he helped me with
tax stuff too. Thanks a lot.

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