How to Handle Resignation of LLC Member

May 11, 2006 | By | Reply More

QUESTION on How to Handle Resignation of LLC Member

Hi. My mother and I started a LLC back in 2003. We are both equal share 50/50 members. However, my mum is getting on and just doesn’t want to bother to be part of this any longer. She would like to resign. What do I need to do? Is it a matter of getting the right form and filling it out and filing it and if so what form is that? How do I handle the resignation of LLC member?

– Bonnie R., AZ




ANSWER

Dear Bonnie,

Some but not all states have a prescribed form on which to report a “disassociation” of a member. In the case of Arizona, there is no such form. A member may resign by simply delivering a written notice of withdrawal (resignation) to the other members of the LLC at their last known addresses.

As far as your tax filing for the year goes, you will file a final partnership tax return for the period ending as of the date of your mother’s withdrawal from the LLC. (Your mother will be responsible for the tax on her share of the net taxable income from the LLC up to that point.) Because your LLC will be left with just one member, it will be a disregarded entity for tax purposes and taxed as a sole proprietorship thereafter. Therefore, you will also need to attach a Schedule C to your 1040 individual tax return covering the period in which your LLC is a single-member LLC. Sole proprietors use IRS Form Schedule C (1040) to report the profit or loss from business.

I would like to take this opportunity to remind folks of the importance of adopting an operating agreement for a multi-member LLC. The resignation of the member in this case appears to be fairly simple. However, many partnerships end for a number of reasons and not always on a good note, so it is important to have an operating agreement that addresses the how’s and why’s of a member’s withdrawal and what happens to the member’s interest in the event of withdrawal. This is for the protection of each partner as well as the LLC itself.

In most states, if a member’s withdrawal violates the terms of an operating agreement, an LLC may recover damages from the withdrawing member–but an operating agreement would have to exist in order for there to be a violation with recoverable damages in the first place. Aside from that, it is good to come to an agreement ahead of time–in writing–so that if an event such as a member’s resignation, withdrawal, death, bankruptcy or divorce occurs, the terms of separation and/or the disposition of the member’s interest in the LLC will be clear.

Chrissie Mould

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Chrissie Mould

Chrissie Mould has over a decade of experience in business administration and startup business consulting. She has helped launch companies in multiple industries and has managed corporate administration and governance for public and private companies. She is an incorporation specialist with MyNewVenture.com LLC. The company provides low-cost incorporation services to entrepreneurs and small businesses.

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Category: Business Structure, Q & A

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