Learn About LLC Agreements
All prospective and current or soon-to-be departing members should also review their company’s operating agreement. This agreement usually sets forth specific procedures followed by your LLC for addition or removal of members. It may also contain detailed buyout procedures and exit clauses to terminate the membership so as to alleviate potential disputes . While these agreements vary in length, complexity and detail, many will contain a right of first refusal or buyout in the event of a member’s desire to leave the company. These provisions can be very beneficial if you are asking a member to depart your company.
Legal and Financial Issues
From a legal standpoint, leaving a Limited Liability Company (LLC) partnership may involve negotiation of amendments to and/or dissolution of the existing operating agreement and/or the LLC. An attorney experienced in business law should be retained to complete the steps mentioned in the above section, to ensure that exiting is done legally and safely. Liability concerns may also be resolved in the separation agreement. If one or more owners remain, how the LLC business will run is often negotiated and communicated in a legal document. Issues to consider could include a succession plan, who will be in control of the company, what role the exiting member will play in the company post-exit, and other operational issues. Generally, if applicable, a financial settlement to a member leaving an LLC or Partnership is calculated according to the operating agreement or partnership agreement, respectively. However, certain factors could change the terms of that agreement, such as adding members, changes in control, a lack of business performance and other circumstances that could cause the company to be worth more or less when the member is getting paid out.
Speakers with Legal and Financial Expertise
Even after decisions are made and an exit strategy is put in place, there may be state laws or regulations that may apply and which the LLC or its members need to abide by. There could also be specific language in the company’s operating agreement that must be followed. Consult with a legal advisor about any steps that need to be taken to protect yourself personally, as well as your investment in the company. You may also want to have an attorney review your operating agreement to make sure it is being followed properly to prevent disputes with the departing member or members. Find out if the company’s bylaws will be affected by the changes you are making or if there are any state reporting requirements. Discuss the financial aspects of withdrawing from an LLC partnership with a qualified financial advisor. Consider the tax implications of your exit. A professional can provide invaluable advice on how best to minimize your tax burden while ensuring compliance with all applicable laws.
Working Out An Exit Situation
To achieve a successful LLC exit with minimal collateral damage, you’ll need to negotiate with your fellow partners. Send a letter that defines your departure date and requests a sit-down to discuss your exit from the organization. Express your desire to end the partnership on a positive note, and share your willingness to ensure a smooth transition and to remain engaged to address any related matters afterward. If anything else, your goodwill can pay off in the form of positive references after you’re gone. If possible, get an interim date, and then during the period before your exit, help with the transition by training someone to take over your responsibilities and sharing any necessary information and knowledge. During this time, you can discuss the specifics of your separation with the other partners. You may want to hire a qualified independent accountant or business analyst to objectively evaluate and create a report on the fair market value of the company and its assets and liabilities. Try to gain a sense from your co-owners as to their opinions about value so you can approach the process collaboratively. You can also determine a fair long-term compensation package for you if you’re staying a while or some kind of severance payment. For an amicable exit—whether a buyout, a phased transition or a full-fledged acquisition—you should focus on proportions based on each person’s buy-in, additional contributions, the amount of time an individual has been with the organization and any financial perks. Remember to discuss with your partners how you’ll spend any potential free time once you leave the organization, as you can use this time arbitrate any disputes that may occur later on.
Submitting Required Paperwork
Depending on the type of organization your LLC is formed as, and the state in which it’s formed, you may need to file paperwork with either the Secretary of State office or the Department of Revenue. Filing this paperwork will officially record your departure from the business with the appropriate government agency, and it keeps you protected if there are any lawsuits filed against the business after you’ve left .
Depending on your state, the required paperwork may include:
Formulas or articles of dissolution
Amendments to the operating agreement
Notice of withdrawal
Cancellation of registration
Form LLC-2
There could also be other forms required, which your LLC may be able to find readily available on its state’s Secretary of State or Department of Revenue website.
Dealing with Taxes
It’s also important to note any tax consequences. Like any other business, leaving an LLC partnership can be complicated. It’s advisable that a qualified accountant be utilized to ensure you are following the right steps and handling all obligations. An accountant can also work with you in determining if the LLC has any tax obligations or whether you need to file personal taxes separate from the LLC’s business tax return.
An LLC is considered a "pass through" business for tax purposes, meaning its income, credits, deductions, etc. are passed on to the individual members. For some this may be an additional tax burden if the business is not generating enough business to cover their share. Yet others may be able to deduct losses from their personal income if they are members of an LLC.
Forming an LLC versus a corporation does have some difference at tax time. Both corporations and LLCs must file their own federal tax returns. However, corporate taxes are calculated at the corporate level. Members of an LLC will report their share of the LLC’s income, deduction, credits, etc. on their own personal tax returns.
If you are going to dissolve the LLC partnership, be careful to follow all the right steps. Be sure to consult your accountant to merge all business and personal tax returns. If you simply leave the partnership, be sure to have your accountant separate all business from personal once you no longer are a member.
Transitioning Your Work
Following an agreement with the remaining partners, you will probably need some time to get your accounts settled. You will also need to begin finding new employment or ways to support yourself financially. Some law partnerships allow their departing partners to take on contract work for a time, which can provide you with pay while you search for a permanent position. This may not be a possibility if you have been disqualified from practice—for example, following an embezzlement charge.
All departing partners will need to legally transfer your responsibility for all of the clients and projects you were working on personally, as well as those that were shared with other partners. While there should be no disagreement about the fate of current cases, you may have a dispute over how to handle payment and other client issues. Following a dissociation, you will no longer be there to answer calls, send documents, or show up to court dates—instead, you might need to assign your legal assistant to finish your work.
Your knowledge transfer can be a key component of a backdoor negotiation to ensure that you receive compensation for some of your at-risk work. For example , you should probably try to protect all pending class action suits, or at the very least, negotiate an amount based on the quantity of work already completed.
Part of the transition process may include making it clear that current clients are now the responsibility of the partners remaining in the firm. That means you should never contact clients without having their permission. If the current partnership agreement specifies, or at least implies, that you were responsible for these cases, you may actually be able to use them as leverage to increase your separation package.
Even former and dissociated partners must comply with the partnership agreement. At this point, it is up to you whether or not you choose to simply comply, or to use this as an opportunity for negotiation. If you find yourself in a fight for rights over clients, or any other issues, then having the best law firm separation agreement and exit strategy is a protection you cannot overestimate.