Withdrawal from an LLC

Mar 29, 2023

I have written previously on Washington’s 2022 Amendment to the LLC Act to permit voluntary withdrawal (see here).  Withdrawal continues to plague LLC members because, while many LLC agreements discuss withdrawal caused by death, disability or bankruptcy, most LLC agreements do not solve the challenges created by a voluntary withdrawal.

I find it helpful to separate withdrawal depending on the type of business involved:  service-based versus asset-based.

Voluntary Withdrawal:  Service-Based Business

I routinely review LLC agreements between members where each member performs services for the company (lawyers, doctors and accountants, for example), but there are no consequences when that member ceases to perform services.  Further complicating the matter, the LLC agreement does not permit voluntary withdrawal.  As a result, an LLC with four members continues, even though one member stops performing services.  How does an LLC get rid of the non-performing member?  Short answer: it is difficult.

As you draft your LLC agreement, consider whether the business is service based, and requires withdrawal (dissociation) in the event a member ceases to perform services.  Consider further whether, in such an event, complete forfeiture of the non-performing member’s interest in the LLC should occur.  A tiered approach to forfeiture may also depend on the length of time services are provided.

Voluntary Withdrawal:  Asset-Based Business

The economics of an asset-based business (think real estate holding company) are different than a service-based business.  In an asset-based business, the business does not suffer as much as a service-based business when a member ceases to perform services for the company.  As a result, draft the LLC agreement to provide for buyout remedies (whether optional or mandatory) for a member who withdraws. 

For both types of LLCs, consider providing definitional guidance with respect to withdrawal.  The statutory definition in RCW 25.15.006(23) provides some guidance, but consider whether ceasing services for a period of time should constitute withdrawal in your LLC.

Thoughtful Drafting

Members of newly formed LLCs rarely consider the consequences of a member who ceases to perform services.  Too many LLCs continue to drag along a member who stopped performing services long ago.  When completing your thoughtful drafting of your LLC agreement, consider the type of business and act accordingly.

For any questions regarding Withdrawal from an LLC email me at info@beresfordlaw.com or give me a call at (425) 776-4100.

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