Can You Remove an LLC Member?

Disputes between business owners (members of an LLC) can quickly threaten the future of a company. Whether the issue involves mismanagement, misconduct, financial improprieties, or simply an irreparable breakdown in the working relationship, many Oklahoma business owners ask the same question: Can I remove an LLC member?

The answer depends largely on the reason for removal and the business's governing documents.

Start with the Operating Agreement

The operating agreement is the governing document for a limited liability company. It's a contract among the members that identifies the owners and their respective shares, describes how the business will operate, determines how decisions are made, and specifies the duties the members owe to the company, among other things. If the operating agreement addresses member expulsion, buyouts, deadlocks, or ownership transfers, those provisions will often determine whether and how a member can be removed. Members may seek to remove another member for misconduct such as:

• Misuse of company funds;

• Breach of fiduciary duties;

• Failure to participate; or

• Competing against the business.

However, when an Oklahoma LLC's operating agreement is silent on member removal, the situation becomes much more challenging. Generally, a member cannot simply be expelled—regardless of whether there is a majority vote by the other members—unless the operating agreement explicitly allows for it. Instead, the members may need to rely on statutory rights, equitable remedies, negotiated buyouts, or judicial intervention.

Removing a member differs from withdrawing as a member. Withdrawal means that a member is voluntarily resigning as a member of the business as opposed to the other members seeking to remove the member. In either situation, the member withdrawing or being expelled still has rights, including having their ownership interest bought out by the company or sold to a third-party. They cannot simply be cut out from the business without compensation for their interest. It would be like removing a person's name from the deed of their home without buying it from them.

Membership Buyouts Are Often the Best Solution

In most business disputes, the most practical solution is a negotiated buyout. A buyout allows the departing member to receive compensation for their ownership interest while allowing the company to continue operations. The buyout process often includes:

1. Determining ownership percentages;

2. Valuing the business;

3. Negotiating payment terms;

4. Executing transfer documents; and

5. Amending company records and the operating agreement to reflect the change.

Oftentimes, the company's operating agreement includes provisions for these factors.

What If There's No Operating Agreement?

Although Oklahoma law does not require LLCs to maintain an operating agreement, it's a very good idea to have one. Without an operating agreement, the default provisions of the Oklahoma Limited Liability Company Act apply. These statutes may not reflect what the owners intended and can make ownership disputes more difficult to resolve. Without clear procedures for removal, buyouts, or deadlock resolution, disagreements frequently escalate to costly litigation.

Legal Remedies

If the operating agreement is silent or when there is no operating agreement, there may be few judicial remedies available. Oklahoma courts can dissolve an LLC when ownership disputes make management impossible, the business can no longer achieve its intended purpose, or misconduct has made continued operation impractical. Judicial dissolution forces the business to close and to wind-up, which involves dissolving the company's assets, paying liabilities, and making distributions to the members. While dissolution is often viewed as a last resort, it can provide a path forward when the members are unable to resolve their differences. The possibility of dissolution also frequently encourages settlement discussions.

Other remedies may include bringing a breach of fiduciary claim or filing a derivative action. However, this does not necessarily mean that a member can or will be removed or does it absolve the company of compensating a member for their ownership interest. Although it may lead to a reduced payment for their membership interest. The legal remdies available will depend on the business structure, the governing documents, and the roles of the owners within the company.

Protecting Your Business

Business owners can reduce the risk of future disputes and ensure their rights are protected by ensuring they have an operating agreement that addresses:

• Member removal and withdrawal procedures;

• Buyout rights;

• Valuation methods;

• Member roles and duties;

• Deadlock resolution mechanisms;

• Voting requirements; and

• Succession planning.

These provisions can provide a roadmap when conflict arises and avoid expensive court battles and a lose-lose situation.

Conclusion

Removing an LLC member is rarely as simple as taking a vote. The outcome often depends on the company's operating agreement, the nature of the dispute, and rights associated with the ownership interest at issue. While some disputes can be resolved through negotiated buyouts, others require court involvement to protect the company and its owners.

To avoid facing a business owner dispute, consult with an attorney who can draft your operating agreement to afford you the best protection. If a dispute does arise, consulting with an attorney early can help you evaluate your options, protect company assets, and determine the most effective path forward.

This article is for informational purposes only and does not constitute legal advice.