How to Get Out of a Partnership LLC

Chris, 

I need to get out of my LLC with my cousin. It’s a horrible situation and every time we talk we start arguing. I just want my money back but they won’t talk to me. What should I do?

Getting You of an LLC (or Getting Someone Else Out)

While it seems like it should be very easy to get out of an LLC, it can be complicated. Even if the business is very small, there are considerations beyond getting your money back. In this post, I’ll try to hit the important points of getting out of an LLC Partnership. These same items apply if you want to remove a member from your LLC.

It’s a Legal Entity So Follow the Rules

The very first thing to remember is that the LLC is a legal entity. It is real property, not just some idea on paper or a means of filing taxes. You own your membership in the LLC and that fact was established when you set it up in your state. Papers were filed with your state’s Secretary of State saying that you and your partner(s) were establishing a company. You agree to operate somewhat transparently. You tell the state what your business will do, who will be part of it, and how you will operate (Operating Agreement). Each year, you update the state on the status of your business operation.

In exchange for a fee, there’s always a fee, you get protection from liability and some other legal benefits. Among those benefits is a clearly documented proof of your ownership in the LLC. Regardless of value, you own it and it takes an expensive legal process to take it away from you.

All of that just means that in addition to the rights come with ownership, you also have responsibilities and duties. One of those duties is to maintain your LLC in “good standing”. That means paying all applicable taxes. Of course, there are other responsibilities like not cheating your customers or conducting illegal trade.

Why do I bring up this stuff if you just want your money back so you can walk away? Let me explain. Perhaps you put up $10,000 as your contribution to start the business. It’s been 2 years and you want out. The business is doing OK but you and your partner argue so much you dread going to work. You’ve had it and want to walk away with your money.  Your partner agrees to give you $5,000 to leave. You’re so fed up you agree. She gives you the money and you go. That’s it, right?

What about liabilities? As a partner, your name is on the lease. Just because your partner has “bought you out” doesn’t obligate the landlord to take you off the lease. If the business fails a year later, the landlord can still come after you for anything due on the balance of the lease. If your partner is broke, the landlord can go after you for all of it.

It gets worse. The IRS sends you a letter saying that the taxes for the year you left were never filed. With penalties, the business owes the IRS $25,000. Your partner is broke. You will have to pay it. Not half. ALL of it. All partners have responsibility for 100% of the liabilities.

I can go on, but you get the picture. When leaving an LLC, you want to get clear protection from risk. There are ways to do that properly to give maximum protection to the departing partner.

The Purchase Agreement

The documentation that protects you from liability and other potential risks is called a Purchase Agreement. Even if you are leaving for a very low amount, you want to draft a Purchase Agreement. Oddly, price is often the easiest piece to obtain agreement when a partner wants out of an LLC.

I’ve have had big deals stall out over small items because people made assumptions about what they thought would be “no big deal” that turned out to be huge. I had a $2 million dollar deal stall because the departing partner insisted on keeping her cell phone. The remaining partners opposed that because the phone was company property. I resolved that one with a bit of creativity that surprised everyone. Call me and I’ll tell you that story!

The final Purchase Agreement should include the purchase price, a release from all known and unknown liability, a release from further claims against the business by the departing partner, a list of personal property that the departing partner may keep, an agreement to not disparage the parties to the agreement or the business, and the terms needed to close the transaction. The closing terms include things like taking the departing partner off the lease, banking, credit cards, wifi, etc. There should be a closing date. On that date, a check is handed over and the deal closes with a filing to remove the member from the LLC.

It’s Not Complicated But It Requires Some Knowledge

The exit from your LLC doesn’t have to be a complicated process, but it does need to be handled correctly. If you are in a tense relationship with your business partner(s), discussion of the details can be pretty stressful. Having a Mediator guide the process will help get it done with less stress and will provide the guidance to cover all the details.

My Mediated Buyout Process

I know things can get tense. That’s why I conduct buyout meetings over 3-4 sessions. We work remotely in a video conference format. Starting with the valuations and working through the terms mentioned above, we generally can wrap up a buyout without major tension and at a fraction of the cost of having lawyers negotiate for each party. In fact, many attorneys refer buyout cases to me because it saves their clients money.

We generally can get everything worked out in a few meetings and then we draft a plain language Purchase Agreement. Once that is signed and “official”, we can go to closing.

Finally, I help guide the closing process so that partners in tension do not have to interact with each other over items that can spark arguments.  We will have created a checklist of items that need to be done and I keep the ball rolling by reminding the partners of what they need to do to finish up the deal.

Always a Huge Relief

People on both sides of these deals always tell me what a huge relief it is to be done with the partnership. Honestly, it’s like the clouds lift and the sun comes up to chirping birds. Seriously, if you are in a tense partnership and want out, the relief you will feel will probably surprise you.

Summary

If you want out of an LLC Partnership, it’s very important that you do it right to protect yourself and the business. After getting the terms worked out, you’ll want to document the departure with a Purchase Agreement. After the Purchase Agreement is signed, work through a closing checklist to wrap up the deal.

Then you can celebrate the fact that you handled all of this professionally and properly.

Chris@teachu.com 

“Be sure to draft a Purchase Agreement that protects you from liabilities if you are leaving an LLC.”