How to Remove a Member from an LLC: Step-by-Step Guide

Removing someone from an LLC is the last thing anyone from the entrepreneurial community wants to deal with. You start your LLC to build, to create, to share the load with people you trust. 

And, removing someone? That’s NEVER the plan. But life and business don’t always move in straight lines.  

Sometimes you fall out with a member. Sometimes they stop showing up, no responses to emails, missed deadlines, approvals get stuck. 

Other times it’s more serious: not contributing at all, breaching the operating agreement, conflicts of interest, refusing capital calls, behavior that risks the brand or creates legal/ethical trouble. 

On top of that, the money side of things can make everything harder. You might not have the cash to buy them out right now; meanwhile, they won’t contribute or step aside. 

So, the project stays in limbo, no progress, just tension. And it starts to feel like the business is being held hostage.

Hope you never have to make this difficult, often emotional, decision to remove a member from an LLC. 

But if it becomes necessary, here’s how to remove a member from an LLC correctly and respectfully.

Let’s get started.

Common Reasons for Removing an LLC Member

Every situation has its own backstory, but most removals fall into a few patterns. 

Let’s discuss a few reasons that have contributed to removal of LLC members in the past. 

Lack Of Contribution

Not bringing in customers, capital, or execution. Net-negative on output and bandwidth.

For example, you and another co-founder are pulling 14-hour days building product, talking to customers, and pitching investors. Meanwhile, one member hasn’t delivered a single feature or intro in months but still wants an equal share.

Missed Responsibilities

LLC members often have specific duties tied to their role. If those responsibilities aren’t fulfilled, like approvals, filings, or deliverables, it blocks the entire company.

Example: Your agreement requires all members to sign off on vendor contracts. A critical supplier deal is stuck because one member hasn’t responded in weeks, costing you a seasonal sales window.

Breach Of Operating Agreement

When a member ignores or violates agreed rules, around finances, IP, or conflicts, it creates both trust issues and legal exposure.

For example, if  a member uses company funds for personal travel without approval, it breaks the agreement and sets a precedent for misuse.

🔖 Related Read: How to Fill Out Your Operating Agreement for Your Multi-Member LLC

Failure To Make Capital Contributions

LLCs often require additional capital calls. If a member doesn’t meet their obligation, the rest either cover their share or the company stalls.

Example: You’ve agreed each member will contribute $25,000 for the next development sprint. Two wire the money; the third refuses. The project stalls because payroll and hosting costs can’t be met.

Conflicts Of Interest

Divided loyalty, whether intentional or not, undermines alignment. If a member is involved in a competing business, trust erodes quickly.

For example, if a member advises another startup in the same space, this will push for your LLC to pivot in ways that conveniently benefit the other company.

Voting Deadlock

In member-managed LLCs, key decisions require majority or unanimous consent. If members are split and neither side budges, the business freezes.

Example: You want to reinvest profits into marketing; another member insists on distributions. The tie halts the budget decision and hampers growth initiatives.

Conduct Creating Legal/Reputation Risk

When a member’s actions expose the company to legal liability or public backlash, you can’t “wait it out.” This includes harassment, discrimination, fraud, data mishandling, non-compliance with industry rules, or public behavior that reflects poorly on the company.

Example: A member listed as “Manager” on your website posts discriminatory remarks on LinkedIn. Two enterprise clients cite their vendor code of conduct, pause active POs, and ask for written remediation. Your brokerage/PLI insurer also flags potential coverage issues tied to leadership conduct. 

Worse, contracts can be terminated for “morals” or “compliance” breaches, insurers can limit coverage, and regulators may investigate. At that point, removal of that member becomes a part of risk management.

Persistent Performance Misalignment

When a member keeps missing clear, agreed KPIs even after you’ve given tools, coaching, and time, it’s no longer a rough patch, it’s a structural issue. 

Think of a sales lead with a target of 20 new mid-market accounts per quarter and a 15% demo-to-close rate: they get SDR support (100 qualified leads/month), enablement, pricing flexibility up to 10%, and weekly pipeline reviews, yet three quarters in a row they close 4, then 3, then 5 deals while peers land 18–26.

You run a 60-day improvement plan with named accounts and call coaching, and the numbers still don’t move. 

At that point, a role change or exit, per the operating agreement becomes mandatory.

How to Remove a Member from an LLC

Let’s take a closer look at the process of how to remove a member from an LLC.

Step 1: Revisit Your Operating Agreement

Before you do anything else, go back to the document you (hopefully) signed when forming the LLC—the operating agreement. This is the rulebook that spells out if and how a member can be removed.

Some agreements are explicit, giving clear grounds like “failure to contribute capital” or “violation of fiduciary duties.” Others might say nothing at all, which means you’ll be relying on state default laws (often much less flexible).

This step is where you understand what’s legally possible versus what you wish could happen. If your agreement doesn’t have removal provisions, you may need unanimous consent or even a court order (both can be messy).

If you don’t have an operating agreement at all, that’s an even bigger gap to fix with a lawyer’s help.

📌 Key Things To Remember Here

• The operating agreement > everything else.

• If silent, state law fills the gap (and usually favors not forcing people out).

• No agreement? You’ll need legal drafting or litigation.

💡 Implications: If your agreement is vague, the process could stretch into months and cost thousands in legal fees. Without one, you risk dissolution or being forced to buy out on terms that aren’t friendly.

Step 2: Document The Grounds For Removal

Emotions can run high here, but “I’m frustrated” isn’t a removal case. You need evidence. Courts, lawyers, and even your own future investors will want to see facts.

That means saving emails where deadlines were missed, meeting notes showing no-shows, financial records proving capital calls weren’t met, or HR complaints showing misconduct.

This isn’t about building a case to embarrass someone; it’s about protecting the company if the removal is challenged later. It also shows you acted with fairness, not impulse.

📌 Key Things To Remember Here

• Document performance issues over time, not just one bad week.

• Keep everything professional: emails, KPI reports, financial records.

• Try resets first (coaching, improvement plans) before jumping to removal.

💡 Implications: If the departing member sues, documentation is what keeps the LLC protected. Without it, you risk wrongful removal claims, damages, and even reversal of the decision.

Step 3: Check Voting Power & Secure Consent

Once you’ve confirmed you can remove someone and have the grounds, the next step is votes. In most LLCs, decisions are based on ownership percentages.

If your operating agreement says removal requires a majority, you’ll need more than 50% ownership in favor. 

Plus, if it requires unanimous consent, even the member you want to remove has to agree. That’s where things can take a hit.

In 50/50 partnerships, this is where deadlocks kill momentum. Without a buy-sell clause or outside mediation, you might not have a clear way forward.

📌 Key Things To Remember Here

• Member-managed LLCs = votes tied to ownership %

• Manager-managed LLCs = managers hold decision-making power

• Deadlocks often need external triggers (buy-sell provisions, court intervention)

💡 Implications: If you don’t have the required voting power, you can’t force removal cleanly. In worst cases, your only option may be dissolving the LLC and reforming without that member.

Step 4: Negotiate Buyout Terms

Removal almost always comes down to money.

Unless your agreement allows forfeiture for cause, the outgoing member is usually entitled to the fair value of their stake. This is where fights tend to erupt, everyone has a different definition of “fair.”

Valuation can be based on book value, a revenue/EBITDA multiple, or a third-party appraisal. If the LLC doesn’t have cash on hand, you can structure payouts over time, use escrow, or offset against unpaid capital contributions.

Think creatively but keep it legal.

📌 Key Things To Remember Here

• Agree on valuation method (preferably pre-set in the agreement).

• Buyouts can be lump sum or installment. Note: Buyout doesn’t have to be cash upfront.

• If disputes arise, neutral third-party valuation is safest.

💡 Implications: If you underpay or delay unfairly, the removed member can sue for their share and block the process. If you overpay without structure, you put the LLC’s survival at risk.

Step 5: Paper The Exit Properly

Once terms are clear, it’s time to update the paperwork. This means drafting a Membership Interest Purchase Agreement (MIPA) documenting the exit and payout, amending your operating agreement to reflect the new ownership structure.

And then, updating your state filings if required. 

Don’t forget the IRS side. Ownership changes affect EIN records and Schedule K-1 reporting.

Schedule K-1 (Form 1065) is the year-end tax statement a partnership-taxed LLC gives each member. It shows that member’s share of the LLC’s income, deductions, credits, and capital changes. The LLC files a Form 1065 with the IRS, and each member uses their K-1 to file their personal/business return. 🔖 Related Read: US Tax Filing Requirements for International Founders – Your Guide

Also, if the departing member created intellectual property for the company, get an IP Assignment Agreement signed so it legally stays with the LLC.

📌 Key Things To Remember Here

• Update operating agreement and state filings.

• Amend tax records (IRS Form 8822-B).

• Secure IP rights formally.

💡 Implications: Without proper filings, banks, tax authorities, or investors may still see the removed member as part of your LLC. That creates liability, even after they have left the company.

Step 6: Transition Operations & Communicate

The last step is operational, but it’s just as critical as the legal paperwork. You’ll need to remove the departing member from bank accounts, payroll systems, and vendor relationships.

Internally, communicate the change clearly to your team to avoid confusion.

This is also where you clean up logins, client handovers, and any day-to-day responsibilities. Handle this quickly to reduce the risk of sabotage, data loss, or reputational fallout.

📌 Key Things To Remember Here

• Update all banks, payroll, and vendor records immediately.

• Remove access to sensitive systems.

• Communicate internally with clarity, not gossip.

💡 Implications: If you leave this messy, the member could still access company funds or data. Worse, clients and vendors may not know who’s officially representing the business, leading to disputes or lost deals.

Tax Implications of Removing an LLC Member

Change in Ownership Structure = IRS Notification

Whenever ownership percentages shift, the IRS needs to know.

The LLC must update its EIN records (Form 8822-B) with the new responsible party. If the LLC files as a partnership, ownership changes also affect Schedule K-1 allocations (profits, losses, distributions).

📌 Key thing to remember: Even if the outgoing member doesn’t get a payout this year, their departure changes how income is split. If you forget to update this, you risk mismatched reporting between your LLC return and their personal return.

Tax Treatment Depends on How the Buyout Is Funded

The outgoing member generally recognizes capital gain or loss on the difference between the buyout payment and their basis (what they originally put in + retained earnings). The LLC doesn’t deduct this, it’s just a reallocation of ownership.

In addition, if the LLC transfers property (say, equipment or real estate) instead of cash, it can trigger recognition of built-in gain. That means the LLC pays tax as if it sold the asset at fair market value.

Hot Assets Rule (IRC 751)

This is a big gray area most founders miss. If the member holds a share of “hot assets” (like unrealized receivables, inventory, or depreciation recapture items), then part of their payout isn’t treated as capital gain, it’s treated as ordinary income (higher tax rate).

Example: You remove a member from a consulting LLC with $200k in unbilled work. Their exit share includes that receivable. That portion is taxed to them as ordinary income, not capital gain.

📌 Implication: Expect higher tax bills on exits from service-based LLCs or asset-heavy ones with depreciated equipment.

Self-Employment Tax Adjustments

In member-managed LLCs taxed as partnerships, members usually pay self-employment tax on their share of earnings. Removing one member reshuffles how that income is split.

• Outgoing member: stops paying after exit.

• Remaining members: may see a bigger share of income (and tax).

📌 Watch out: Check your quarterly estimated tax payments. Your personal liability may jump in the year of removal.

Foreign Member’s Extra Layer of Complexity

When the member you’re removing is not a U.S. person (nonresident alien or foreign entity), the IRS doesn’t just let you handle it privately, it steps in with strict withholding rules under IRC Under section 1446.

What needs to be done?

• The LLC must withhold U.S. federal tax on the foreign member’s share of effectively connected income (ECI).

• This applies even if you’re buying them out, and even if the LLC itself doesn’t distribute cash that year.

• You’re required to issue Form 8805 (Foreign Partner’s Information Statement of Section 1446 Withholding Tax) so the member can claim credit for the withheld tax on their U.S. return.

🔖 Related Read: Forms 8804 & 8805: The Complete Filing Guide for Multi-Member LLCs with Foreign Partners

For instance, let’s say you’re removing a foreign member who owns 30% of the LLC. The buyout agreement says you’ll pay them $200,000.

If the LLC generated taxable U.S. income during their ownership, you may have to withhold 21–37% (depending on type of income and treaties) and remit it to the IRS. They only get the remainder.

Best Practices for Smooth LLC Member Removal

Founders who get through this smoothly usually do a few things differently. They plan for exits early, keep conversations open instead of letting silence turn into conflict, lean on neutral experts when emotions run high, and make sure compliance and tax details don’t get missed.

Removing a member is never just a checklist of legal steps. It’s also about how you handle the process. 

Here are a few best practices to make the transition cleaner, faster, and less draining for everyone involved.

Plan Ahead With A Real Operating Agreement

Think of this as your “break-glass” plan. A clear operating agreement sets the rules for removal, voting, valuation, and payouts before emotions get involved.

📌 Keep in mind: Spell out grounds (performance, capital calls, misconduct), voting thresholds, a valuation formula, and a buy-sell/deadlock clause.

Keep Communication Open (Early And Documented)

Silence breeds blow-ups. Say what’s slipping, by when it needs to change, and what “good” looks like.

Write it down: goals, dates, who’s doing what. That way, if you need to escalate, you’re acting on a record, and not on instincts.

Use short recap emails after tough calls; log KPIs and missed deliverables, and set a review date.

Bring In A Neutral Adult Before It’s A Fight

Valuation and blame are where founders get stuck. A mediator, CPA, or attorney lowers the temperature and narrows options to what’s practical. Third-party numbers beat personal bias.

Use a neutral appraiser for value, a mediator for terms, and counsel for the docs.

Outsource The Paperwork So Nothing Slips

Once terms are set, execution speed matters. Amend the operating agreement, file state updates, adjust bank signatories, update payroll, vendors, cap table, EIN responsible party, and K-1 allocations.

Treat It As A Transition, Not A Scandal

Your team, customers, and investors just want to know the business is steady. Share a short, factual update and move on.

Internally, close loops fast like remove access, handovers, and owners on accounts.

How doola Can Help With LLC Formation & Compliance

Handling LLC ownership changes can feel overwhelming. Between updating state filings, managing tax records, and making sure compliance boxes are ticked, it’s easy to miss something that comes back later as a penalty or delay. 

But don’t worry. doola has your back.

As a trusted partner for founders, doola helps with:

🚀 LLC Formation: Setting up your LLC correctly from the start, in any U.S. state.

🚀 Compliance: Managing annual reports, state filings, and amendments.

🚀 Tax Licenses: Ensuring you stay up to date with federal and state requirements.

With doola, you save time, avoid paperwork headaches, and stay legally compliant while focusing on growing your business.

If you’re handling LLC ownership changes, let doola make compliance easy so you can focus on your business.

Sign up today to know more about how doola can help with formation and compliance.

FAQs

Can you remove a member from an LLC without their consent?

Sometimes. It depends on your operating agreement and state law.

If the agreement allows forced removal, you can proceed. If not, you may need a court order or unanimous member approval.

What happens if my LLC operating agreement doesn’t cover member removal?

State default rules kick in. These often require unanimous consent or legal intervention, which can slow things down and increase costs.

Do I need to file paperwork with the state after removing a member from my LLC?

Usually, yes. Most states require an updated annual report or amended filing to reflect ownership changes.

You may also need to update your EIN records and licenses.

How is a removed LLC member compensated for their ownership share?

Typically through a buyout based on fair market value or a formula in the operating agreement.

If there’s no formula, members may need a valuation or legal negotiation.

What are the tax implications of removing an LLC member mid-year?

The departing member must report their share of profits or losses up to the removal date. The LLC may need to issue a final Schedule K-1 and adjust future tax allocations.

Can an LLC continue with only one member after removal?

Yes. An LLC can operate as a single-member LLC, though tax treatment and reporting may change depending on how the LLC is classified.

How can doola help me with LLC compliance after changing members?

doola handles state filings, operating agreements, and ongoing compliance, so you don’t miss deadlines or accidentally break the rules while restructuring.