What to do when you want to do something else?

Sometimes things just don’t work out. That can be true in a marriage or in a business. When a member of a two-person LLC wants out, and assuming partners agree about departure issues, you do not need to amend the LLC entity itself; rather, the operating agreement of the LLC needs to be amended and restated to explain why the amendment is being undertaken. Good drafting will eliminate reference to the departed member, and adjust the membership interest of the remaining member to 100% (only the remaining member needs to sign the amended op agreement).

In Maryland, the operating agreement is an internal document that does not go to the State (but may need to be provided to the LLC’s lender if it has one). There are no “standard” documents for the transaction.  I typically draft a “Purchase/Sale of LLC Membership Interest Agreement” and an “Assignment of LLC Membership Interest” to accomplish the transfer.  It is critical to have the remaining member consider with his/her tax adviser whether the purchase/transfer of the departing member’s interest should be to the remaining member or directly to the LLC itself (the tax implications may be different for each).

From a property standpoint, if the LLC owns real property, one should work with an attorney to review carefully the relevant tax statutes to see if the transfer of the LLC membership interest is subject to transfer tax.  If so, you will need to file the particulars with the appropriate state agency.  If not, nothing needs to be filed with the State under that statute.  Also, some leases have a “no assignment” clause that treats any membership interest transfer within an LLC as a prohibited assignment, so if the LLC is a tenant under a lease, make sure the transfer doesn’t violate such a clause.

From a banking standpoint, if the property is encumbered by a lien, the new member and the departing member need to make sure the lender is consulted in advance before any transfer of the membership interest, so as not to run afoul of any provisions in the lien/loan documents.

We routinely work with clients on these types of issues. Anyone with questions should feel free to contact our office with further questions.

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