How to leave an LLC? Not always as simple as it seems

All LLC’s should have a well set out operating agreement, describing how the LLC will operate from an administrative standpoint. Some of these operating agreements will have provisions describing how a member may leave the LLC. However, most LLC’s either don’t have a proper operating agreement, or if they do, it simply refers to the Wisconsin Statutes for the method of disassociation.

There is nothing wrong with this approach, as the statute is well written, but it is important to understand what happens under that statute. The Wisconsin LLC disassociation statute is 183.0802 and of particular interest in subsection (3)(a), which covers voluntary withdrawal from the LLC.

(3)(a) Except as provided in par. (b), a member may voluntarily withdraw from a limited liability company at any time by giving written notice to the other members, or on any other terms as are provided in an operating agreement. If the withdrawal occurs as a result of wrongful conduct of the member, the limited liability company may recover from the withdrawing member damages as a result of the wrongful conduct and may offset the damages against the amount otherwise distributable to the member, in addition to pursuing any remedies provided for in an operating agreement or otherwise available under applicable law.

This is pretty self explanatory, if you are being removed, or remove yourself due to some act of wrongdoing, maybe theft or fraud, of course the remaining LLC members can come after you for the amount due. If you simply want to leave you can do so, but it is subject to subsection 3(b)

(b) If a member acquired an interest in a limited liability company for no or nominal consideration or owns an interest as to which the power to withdraw is prohibited or otherwise restricted in the operating agreement, the member may withdraw from the limited liability company with respect to that interest only in accordance with the operating agreement and only at the time or upon the occurrence of an event specified in the operating agreement. If the operating agreement does not specify the time or the event upon the occurrence of which the member may withdraw, a member who acquired an interest in the limited liability company for no or nominal consideration may not withdraw prior to the time for the dissolution and commencement of winding up of the limited liability company without the written consent of all members of the limited liability company. Unless otherwise provided in an operating agreement, in the case of a limited liability company that is organized for a definite term or particular undertaking, the operating agreement shall be considered to provide that a member may not withdraw before the expiration of that term or completion of that undertaking.  (emphasis added)

The highlighted portion is the most interesting part of the provision. I think you could call this a “sinking ship” provision in the sense that it prohibits members that had no stake in the game, but joined the LLC and thus had the potential for profit, from abandoning ship when things get tough. This would be unfair to the other members and any creditors that may be left holding the bag if that member leaves.

It is an important provision to keep in mind, and perhaps is something to consider when setting up your LLC or perhaps when amending your operating agreement.