How to Remove a Member of an LLC

As a business grows, its ownership structure may change and an owner may need to be removed. Removing an owner of a limited liability company (also known as a member) may become necessary if a member retires, dies, changes career, commits a breach of conduct, or has a dispute with other LLC members. When members decide that somebody within their ranks must leave the company, the removal can be voluntary or involuntary.
Involuntary removal tends to be more complicated and contentious. However, there are several legal procedures that can be followed to make the removal as smooth as possible. The LLC’s governing documents, as well as state LLC laws, affect the options available for involuntary removal of a member.

LLC Membership Structure and Governance
An LLC is a business entity that combines aspects of a traditional corporation and a partnership. However, unlike a partnership, LLCs can have one member. There is no upper limit on the number of members allowed in an LLC, unless it is taxed as an S corporation.

LLC ownership is typically expressed as a percentage of interest in the company. Depending on the provisions of the LLC’s operating agreement, the ownership percentage may affect members’ voting rights and rights to profits generated by the LLC.

Upon formation, an LLC must submit documentation to the state where it is organized. States do not require an LLC operating agreement, but having one is highly recommended for internal purposes because it describes how the LLC is to be run and often provides a mechanism for removing a member.

Removing a Member according to Governing Documents
An LLC member voluntarily withdrawing from the company is the best scenario. If the member is not willing to withdraw voluntarily, the next best scenario is having an operating agreement that provides a procedure for involuntary withdrawal (i.e., expulsion).

An LLC’s operating agreement may explain the grounds for, and means of, ousting a member. The usual method of involuntary removal is a vote by the other members followed by a buyout based on the departing member’s interest or share in the company. Member buyouts may be addressed in a buy-sell agreement or another internal governing document.

Absent a documented, formal procedure for removing a member, the LLC could negotiate a buyout deal on a voluntary basis, which would keep the matter out of court, saving time, money, and headaches.

Removing a Member according to State Law
If the LLC lacks an operating agreement that specifies a method for involuntarily removing a member, and if a voluntary departure cannot be negotiated, the removal will need to be resolved judicially in accordance with state law.

While state LLC laws vary, many are based on the Revised Uniform Limited Liability Company Act (RULLCA). Twenty-one states and the District of Columbia have adopted the RULLCA, which provides three situations in which the court, when petitioned by the LLC, may order the expulsion of a member:

1. The member engages in “wrongful conduct” that “adversely and materially” affects the company’s activities.

2. The member has “willfully or persistently” committed a “material breach of the operating agreement” or materially breached their duties to the company.

3. The member engages in conduct that “makes it not reasonably practicable to carry on the activities and affairs with the person a member.”

Importantly, in cases where the court acts to expel a member from an LLC (known in the RULLCA as “dissociation”), the member does not necessarily lose all of their rights and interests. Although they lose the right to participate in the LLC’s activities and no longer have fiduciary obligations, they are still entitled to receive distributions. In some states, including New York, however, the court may order the sale of a dissociated member’s economic interest in the LLC.

Dissolving the LLC

Rather than petitioning the court to remove a member from an LLC, members can petition the court to dissolve the LLC. An LLC must be dissolved in order for it to be terminated, i.e., for it to legally cease to exist. The LLC cannot enter into new contracts, although it may be required to satisfy existing agreements. Its creditors must also be paid and its assets must be distributed among members. Members of the LLC who wish to continue working together are free to begin a new LLC and operate under the terms they establish.

Final Steps
Once an LLC member has left the company, whether voluntarily or involuntarily, the company’s records should be updated to reflect the change. This may involve filing documents with the state where the company operates, as well as notifying financial institutions, insurance companies, investors, the Internal Revenue Service, and other stakeholders. If the existing operating agreement does not adequately address involuntary removal of a member, it should be updated to address this issue.

If you are in the process of removing a member from your LLC, schedule a consultation with our team. We can guide you in crafting a removal plan that helps you effect this change as smoothly as possible.

Make Gifts That Your Family Will Love but the IRS Won’t Tax

Do not let constant political and financial speculation prevent you from making tax-free annual exclusion, medical-payment, and educational gifts to or for the benefit of your loved ones.

Make Annual Exclusion Gifts 

Annual exclusion gifts are transfers of money or property in an amount or value that does not exceed the annual gift tax exclusion. In 2021, the annual gift tax exclusion is $15,000 per recipient. Therefore, this year you can give up to $15,000 per person to as many individuals as you choose without having to file a federal gift tax return (Internal Revenue Service Form 709). In other words, the Internal Revenue Service (IRS) does not consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all. You may need to file a gift tax return if your gifts either exceed or do not qualify for the annual exclusion amount. Your estate planning attorney or accountant can guide you.

Married couples can take double advantage of the annual exclusion and gift $30,000 in 2021. However, in some situations, a couple may still need to file a gift tax return if the amount of the gift is to be split between them. They should consult with their estate planning attorney or accountant to be sure.

 Make Payments That Qualify for the Medical Exclusion

 A payment that qualifies for the medical exclusion is another type of transfer that the IRS does not consider to be a gift for gift tax purposes. Payments qualify for this exclusion if they are made on behalf of an individual to a person or an institution that provided medical care or medical insurance to the individual. In general, medical expenses that qualify for this exclusion are the same ones that are deductible for federal income tax purposes. Therefore, in 2021, you can pay the cost of your grandchild’s emergency appendectomy and, in the same year, give your grandchild an additional $15,000 without having to file any gift tax returns. 

 To qualify for the medical exclusion, a payment must meet two critical requirements.

• You must make payment directly to the person or institution that provided the medical care or medical insurance. If you give the money to the individual who received the medical care or insurance benefit, even with explicit instructions that it be used to pay for the medical care, your payment will be considered a gift to the individual and not payment of a qualified medical expense.
• The amount paid must not have been reimbursed by the individual’s insurance company. Any reimbursed amount is not eligible for the unlimited medical exclusion from the gift tax, and that amount will be treated as having been made on the date the individual received the reimbursement.

Make Payments That Qualify for the Educational Exclusion

 A payment that qualifies for the educational exclusion is another type of transfer that the IRS does not consider to be a gift for gift tax purposes. For example, in 2021, in addition to paying for your grandchild’s emergency appendectomy and giving them $15,000 (see above), you can pay their college tuition costs without having to file any gift tax returns or pay any gift tax. 

To qualify for the educational exclusion, a payment must meet two critical requirements.

• You must make payment directly to the institution providing the education rather than to the individual receiving the education.
• Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.

If your payment fails to meet either of these requirements, it will be considered a gift to the individual.

 Giving gifts can be an effective way to provide financial assistance to your family members. If you have any questions about how to make gifts of money or property to your family without also giving money to the IRS, please contact our office. We are available for in-person and virtual consultations.

Navigating Mineral and Surface Contracts

It can be a time of excitement when a landowner is contacted regarding some sort of mineral or surface rights proposition. Be it a cell tower, wind turbines, a pipeline, or the sale or lease of mineral rights, landowners need to be certain they are protecting their interests. As well as some landowners know every inch of their property, oftentimes that knowledge is no more than six inches deep and stops long before drilling is fruitful.

According to Crystal McDonough, landowners are periodically at a disadvantage when negotiating such contracts because the other party is the one with the data of geologists, professional landmen, and even surrounding contract values for comparison. Simple mistakes- like entering automatically renewing contracts- can be avoided by utilizing a seasoned natural resources attorney.

A cattleman attempting to quickly learn the oil and gas, surface use, or mineral rights leasing finer points is much like an oil and gas man walking into the livestock auction to purchase cattle with only a basic understanding of the business. An expert at your proverbial elbow could prevent a multitude of mistakes and avoid trouble as deep as the shale.

Knowing what mineral and surface rights might bring in a competitive bid situation can also be important information for a landowner hoping to identify a buyer. Perhaps most importantly, an experienced oil and gas attorney can ensure that a landowner knows exactly what type of rights they own in addition to surface rights.

With contract negotiations, the more data and information a landowner has, the more bargaining power they have and that is worth more than even a steadily bobbing oil derrick or wind turbine.

 

Property Due Diligence:​
Going Beyond Title

Property ​Rights ​To ​Consider​

• Mineral Ownership​​
• Water Ownership​​
• Renewable Energy​​
• Easements​​
• Zoning​​
• Liens ​​
• Mortgages​​
• Covenants​​
• Environmental and Operational Concerns​​
• Lease Analysis​​
• Regulatory Analysis​​
• CRP and other Government Land Programs​​
• Other Contractual Obligations​

Understanding ​How They Relate ​and Work Together​​

Title​​

• Mineral Ownership​​
• Water Ownership​​
• Easements​​
• Lien​s​
• Mortgages​​
• Covenants​​
• Recorded Leases​

Regulatory Analysis​

Federal​​

• EPA​​
• Federal Energy Regulatory Commission​​
• Bureau of Land Management​​
• U.S. Fish and Wildlife Service​​

​​Colorado​​

• Colorado Oil and Gas Commission​​
• Water Resources Division​​
• State Land Board​​
• Colorado Health Department​​

Local​​

• County, city and municipal zoning and ordinances​
• Contractual Obligations​
• Purchase Sale Agreements​​
• Grazing Leases​​
• Farming Leases​​
• CRP​​
• Other Government Land Programs​​
• Rental Agreements​​
• Lease Agreements​​
• Housing Agreements​​
• HOA Bylaws and Covenants​​
• Existing Permits (for example water permits)​​
• Zoning Variance Permit​​

Putting It All Together

Legal Analysis To Understand…​

• Risks​
• Recommendations​
• Cloud On Title (Quite Title, Det. Of Heirship, Probate, etc.)​
• Permit Applications​
• Cost Benefit Analysis​

Drive Greater Resilience, ​
Less Risk in a ​
Post-COVID World​

Click here to view video with more details and information.

Crystal McDonough, Owner and Attorney McDonough Law Group​

Karen Breen, CPA, Embark Finance & Accounting Advisory Services, Managing Director​

Judith Pearson, Woodruff Sawyer Family Office and Trustee Liability Group Leader​

Don’t Become a Statistic​

1. Business Stress Test™​

– Legal, Risk, Finance​

2. Get out of the Firefighting Mode that COVID created​.

3. Seize Control of Your Insurance Program​

– Understanding the current insurance marketplace in the context of historical challenges​.

– New world new risks​.

Business Stress Test™ – Legal​

According to a 2014 Forbes article, between 36% and 53% of US businesses are involved in at least one legal or court proceeding in any given year. ​

​Many of those businesses are sued by employees, contractors, vendors, clients, customers, and even business partners. ​

​What’s even more concerning is the fact that many of these legal issues and disputes could be prevented, or at least minimized, with the proper legal planning and compliance. ​

​It is important to do a thorough review of your operations, procedures, and legal documents to identify any holes or weaknesses that are leaving your business vulnerable to liabilities, lawsuits, and other disputes.​

Regulatory Compliance Ever Changing Rules (federal, state, local, etc.)​

Return to work policies and potential claims. ​

Layoffs may increase as stimulus packages and PPE loans go away – may trigger alleged wrongful termination, demotion, or failure to promote an employee.​

Families First Coronavirus Response Act (FFRCA) requires employers to receive paid sick leave.​

Family & Medical Leave act (FMLA)​

Negligent in adhering to employment-related policies and procedures, such as improper training​.

Americans with Disabilities Act (ADA) how will long haulers be classified? What accommodations must be made?​

Privacy and HIPPA laws​

Worker Adjustment and Retraining Notification (WARN) Act claim for unpaid wages.​

OSHA guidelines​

Will your company require vaccines? ​

Yes, but some employees may be excluded.​

-​ Employees with disabilities​.

-​ Employees with sincerely held religious beliefs.​

-​ Employees covered by collective bargaining agreements. ​

​What accommodations must be provided?​

​Can I require proof of vaccinations of employees and guests? ​

​How does this affect my employment practices, fiduciary liability and workers compensation policies be affected?​

Business Stress Test™ – Risk​

Seize Control of Your Insurance Program​

Understanding the current insurance marketplace in the context of historical challenges​.

New World New Risks​

While the magnitude of D&O claims isn’t different ​the types claims are challenging.​

Adequacy of disclosure in your financial/business environment.

Balancing and prioritizing diverse and complex interest of stakeholders (shareholders, employees, customers, beneficiaries).

Regulatory compliance

Reputational risk

Business Stress Test™ – Finance​

Build RESILIENCE & REINVENT How Finance Teams Operate ​

Cash Remains King!​

Optimize Working Capital​.

Don’t just focus on P/L at the expense of the balance sheet​.

Accelerate receipts, manage inventory turn, extend payments.​

Review tax planning and seek accelerated refund claims​.

Current ratio above 1.0 is key​.

Always Be in a State of Finance Readiness​

GAAP vs cash basis financials​.

​Agile Forecasting – run multiple scenarios, stress test debt covenants​.

​Ensure financials enable a lender or investor to understand your business.​

Sell side due diligence – act as though you’re going to sell and prepare the documents that a buyer would be interested in​.

Revenue, Expenses, Margins, Trends, Client Concentration, Forecasts, Working Capital, etc​.

Finance Automation is Front and Center​

Reduce Time to Close = Better + More Timely Decision Making​

​Digital Transformation.

Automation of manual processes.

Integrate Disparate Systems – Move out of Excel!

Data analytics, Dashboard/Management Reporting.

What gets measured gets managed.

Why do it? ​Per KPMG ​2021 Report​

A transformed finance function transformed can deliver:​

45% cut in general accounting costs​.

15% improvement in working capital​.

50% reduction in manual reconciliations​.

Digitization of the Workplace – Legal/Risk​

Contracts and Agreements​

Subcontractors’ vs Employee agreements, vendors, leases, licenses, etc.​

Cyber: Combination of Increased Threats, Cyberattacks and Malware Continue​
in Remote Workplace​

1. Lack of two factor authentication​.

2. Cloud based breaches.​

a. Misconfigured security measures​.

b. Lack of monitoring security.​

3. Employee connectivity not as robust as corporate environment​.

4. Cyber security staffing (4 million cybersecurity jobs unfilled)​.

What You Need to Know about Hiring Your First Contractor

Hiring workers is an important step for a business. A business owner is faced with a chicken-and-egg dilemma: Is it better to hire employees anticipating that the business will grow, or wait until the business has grown and then hire employees? When a business is starting out, a full-time employee may not be needed. Business owners may instead consider hiring an independent contractor to complete smaller, discrete tasks or to work on specific projects.

Hiring independent contractors instead of employees allows business owners to outsource certain tasks, such as managed IT services or bookkeeping, without the expense and administrative burden of setting up W-2 withholdings, benefits, and payments for Medicare, Social Security, unemployment compensation insurance, and worker’s compensation insurance. Additionally, hiring independent contractors increases a business’s flexibility: Employers can end their relationship with contractors more easily than with staff employees, and they are not obligated to pay contractors when there is no work.

Before hiring your first independent contractor, make sure you are fully prepared. While this list is not exhaustive, it will provide you with some important background information before you hire a contractor.

1. Understand the factors relevant to a worker being legally classified as an independent contractor. Often, independent contractors are business owners who are in a profession or trade that offers services to the public. According to the Internal Revenue Service (IRS), a worker is an independent contractor for a business if the business owner can only control or dictate the type of work or result of the work to be completed and not the manner in which the work is completed.

A few questions can help you determine whether the person you want to hire is likely to be classified as an independent contractor rather than an employee. First, will you be hiring this person for a temporary project or projects? Second, will the worker determine where and when to conduct the work that will be done for you? Third, will this person use his or her own technology or equipment to complete the work? Finally, will the worker be paid on a flat-fee basis or hourly?

Generally, the more control the worker has over the manner in which the work is performed, the more likely the worker is to be classified as an independent contractor. The more the employer dictates the time, place, and manner in which the work is done, the more likely the worker will be legally classified as an employee. It is very important to make sure you classify your workers correctly as independent contractors or employees. You risk paying significant fines and penalties if you misclassify your workers.

2. Verify credentials. As with any new hire, make sure to request and review the prospective worker’s resume and references before the worker begins work. Review the worker’s resume, ask questions, and make sure the person has the qualifications and experience necessary to complete projects for your business. Also, call the references. If the worker owns a business, check the Better Business Bureau as well as online reviews. Make sure there are no complaints filed against the worker or any allegations that would make hiring the worker inadvisable.

In some instances, it may be appropriate to conduct background checks. However, you should do this primarily when a person’s criminal history is relevant to the work at hand. Ban the Box legislation is aimed at preventing discrimination in hiring of people with arrest records or convictions. However, some states require individuals working with children and the elderly to undergo a background check.

3. Establish an accurate payment system. Business owners should ask the independent contractor to submit detailed invoices for work performed. A contractor should not be paid prior to receipt and review of an invoice. Paying a contractor without receiving an invoice resembles payment of wages to an employee. In addition, a business owner should not withhold any taxes from the contractor’s payment. The contractor is responsible for paying the contractor’s income taxes, as well as Social Security and Medicare taxes. You will need to keep track of payments made to the contractor and report them to the IRS.

In addition to taking the steps outlined above, ensure that you have the following essential documents in place:

1. Tax forms. The independent contractor will complete a Form W-9 with the contractor’s Tax Identification Number, and you will complete the corresponding Form 1099-NEC to report payments made to the contractor to the IRS. Check with your CPA to ensure that you have complied with the state and federal requirements.

2. Independent contractor agreements. Every employee should sign an employment agreement with your business. Similarly, every independent contractor should sign a contract that defines the work to be performed, the nature of the relationship (independent contractor, not employee), termination provisions, and payment terms.

3. Confidentiality agreement. Your business’s success stems from its unique business strategies and trade secrets. When an independent contractor begins working with you, the contractor may become familiar with these strategies and secrets. Before the contractor begins any work for your business, you should ensure that the contractor has signed a nondisclosure agreement prohibiting disclosure of this confidential information to your competitors or anyone else without your permission.

4. Agreement not to compete or solicit. Before a contractor begins work, you may also want the contractor to sign an agreement not to compete with you after the working relationship ends. A noncompetition agreement sets out terms to prohibit the contractor from competing with you in a certain geographic area and for a specified time after the relationship with your business has ended. Likewise, an agreement not to solicit is designed to prevent the contractor from taking your customers or employees with him or her when the contractor leaves. The contractor should sign a nonsolicitation agreement prior to beginning work.

Keep all records and agreements on file for each of your independent contractors. While you may not be required to turn over your files, if the IRS audits your business, having these documents will help confirm the nature of the independent contractor’s relationship with your business. This list is not exhaustive for every type of business, but we have a team of lawyers ready to help you prepare these documents and any others that are specific to your business. Give us a call today to set up an appointment.