Membership in a Company: How to Addition or Removal of a Member from Limited Liability Company in Delaware

Narendra Kumar

29 Jun, 2019

Of ownership, stakeholders should be informed of the same. Banks, other related it is an easy & quick process to amend the internal ‘operating agreement’ of a Delaware registered Limited Liability Company. Let’s have an insight of Membership in a Company registered in Delaware.

Membership in a Company in Delaware

Once there is a proposal for restructuring parties must have a piece of knowledge or intimation about the  Membership in a Company i.e. addition or removal of members.

Let’s assume one of the shareholders has to exit, he can take the required route. One can sell their shares to someone else or if you believe the shares are worthless, notify the board of directors of the corporation that you are abandoning your shares and return any stock certificates that may have been issued to the corporation.

Conclusively it can be said that any addition or removal of members should be shown & justified in the operating agreement. However, the new management should be reflected in the LLC operating agreement copy.

IRS:

If Employer Identification Number has been issued to the LLC, IRS will require the authorized signatory to inform about the relevant changes or restructuring.

• If the member who is leaving the LLC was listed as the Responsible Party, the IRS will need to be informed of the change; thus the LLC should typically file IRS Form 8822-B. The IRS mandates the 8822-B Form to be filed within 60 days of the change in ownership.
• If you are changing from a multi-member LLC to a single-member LLC, another issue to ponder is how the LLC is taxed by the IRS. Typically, for tax purposes, the IRS considers a single-member LLC a disregarded entity and a multi-member LLC a Partnership Firm.  In order to change your company to a single-member LLC, IRS Form 8832 will need to be completed and submitted to the IRS.

• However, It is not only in the state of Delaware. The only document required to be filed in Delaware to create an LLC is the Certificate of Formation.

Unlike other states, Delaware requires very little information to be made public in order to form an LLC.

Necessary Change:

Information such as the member(s) name, address and the percentage of the business owner is not required to be provided to the state of Delaware and therefore is not part of the public record. This information is kept on file internally within the Limited liability company Operating Agreement.

• The LLC’s Operating Agreement can be altered as needed by the members, without filing the changes with the state of Delaware. Some of the typical changes people make are the removal or addition of a member or the change in the percentage of a member’s ownership.
• The LLC’s Operating Agreement must be amended to reflect that a new member is now part of the Limited liability company or to reflect the removal of a member, and all current members must sign the newly amended Operating Agreement, but you are not required to file the amended Operating Agreement with the state of Delaware.
• The same holds true when removing a member. It is important to have the resigning member acknowledge the terms whereby that member is leaving the Limited liability company in writing, such as the amount paid for the interest and to whom the interest is being transferred. After the member signs the resignation and transfer acknowledgement, the remaining members sign a First Amended and restated limited liability company Operating Agreement documenting the change to make it effective. Subsequent transfers would be listed in order, for example, the next change would be contained in a “Second Amended and Restated Limited liability company Operating Agreement” and so on.

 Notification of Change?

Delaware LLC is a “contractual entity.” This means members of the Limited liability company derive their ownership interest from the Limited Liability Company Operating Agreement they enter into with each other. Most LLC agreements provide that all members must consent to the transfer of another member’s ownership interest for the new member to be a voting member. Therefore, it is important when adding a member to have all members sign-off on the new LLC Operating Agreement. The first new agreement is typically called the “First Amended and Restated LLC Operating Agreement” since it was both changed and restated in its entirety to replace the previous agreement.