Planning For Withdrawal of a Member

One of the most important, but often overlooked, elements of an LLC operating agreement is provision for withdrawal of a member. In some states, an LLC member is not allowed to withdraw absent a provision in a written operating agreement specifically allowing for withdrawal. See Texas LLC law and Florida LLC law. In providing for withdrawal of a member from your LLC, two matters should be addressed: (a) the mechanics of withdrawal (when, where, and how notice of withdrawal is given) and (b) compensation to the withdrawing member. Of the two, compensation is the more difficult question. In Florida, if the LLC operating agreement does not specify the amount a withdrawing member is to receive, the withdrawing member is to receive "fair value" for his or her LLC interest. Florida Stat. Section 608.427(2). Sounds nice, the member who leaves gets what's "fair". The problem is that "fair value" is a nebulous term and difficult to arrive at precise calculation for assets that are not publicly traded. Hire five experts to determine fair value of a closely held business interest and you probably will be handed five different valuations. One option is to return the withdrawing member's capital account. Other options are formula's that can work either off of the capital account or the ownership interest. For example, member capital account multiplied by 110%. Or, LLC profits for the prior year multiplied by six and, then, by the member's ownership percentage. Formulas are hard to arrive at but they surely save much headache on the backend.