Single member LLCs are really sole proprietorships for which the law gives limited liability protection traditionally enjoyed by corporations. An LLC with two or more members is, at its core, a business marriage. And we know marriages can, and often do, go bad. The best course of action is to plan for a potential breakup. Amicable LLC breakups are easy enough to draft for in an LLC operating agreement. Either one member withdraws (see below article on member withdraw) or the members mutually agree to dissolve their LLC. What if there is no agreement between the members? Then we are faced with a contested business divorce and it can get ugly. When there are just two members, each with 50% ownership interest, there really is no way to resolve the issue. There is no majority owner with voting power to oust the minority. Dissolution based upon management deadlock is the ultimate resolution of the impasse unless the two members can agree on a course of action.
The most common situation I encounter involving a desire to remove a member is one where a member does not live up to his or her commitments to provide money or services to the LLC. See post on the topic. It is common for state LLC laws to prohibit removal of a member unless there is a written LLC operating agreement that specifically provides for removal. I should back up and emphasize the importance of your operating agreement specifically detailing what cash payments and services are to be provided by each member. A written operating agreement that leaves out these provisions is fatally defective.
You're first option, assuming the operating agreement plainly states that the member is to provide money or a service, is to sue the member for breach of contract. It's difficult to continue in business with a person who you had to sue in order to force him or her to live up to their commitments. The logical resolution of the problem is removal of the deadbeat member. And that is a sticky wicket to negotiate. First, the operating agreement must provide for removal under these circumstances. Second issue, can the moving members gather sufficient votes to remove the member? Here is the rub. Operating agreements commonly provide for removal of a member only upon a supermajority vote is required. Supermajority is generally anywhere from 60 to 90 percent. If the member you are trying to remove holds at least 41% of the ownership in the LLC, under some LLC operating agreements, you cannot remove him or her even if they have failed to provide the required capital contribution or services.
An alternative way to draft the operating agreement is that the member up for removal is barred from voting on the motion. Thus, if it takes supermajority for removal, this is determined without inclusion of the ownership interest of the member up for removal. For example, assume ABC LLC has three owners, two of whom (A & B) own 40% and last (C) holding 20%. Further assume ABC LLC has a provision in the operating agreement for removal of an LLC member who fails to provide services upon a 66% vote of members in interest. If the operating agreement excludes the ownership interest of the member up for removal from the calculation, then A and C members could vote to remove member B for failure to pay the required capital contribution. Although A & C together own only 60% of the interest in the LLC, they own 100% when the interest of B (the member up for removal) is not taken into consideration.
The downside of excluding the ownership interest of the member up for removal from the calculation of supermajority? A majority own is likely not to agree to such a provision. By doing so, he or she has agreed to summary mechanism for the majority member's removal from the LLC. Bottom line: if your LLC has more than one member, deal with the issue of removal of a member up front in your LLC operating agreement. The operating agreement should detail (a) the grounds for removal, (b) the actual mechanism for removal, and (c) compensation to the member upon removal for his or her LLC interest.