What happens to remaining 2 LLC members' % interest if a 3rd member leaves LLC?

[ferg0146]

What is the name of your state (only U.S. law)? WI

If there are 3 members in a member-managed LLC and one member leaves, how are his shares divided between the remaining members absent relevant language in the agreement? Am I correct in assuming that the default rule (WI, but non-state specific is fine) is that, after the departing member is compensated for the value of his shares, the LLC effectively "absorbs" the departing member's shares so the remaining members are left with their proportional % interest?

Ex: there are 100 total shares. A has 50%, B has 30% and C has 20%. A leaves and both B and C are willing and able to purchase as many of his shares as they can (both would like majority ownership). Would B and C's shares now be increased based on their original %, i.e. B now has 60% (30 of remaining 50 shares) and C has 40%? One would think the market could also prevail and B and C could have a bidding war for A's shares. Issue gets tougher if it is a family business and A, dad, originally intended for sons B and C to eventually be 50-50 partners by the time A left? But, for A to simply make B and C 50-50 would be unfair to B, who would only get a boost of 20% out of A's shares, while C would increase 30%. Even A just dividing his shares equally to B and C (25 to each) would leave B with 55% and C with 45%. B and C could have a bidding war offering A more and more money for majority share, but in the family example it would be tough for A to choose which of his sons B and C to sell majority share to (essentially, picking a favorite), so A may rather let the default rule be the bad guy.

I know there are potentially other questions embedded in that example, but my main question here is if the default is for the LLC to absorb the departing member's interest and the existing members would remain at their proportional %? Thanks in advance for any input!

 

[Zigner]

What is the name of your state (only U.S. law)? WI

If there are 3 members in a member-managed LLC and one member leaves, how are his shares divided between the remaining members absent relevant language in the agreement? Am I correct in assuming that the default rule (WI, but non-state specific is fine) is that, after the departing member is compensated for the value of his shares, the LLC effectively "absorbs" the departing member's shares so the remaining members are left with their proportional % interest?

Ex: there are 100 total shares. A has 50%, B has 30% and C has 20%. A leaves and both B and C are willing and able to purchase as many of his shares as they can (both would like majority ownership). Would B and C's shares now be increased based on their original %, i.e. B now has 60% (30 of remaining 50 shares) and C has 40%? One would think the market could also prevail and B and C could have a bidding war for A's shares. Issue gets tougher if it is a family business and A, dad, originally intended for sons B and C to eventually be 50-50 partners by the time A left? But, for A to simply make B and C 50-50 would be unfair to B, who would only get a boost of 20% out of A's shares, while C would increase 30%. Even A just dividing his shares equally to B and C (25 to each) would leave B with 55% and C with 45%. B and C could have a bidding war offering A more and more money for majority share, but in the family example it would be tough for A to choose which of his sons B and C to sell majority share to (essentially, picking a favorite), so A may rather let the default rule be the bad guy.

I know there are potentially other questions embedded in that example, but my main question here is if the default is for the LLC to absorb the departing member's interest and the existing members would remain at their proportional %? Thanks in advance for any input!

An LLC doesn't have shares. You may want to speak with a business advisor to give you guidance on this, since it's such a basic concept.

 

[ferg0146]

An LLC doesn't have shares. You may want to speak with a business advisor to give you guidance on this, since it's such a basic concept.

Thanks for the response. I'm hopeful someone can still provide input on my hypothetical since it does not turn on the definition of "share" vs. % ownership or member interest.

 

[LdiJ]

Thanks for the response. I'm hopeful someone can still provide input on my hypothetical since it does not turn on the definition of "share" vs. % ownership or member interest.

If the LLC buys him out then his membership simply expires and there would be two members remaining. Each of their percentages of ownership would increase proportionally to their current percentages. If one of you buys out his membership individually, then you would gain his 20%. I would see an advisor about the validity of breaking his membership up into smaller pieces for purchasing purposes.

 

[justalayman]

An LLC doesn't have shares. You may want to speak with a business advisor to give you guidance on this, since it's such a basic concept.

I went through this before. While they don't have shares, they still own a share and it can be expressed in terms of shares although there is less confusing and more appropriate terminology. The members are pretty much free to divvy it up and call it what they want. Persoanlly i prefer something such as interest share documentation (trying to avoid calling it shares) to prove the ownership of each member

Ferg,
The member's share of ownership is their's to do with as they choose. It's theirs. If they wish to sell it to you or the other member or me, it is their choice. If you and partner don't purchase all of the leaving members interest, he retains it. It has to belong to somebody so if he doesn't sell it or give it away, it's still his.

If he is relinquishing all his interest, if you have created a means using a share certificate to represent your interests and at the moment it is simply a reflection of percentage of interest held, the leaving partner can apportion his interest as he chooses and sell it to whomever for whatever price he decides to put on it.

If he wants to sell you half of his interest for $1 and the other half to the other member at a cost of $1000000, he can. What is happening is outside the confines of the membership agreement and into personal investment. A member can sell their interest to any party for any amount they choose.

Of course everything is subject to the rules in the agreement but since you have said this is not addressed, there are no rules governing it.