Dissociation, Withdrawal and Expulsion

Scope of the chapter. This chapter examines the ways in which a person ceases to be a member of an LLC while the LLC itself continues: voluntary withdrawal or resignation, expulsion under the operating agreement or by the other members, expulsion by court order, and the events, such as death, incapacity, bankruptcy and the termination of an entity member, that end membership by operation of law. It then examines what happens to the departing person and to the LLC when membership ends, including the fate of the departing member's economic interest, the end of governance rights, the survival of duties and liabilities, and the special problems that arise when the last member departs.

Vocabulary. The statutes do not use a common vocabulary. The Delaware act speaks of a member who "resign[s]" from the LLC and of a person who "ceases to be a member." Del. Code Ann. tit. 6, §§ 18-304, 18-603. The uniform acts use "dissociation" as the general term for any event by which a person ceases to be a member and "withdrawal" for the voluntary act of leaving by express will. Rev. Unif. Ltd. Liab. Co. Act §§ 601, 602 (2013). New York and Nevada speak of withdrawal and, in Nevada, of resignation or withdrawal. N.Y. Ltd. Liab. Co. Law § 606; Nev. Rev. Stat. § 86.331. Texas uses "withdraw" and "expelled." Tex. Bus. Orgs. Code § 101.107. This chapter uses "dissociation" in the uniform-act sense, to mean any event that ends a person's status as a member, and uses "withdrawal" and "resignation" interchangeably for voluntary departure. Where a statute's own term matters, the chapter uses it.

The two questions. Every dissociation raises two questions that the statutes answer separately. The first is whether, and when, the person has ceased to be a member. The second is what the person takes away. In the early LLC statutes, modeled on partnership law, the answer to the second question was ordinarily a payment of the fair value of the departing member's interest. In most current statutes the default answer is that the departing member takes nothing away except the economic rights of a transferee, which remain invested in the LLC until it makes distributions or dissolves. The shift between these two models, and the reasons for it, is the central development examined in ¶ 3110.

Organization. The chapter proceeds in nine parts:

1. the origins of the law of dissociation (¶ 3110);
2. the statutory frameworks of Delaware, the uniform act and the principal non-uniform states (¶ 3120);
3. voluntary withdrawal and resignation (¶ 3130);
4. expulsion under the operating agreement and by the members (¶ 3140);
5. expulsion by judicial order (¶ 3150);
6. death, incapacity, bankruptcy and the termination of entity members (¶ 3160);
7. the consequences of dissociation (¶ 3170);
8. the departure of the last member (¶ 3180); and
9. planning and drafting (¶ 3190).

Relation to other chapters. Transfers of interests, the status of transferees and the admission of new members are examined supra ch. 29. Buyout obligations, rights of first refusal and drag-along and tag-along rights, which an operating agreement commonly attaches to dissociation events, are examined supra ch. 30. Deadlock, oppression and judicial dissolution are examined infra chs. 32 and 33. The treatment of a member's interest in the member's own bankruptcy is examined in greater depth infra ch. 49, and the tax consequences of a member's departure, including liquidating distributions and redemptions, infra ch. 41. The use of dissociation and transfer provisions in estate planning is examined infra ch. 50.