Withdrawing From an LLC and Keeping your Capital Contribution

When most people go into an LLC, they have high hopes and big plans and want to make the business a success. Sometimes things don’t work out that way and you want to walk away early. Sometimes things are working out but you reach the stage where you feel you have done everything you can with and in the business, and it’s time to split away.

In the ideal world, you will have made an operating agreement that covers every eventuality, including withdrawing capital. The rules regarding how members withdraw vary from state to state, and the issue is a little more complicated when there is no operating agreement.

Arizona Law and Withdrawing from an LLC

The good news is that the law in Arizona is some of the most permissive in the country when it comes to withdrawing from an LLC. It is possible for a member to withdraw voluntarily simply by informing the other members of the LLC in writing. There are some instances where automatic withdrawal may occur as well, such as if a member filed for bankruptcy.

Getting Your Capital Returned

Usually, when a member attempts to withdraw, they will request that they are bought out or otherwise get back the capital that they invested in the business. In an ideal scenario, the other members of the company would be happy to oblige with this and buy the other member’s interest in the business.

Sometimes, the departure is not on good terms, however, or the other members of the business may not be in a financial position to purchase the withdrawing member’s stake in the company. It may also be that the business is not in a position to return funds without defaulting on other obligations.

The Arizona Limited Liability Company Act

This is where things can become complicated. It is a good idea to seek legal advice if you are withdrawing from a business and you are looking to have your capital returned. Usually, any rights for capital and for continued distributions would be laid out in the operating agreement. Depending on when your LLC was formed, you may or may not be bound by some new rules.

The Arizona LLC Act was passed in 2018, and the new agreements described in the act will apply by default to all LLCs formed after September 1 2019, and will retroactively apply to other LLCs as of September 1 2020. During the transition period, the rules governing LLCs can be complex and confusing.

Seeking advice from company law specialists will help to ensure that you get guidance which relates to your specific company circumstances so that you can manage your withdrawal and the rights of the company in a fair and reasonable manner. Members of a company have a right to withdraw by providing a written notice, but the distribution of earnings or the withdrawal of capital contributions is not guaranteed when a person departs from the company. Keeping clear records from day one, and forming an operating agreement, is a wise move to avoid tension.

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