Adding or removing an owner called a “member” in LLC speak does not have to turn into a soap opera. In Michigan, you can handle ownership changes smoothly if you take a methodical approach rooted in your operating agreement, the Michigan Limited Liability Company Act, and a few predictable tax and banking steps. The goal is to protect the company while treating people fairly and keeping regulators, lenders, and the IRS happy. This article walks you through the calm, professional way to do it and highlights where the law supplies default rules if your paperwork is silent.
Please note this blog post should be used for learning and illustrative purposes. It is not a substitute for consultation with an attorney with expertise in this area. If you have questions about a specific legal issue, we always recommend that you consult an attorney to discuss the particulars of your case.
The starting point is always your operating agreement. Think of it as the rulebook you and your co-owners wrote for yourselves. It should tell you who can be admitted as a new member, what vote is required, how to value membership interests, what happens if a member wants out, and how buyouts are funded. Many well-drafted agreements go further, anticipating real-world events like retirement, disputes, disability, or the need to recruit a strategic partner. If you already have these provisions, the path forward is mostly about following your own instructions. If your agreement is thin or nonexistent, Michigan law supplies default rules, and you will want to document the group’s decisions carefully so you do not create confusion later.
A change in ownership usually begins with a business reason. Perhaps you need capital or expertise and want to admit an investor. Maybe a founding member is relocating, retiring, or facing a conflict of interest and wants to sell. Sometimes the company has outgrown its original ownership mix and needs to realign incentives. Whatever the catalyst, the smart move is to map the business goal onto the procedures your agreement requires. If you are adding a member, you will be looking for the admission procedure, any minimum capital contribution, and voting thresholds. If you are removing a member whether voluntary or involuntary you will be looking for triggers, notice and cure periods, redemption mechanics, pricing formulas, and payment timing. When agreements are silent, Michigan’s LLC Act fills some but not all gaps, so build consensus on the missing pieces and memorialize them in writing.
The voting step is the first place drama tends to creep in, so it pays to be precise. Many agreements require unanimous consent to admit a new member but allow a majority-in-interest to approve other actions. This preference reflects the idea that existing owners should not be forced to accept a new partner against their will. For removals, well-drafted agreements lay out specific grounds and processes, because expulsions that occur without a contractual basis invite disputes. If your agreement leaves admission or removal unclear, the default rules under Michigan law will govern. In practice, the least contentious route is a written consent signed by the requisite members, with the resolution stating exactly what was approved, whether it is an admission, a withdrawal, a redemption, or a transfer. Using neutral, descriptive language and keeping personalities out of the paperwork lowers the temperature considerably.
Once you know the votes you need, the next question is price. Valuation is the beating heart of a peaceful ownership transition. Many agreements adopt a simple book-value formula, but that approach can understate the value of a profitable company and overstate the value of a struggling one. Others call for a multiple of earnings, an appraisal by a neutral business valuator, or a formula tied to recent purchases and sales within the company. If your agreement offers a formula, use it, document the numbers and assumptions, and have all sides initial the calculations. If it does not, agree on a method before you move forward. In close-knit companies, the most efficient path can be a short valuation protocol: a qualified appraiser produces a number using a standard method, and if either side disagrees beyond a set tolerance, a second appraisal is averaged with the first. This is more predictable than haggling and easier to defend later.
Payment terms matter just as much as price. Michigan law does not force you to pay cash on the barrelhead unless your agreement says so. You can structure redemptions or purchases in installments, secured by a promissory note and sometimes by the interest being purchased. To minimize friction, specify the down payment, the interest rate, the schedule, and any prepayment rights. Tie payment to customary covenants that protect the company, such as confidentiality and non-disparagement, and ensure that the selling member’s obligations do not accidentally continue past the closing. Where appropriate, consider a modest holdback for known risks, like a pending customer dispute that could adjust the purchase price once it is resolved. Clear terms reduce misunderstandings and keep relationships intact even as roles change.
With economics in place, you can turn to the paperwork. Ownership changes are typically implemented with a membership interest purchase agreement or redemption agreement, depending on whether the interest is sold to another person or repurchased by the company. You will also want an assignment of membership interest and, very importantly, an amended and restated operating agreement or at least a short amendment that updates the member list, ownership percentages, management roles, and any revised governance terms. It is smart practice to attach a fresh capitalization table showing each member’s units or percentage after the transaction. If your LLC is manager-managed, confirm in writing who the managers are and whether any managers are changing, resigning, or being appointed as part of the deal.
Michigan’s public filings are simpler than many people expect. The state does not track the names of your members, and you usually do not file ownership changes with Lansing. What the state cares about is your registered office and registered agent, your company name, and whether your annual statement is current. If the registered agent or registered office is changing as part of your transaction, you will file the appropriate form with the Corporations Division to update that information. If your articles of organization identify managers by title or contain language that requires an amendment when management changes, you will file a certificate of amendment. Otherwise, there is no routine state filing just to record a buyout or a new member. That said, keep your annual statement current every year and make sure your contact information is accurate so notices and service of process reach the right person after the transition.
Banks and lenders typically require their own updates, and this is a common source of delay. An ownership change often means new authorized signers, new online banking users, and a fresh resolution from the LLC confirming who can borrow, pledge, or access accounts. Ask your banker for the exact form they need and provide the signed resolutions and identification in one package. If the LLC has a line of credit or equipment loan, check the covenants; some credit agreements treat major ownership changes as a default unless the lender consents. Building in time for lender sign-off avoids last-minute scrambles. The same logic applies to insurance carriers, landlords, and significant vendors that require notice of ownership or management changes under their contracts.
Tax classification is another area where a little planning avoids big headaches. A single-member LLC is disregarded for federal tax purposes by default, meaning the owner reports the income on a Schedule C or through a corporation if there is an election in place. The moment you add a second member, the LLC generally becomes a partnership for tax purposes unless you elect to be taxed as a corporation. That change ripples through your reporting obligations, which can include obtaining a new EIN, filing a partnership return on Form 1065, and issuing Schedule K-1s to the members. If your company has an S corporation election and you are adding a new owner, you must confirm the new member is eligible and that the ownership structure will continue to satisfy S corporation requirements. When owners exit mid-year, be deliberate about how profits and losses are allocated. Michigan follows federal classification in most respects, so the planning you do for federal tax purposes will usually carry through to state filings as well.
For the IRS, there is also an easy-to-miss notification: the responsible party for the LLC’s EIN should be updated when control changes, and this is done with Form 8822-B. Many companies forget this step, which can cause IRS notices to go to the wrong individual or delay the resolution of a payroll or information-return issue. Payroll systems, sales tax accounts, and city registrations require the same attention. Most of these updates are administrative, but failing to make them can lead to unpleasant surprises like rejected filings or locked online accounts just when you need them the most. A short checklist with confirmations from each agency or vendor is a surprisingly powerful drama reducer.
If you are removing an owner, think carefully about how their ongoing relationship with the company should change. The cleanest path is to sever all roles at closing, but that is not always practical. Some exits are better handled as a short consultancy, an earn out that rewards’ successful handoff of key relationships, or a trailing advisory role. The critical move is to rewrite titles, duties, and access rights clearly, so customers, employees, and counterparties are not confused. Disable credentials that are no longer needed, update internal distribution lists, and reassign signature authority promptly. In small and mid-sized businesses, these seemingly administrative steps carry outsized reputational value; the smoother they are, the more confidence your market will have in the company after the change.
Dispute-proofing your documents is worth the extra hour. Even when everyone is friendly, memories fade, and oral understandings get reinterpreted over time. Your transaction package should include mutual releases that carve out obligations that need to survive, such as tax audit cooperation, indemnities that relate to pre-closing periods, and confidentiality commitments. When consideration is paid over time, spell out what happens if the buyer misses a payment, whether there is a grace period, and whether interest increases after default. If security is appropriate, file the necessary lien documents and recite them in the agreement so there is no ambiguity. Taking this care is not about mistrust; it is about giving both sides a clear roadmap if something unexpected happens.
Companies sometimes worry that membership interest transfers will trigger securities law problems. In closely held LLCs that operate businesses rather than selling passive investments, most membership transfers qualify for exemptions from registration. Nevertheless, it is prudent to include simple investor representations from both buyer and seller confirming the buyer’s sophistication, investment intent, and access to information, and to avoid public solicitation. A modest paper trail that shows you stayed within common exemptions makes due diligence far more comfortable if you are later selling the entire company or bringing in institutional capital.
Adding your first outside member presents a special case, especially if you began as a single-member LLC. You are not just changing the cap table; you are changing the company’s governance DNA. The move from sole decision-maker to multi-member governance requires explicit voting rules, tie-breakers, dispute resolution steps, and a fresh look at distributions, capital calls, and deadlock mechanics. If you skip this work and assume goodwill will carry you through, you are effectively choosing the state’s default rules, and those may not match your expectations. Use the admission of a new member as an opportunity to adopt a full operating agreement tailored to how you genuinely intend to run the business.
Removals that are not voluntary require even more care. If the operating agreement provides for expulsion based on specific conduct, follow the process in the document to the letter, including any notice, cure, and vote requirements. If there is no contractual expulsion right, Michigan law permits courts to order dissociation in certain severe circumstances, but that is a last resort and not a substitute for good planning. In practice, most involuntary exits are negotiated redemptions framed around the company’s need to move forward. A respectful tone, fair pricing, and realistic payment terms do more to keep matters out of court than any lawyerly flourish ever will.
Communication with your team is the soft skill that prevents small ripples from becoming waves. Employees do not need chapter and verse, but they do need to know who is in charge, who approves what, and whether strategy is changing. Customers and key partners appreciate a brief note that is forward-looking and reassures them about continuity. Script the message carefully, avoid airing internal details, and keep the company’s voice consistent across email, website bios, and social channels. A tidy, confident message signals that the ownership change is a planned evolution rather than a crisis.
Recordkeeping closes the loop. Keep copies of all consents, agreements, amendments, appraisals, payment schedules, lender approvals, insurance endorsements, and notices. Update your minute book or digital corporate records, and confirm your cap table reconciles to the agreements you signed. The mismatch between what the documents say and what the bookkeeping shows is one of the most common sources of later friction, especially when a new financing or sale is on the horizon. If you have a CPA, ask them to review capital accounts after the change so the tax allocations for the current year align with your legal documents.
Looking forward, the best way to avoid drama in the next ownership change is to strengthen your operating agreement now. Build in a buy-sell framework with clear valuation and payment mechanics, define when someone can be required to sell, specify whether the company has a first option to purchase, and set unambiguous voting thresholds for admissions and significant transactions. This includes simple but powerful housekeeping items like mandatory address updates, consents that can be signed in counterparts and electronically, and a mechanism for resolving valuation disputes without litigation. These are not just legal niceties; they are practical tools that let business owners get back to running the business.
Finally, remember that every ownership changes lives at the intersection of law, tax, banking, and human relationships. Michigan law gives LLC owners wide latitude to write their own rules, and most of the state-level formalities are straightforward. The true art of a no-drama transition is the combination of a clear operating agreement, fair economics, documented votes, tidy filings, coordinated notices to your financial institutions and counterparties, and respectful messaging to the people who rely on your company. When you execute on those pieces, adding or removing an owner becomes just another well-managed project rather than a saga.
Business owners often ask whether admitting a new member requires filing anything with the State of Michigan. The simple answer is that ownership changes themselves usually are not filed. Instead, you focus on internal documents and update your registered agent or management information only when those items actually change. That said, you should not treat the absence of a filing requirement as a reason to be casual. Your internal paperwork is what courts and buyers will study later, so give it the same care you would give a public filing.
Another common question is whether a new EIN is required when ownership changes. The answer depends on how the change affects tax classification. If a single-member LLC admits a second member and begins operating as a partnership, obtaining a new EIN is commonly required. If a multi-member LLC redeems one member but remains a partnership, a new EIN is generally unnecessary unless you are simultaneously changing classification. When in doubt, coordinate with your accountant so your payroll, information returns, and K-1s all align.
People also want to know whether a member can be forced out. The safest pathway is the one your operating agreement provides. If the agreement allows for expulsion based on defined grounds and a clear vote, follow that roadmap. Where the agreement is silent, Michigan law allows judicial solutions for serious misconduct, but courts do not step in just because the relationship is tense. That reality is why buy-sell provisions and mediation mechanisms are so valuable; they give you dignified, predictable exits without turning the business into a battleground.
Finally, first-time buyers and sellers of membership interests worry about accidentally running afoul of securities rules. In closely held operating companies, membership interests are typically sold within exemptions that do not require registration, but that does not mean you can be careless. Keep the transaction private, ensure the buyer has access to information, include straightforward investor representations, and maintain a file that shows you did not broadly solicit the public. These small steps are inexpensive assurance against future diligence questions.
If you prefer a narrative over checkboxes, picture your closing as a short, orderly story. You begin with the owners agreeing in writing on the decision to add or remove a member. You then settle on the valuation method and payment terms, and you capture those in a purchase or redemption agreement and an assignment. You refresh your operating agreement, so it mirrors the new ownership and governance reality. You visit your banker figuratively or literally with a signed banking resolution and updated signers. You confirm any lender consents and swap out old credentials for new ones. You notify your insurer, landlord, and key partners of changes that matter to them. You coordinate with your CPA so the tax reporting works on day one rather than being cleaned up at year end. And you close the loop by filing any required updates with the state while storing all your documents neatly for future reference. Done this way, the process is purposeful and almost boring in the best possible sense.
The business world often glamorizes the drama of breakups and power struggles, but a well-handled LLC ownership change in Michigan is the opposite: careful, cordial, and predictable. With a solid operating agreement, fair economics, clear paperwork, and timely notices, you can make ownership transitions as routine as renewing your insurance and as forgettable as a quarterly board consent. That is not just good lawyering or good accounting; it is good leadership.
Contact Tishkoff
Tishkoff PLC specializes in business law and litigation. For inquiries, contact us at www.tish.law/contact/. & check out Tishkoff PLC’s Website (www.Tish.Law/), eBooks (www.Tish.Law/e-books), Blogs (www.Tish.Law/blog) and References (www.Tish.Law/resources).
Sources:
- Michigan Limited Liability Company Act, Michigan Compiled Laws, Chapter 450, Act 23 of 1993 (as amended). https://www.legislature.mi.gov/documents/mcl/pdf/mcl-Act-23-of-1993.pdf
- Michigan Department of Licensing and Regulatory Affairs (LARA), Corporations Division, guidance on LLC formation, amendments, and annual statements. https://www.michigan.gov/lara/bureau-list/cscl/corps/limited-liability-co/filling-requirements-continued/annual-filings
- Internal Revenue Service, Publication 541, Partnerships, and Instructions for Form 1065 (classification and member changes). https://www.irs.gov/pub/irs-pdf/p541.pdf
- Internal Revenue Service, Form 8822-B and Instructions (Change of Address or Responsible Party). /www.irs.gov/pub/irs-pdf/f8822b.pdf
- American Bar Association, Model LLC Operating Agreement Commentary and related practice guidance on buy-sell provisions and member admissions/dissociations. https://www.americanbar.org/groups/business_law/resources/business-lawyer/2022-fall/model-form-limited-liability-company-agreement/
This publication is for general informational purposes and does not constitute legal advice. Reading it does not create an attorney-client relationship. You should consult counsel for advice on your specific circumstances.