How to Kick Out an Owner
Updated: May 17, 2020
If your small business has multiple owners, there may come a time when someone wants to kick out an owner for underperformance or personality issues. But it's not as easy as it sounds. You can't just "terminate" them and strip them of their ownership.
Each owner holds equity in the business (e.g., stock in a corporation or membership interests in an LLC). Each owner traded something (e.g. cash, property, or services) to get his or her equity. Therefore, the equity has value and cannot be taken away without the owner's agreement. Even if the business can terminate the owner's employment, it cannot terminate his or her ownership. Instead, it must buy out the departing owner or you could end up in a situation where the expelled owner no longer works at the business, but still owns part of it and has voting rights.
If the business owners signed a contract to restrict and govern their ownership interests (e.g., a Shareholders' Agreement for a corporation or an Operating Agreement for an LLC), that contract might contain provisions about how to expel or buy out an owner. So look there first.
If the Shareholders' Agreement or Operating Agreement doesn't set forth a process for expelling or buying out an owner, then the business (the remaining owners) need to negotiate a buy-out of the departing owner. It's usually a messy, time-consuming, and expensive exercise where neither side is happy with the outcome (the business thinking it is unfairly paying too much and the departing owner thinking he's not getting paid enough).
This problem can be avoided (or at least minimized) if the business owners enter into a Shareholders' Agreement or Operating Agreement containing buy-out provisions. It's like a prenuptial agreement for business owners - you hope you won't ever need it, but if things get bad, it's there to provide a road map of how to resolve the dispute.