The Hidden Dangers of “Withdrawing in Principle” from an LLC

For many New York LLCs, relationships change long before paperwork does. A member may stop participating in operations, stop contributing capital, or declare themselves “withdrawn” from the business. But as Sealy v. Clifton LLC illustrates, failing to formally transfer or assign a membership interest—or to seek judicial dissolution—can create years of uncertainty, litigation, and financial exposure.

1. You’re Still a Member Until the Law Says You’re Not

In Sealy, the administrator of a deceased member’s estate argued that Sealy had effectively withdrawn from the LLC years earlier because he stopped participating in operations. The court rejected that argument outright: there was no evidence Sealy withdrew pursuant to LLC Law § 606 or under the operating agreement.

This case demonstrates an example where:

• Simply “walking away” does not end membership.

• A member who stops participating still retains rights—including the right to seek dissolution years later.

• Conversely, other members must still treat that person as an owner of the LLC.

This can be a costly limbo for everyone.

2. Without a Transfer, the Interest Lives On

A member (and their member partners) may believe they have “quit,” but unless the membership interest is validly transferred or assigned, the interest remains where it always was.

In Sealy, even though Sealy allegedly stopped participating around 2000, he still owned 50% of the LLC in 2006 when his co‑member died, giving him standing to assert dissolution rights tied directly to the operating agreement.

That standing gave him control over:

• Whether the LLC dissolved upon the co‑member’s death

• The winding up process

• Access to an accounting

• Control over key assets (e.g., filing a lis pendens to block a sale)

A member who intends to exit but fails to transfer their interest may unintentionally retain enormous leverage—invited or not.

3. Allowing “Zombie Membership” Creates Legal and Operational Chaos

When a member has informally withdrawn but remains a member legally, every decision is vulnerable to later dispute.

In Sealy, the lack of clarity created:

• Litigation over whether Sealy had authority or standing

• Delays in selling property and completing transactions

• Claims of laches and disputes over valuation

• Uncertainty over who controlled day‑to‑day operations after the death of the other member

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The LLC became essentially unmanageable because a “withdrawn” member wasn’t actually withdrawn at all.

4. Dissolution Rights May Linger Longer Than Expected

The court held that Sealy’s right to seek dissolution did not accrue when he was allegedly “frozen out” years earlier; it accrued only when the co‑member died.

So even long‑dormant members may suddenly return—with full statutory rights—when an event triggers dissolution under the operating agreement or LLC law.

This can shock remaining members who believed the person was long gone.

Practical Lessons for LLCs

• Formalize withdrawal. An oral departure or a practical withdrawal is not enough.

• Document all transfers or assignments. Amend schedules, obtain necessary consents, and comply with the operating agreement.

• Update your operating agreement. Include clear mechanisms for withdrawal, buyout, and valuation events.

• Do not assume abandonment extinguishes ownership. It doesn’t.