Exit of a participant from an LLP: grounds, formalisation and settlement of the share

A participant wants to cease participating in the partnership and expects that it is enough to file an application and receive money for the share. In practice, things are different in Kazakhstan: a unilateral free exit from an LLP is not provided for by law, and the share is disposed of through its alienation. Hence the confusion: people look for an application form, although what they need is a contract and notarial certification.

From the article you will learn what methods of transferring a share exist, how the pre-emptive right of other participants works and when the partnership buys back the share itself. We will separately cover the preparation of documents, notarial certification of the transaction, registration of changes with the justice authorities, settlement of the share and tax consequences. At the end — a comparison of exit with the sale of a share and liquidation, disputed situations and a checklist of actions.

Exit of a participant from an LLP: what it means and when it arises

Exit of a participant from an LLP is the termination of participation in a limited liability partnership. Participation can be terminated by disposing of the share through alienation — sale, gift or exchange, subject to the pre-emptive right of purchase of other participants. The share may also be bought back by the partnership itself, if this is provided for by law or the charter. Participation can be terminated compulsorily only through the exclusion of a participant by decision of the general meeting or the court.

Exit and sale of a share are not the same thing. On a sale, the participant receives payment from the buyer, and the composition of participants changes after the transaction is registered. If the partnership itself acquires the share, it provides the consideration: it pays the value of the part of the property corresponding to the participant's share, in the manner determined by the charter and the contract.

The exception is a compulsory measure for gross breach of duties or actions that hinder the partnership's operations. The decision is taken by a court at the request of other participants, whereas a participant disposes of a share voluntarily.

• Termination of participation is formalised by a transaction for the disposal of the share, not by a notice of exit
• A share is disposed of by way of sale, gift or exchange
• The sale of a share is a compensated transaction with a buyer, not an exit from the membership
• Expulsion of a participant is applied compulsorily and only by a court decision
• The composition of participants changes after state re-registration of the partnership
• Termination of participation entails a recalculation of shares and an update of the LLP's records

Grounds and methods for a participant's exit from an LLP

Participation in an LLP is terminated not at the participant's wish, but by one of the methods provided by law: disposal of the share, buyout of the share by the partnership itself, compulsory buyout by a court decision, or liquidation of the partnership. A unilateral exit by notice is not provided for by law.

A share can be disposed of in two ways — by disposing of it to other participants or to third parties. On a sale to a third party, the other participants' pre-emptive right to purchase applies: they must be notified in writing and their refusal or the expiry of the period must be awaited. If this is breached, the transaction is challenged and the buyer risks losing the share.

• disposal of the share to another participant of the partnership
• sale or transfer of the share to a third party subject to the other participants' pre-emptive right
• buyout of the share by the partnership itself in the cases provided by law and the charter
• liquidation of the LLP as a method of terminating participation for all participants
• conclusion of a separate agreement on the disposal of the share, executed in the established manner

The LLP charter and a participant's exit: what conditions are set out in advance

The procedure for a participant's exit from an LLP is determined by law, the charter and the foundation agreement. These documents establish how a participant disposes of the share and what procedures accompany a change in the composition of participants. Before taking any action, it is important to check the partnership's internal documents.

The exit conditions may simplify the procedure or create barriers. The charter may provide for a pre-emptive right of the partnership or other participants to acquire the share, restrict its disposal to third parties, or establish a special approval procedure. The partnership itself may buy out the share in the cases provided by law and the charter.

• the conditions for disposal of the share to third parties and participants
• the existence of the partnership's pre-emptive right to buy out the share
• the procedure for convening and adopting a decision of the general meeting
• the requirements for the form and content of the agreement on disposal of the share
• the procedure for determining and paying the value of the share
• restrictions on the disposal of the share and the consequences of breaching them

How to formalise a participant's exit from an LLP: disposal of a share and documents

A participant's exit from an LLP is formalised not by a withdrawal application but by a transaction disposing of the share: sale, gift or exchange. The participant determines to whom the share is transferred — to another participant, to the partnership (if this is provided for by the charter and the law) or to a third party — and prepares the contract. On a sale to a third party, the participant notifies the executive body in writing of the price and terms so that the other participants can exercise their pre-emptive right of purchase.

After the pre-emptive purchase period expires or written refusals are received from the participants, the transaction is certified by a notary. A general meeting is then convened, which records the change in the composition of participants and approves amendments to the charter. On the basis of the minutes and the contract, the documents are submitted for registration of the changes with the justice authorities — only after that is the composition of participants considered changed.

• Determine the method of disposing of the share and the future recipient: another participant, the partnership or a third party.
• Notify the executive body and the other participants in writing of the price and terms of the transaction.
• Check the charter to see whether the consent of the partnership or the participants is required for disposal of the share.
• Prepare the documents for disposal of the share: the contract, the minutes of the general meeting, amendments to the charter.
• Submit the documents to a Public Service Centre or online for registration of the changes with the justice authorities.
• Obtain updated information on the composition of participants and the shares.

Timeframe and procedure for paying the share to a participant on exit from an LLP

A participant's exit from an LLP is formalised by a transaction disposing of the share: notarial certification of the contract and registration of the changes in the composition of participants with the justice authorities. If the share is acquired by the partnership itself, it becomes obliged to settle with the departing participant. The amount of the payment is determined by the charter and the contract — as a rule, on the basis of the value of the part of the partnership's property corresponding to the participant's share, according to the accounting records.

The payment timeframe is determined by the law and the partnership's charter, so the specific dates and the calculation procedure should be checked in the charter before the transaction. As a general rule, the value of the share is paid in money, and if this is provided for by the charter or an agreement of the parties, property is transferred in kind. If the participant disagrees with the amount, they are entitled to request a review of the calculation. Delay gives the right to recover the amount of the debt, a penalty for the unlawful use of another's money and losses, and an understatement of the share's value can be challenged. Compliance with the timeframes and procedure reduces the risk of disputes over the challenging of transactions with the share and claims against the partnership's bodies.

• Determine the size of the participant's share in the charter capital.
• Calculate the LLP's net assets according to the accounting records.
• Determine the value of the part of the partnership's property corresponding to the participant's share.
• Pay the value of the share in money or transfer property in kind.
• Certify the transaction with the share by a notary.
• Register the changes in the composition of participants with the justice authorities.

The most common mistake is looking for a withdrawal application form. In Kazakhstan, a share is not returned to the partnership by application but disposed of by transaction, and you need to start with the charter and the terms on the pre-emptive right.

Taxes and obligations of a participant on exit from an LLP

On a participant's exit from an LLP, tax consequences arise for both parties. The participant receives property income in the form of an increase in the value of the share and declares it independently. Withholding of individual income tax at the source of payment arises only where the share is bought back by the partnership itself and it is the one making the payment. Social payments are not accrued on payment of the share, but on termination of an employment contract compulsory pension contributions and social contributions arise in the general manner.

Settlements on the share are determined by the contract and the charter, not by a fixed monthly term, so the payment schedule and the moment the income arises are agreed in advance. If the participant is a legal entity, the income is subject to corporate income tax at the recipient, while the LLP does not reduce its taxable income by the amount of the payment of the share.

• Check the charter and the contract on the procedure and timeframes for settling the share.
• Reconcile the calculations with the budget for all taxes and contributions.
• Settle debts to counterparties or agree a schedule.
• Determine whether individual income tax is withheld at the source of payment if the share is bought back by the partnership.
• Reflect the transaction in corporate and individual income tax returns.
• Keep the documents confirming the contribution and the amount of payment for tax reporting.

Comparison of options: withdrawal of a participant from the LLP, sale of a share or liquidation

When a participant wants to cease participation in an LLP, in practice one of three scenarios is chosen: withdrawal of the participant from the LLP or sale of the share, as well as full liquidation of the partnership. In Kazakhstan there is no institution of free unilateral withdrawal of a participant from an LLP: a participant disposes of a share through its alienation — sale, gift, exchange. Therefore, "withdrawal" here is always formalised by a transaction for the alienation of a share, and not by an application in free form.

Alienation of a share affects corporate relations: the composition of participants changes, but the LLP continues to exist as a legal entity. Liquidation terminates the existence of the partnership, requires settlements with creditors and completion of tax procedures. The first route is faster and more local, the second is a full winding down of the business.

• timelines: alienation of a share is faster, liquidation takes a long period
• complexity: a transaction with a share is local, liquidation affects all obligations of the LLP
• tax consequences: depend on the type of transaction and the subsequent distribution of property
• volume of documents: for the sale of a share — the transaction and registration, for liquidation — a full set of reporting
• preservation of the business: alienation of a share allows the LLP to continue operating, liquidation terminates the activity

The timelines and tax consequences depend on the terms of the specific transaction and the requirements of the legislation of the Republic of Kazakhstan.

Disputed situations when a participant withdraws from an LLP and ways to resolve them

Disputes on withdrawal from an LLP arise from procedural violations and differing interpretations of the charter. A participant initiates a transaction to alienate a share, but the paperwork is delayed on the pretext of approvals or debts. The procedure is governed by the Law on Limited and Additional Liability Partnerships and the charter, which may provide for a pre-emptive right of the partnership or the participants to buy out the share. If the partnership or the participants obstruct the transaction without lawful grounds, the refusal is challenged in court.

Non-payment of the share is a common conflict: the partnership avoids settlement or undervalues the share. The participant is entitled to claim the value of the share based on the accounting records or property in kind. If the value is undervalued, an appraisal is carried out, and the difference is recovered through court. If the payment deadline is breached, a penalty or interest is charged if this is provided for by the charter or the law.

• Check the charter and the law for the conditions of withdrawal and the procedure for paying the share.
• Send the partnership a written notice of alienation of the share and a demand for settlement, stating the deadlines.
• Record the refusal or inaction: keep the correspondence, obtain a written response.
• Initiate an appraisal of the value of the share by an independent valuer.
• File a claim with the court to recover the value of the share, the penalty and to oblige registration of the changes.
• If necessary, file a complaint with the justice authorities about the evasion of registration.

Consequences of a participant's withdrawal from an LLP for the partnership itself and the remaining participants

A participant's withdrawal also affects the partnership itself. The participation structure changes: the share of the departing participant is redistributed among the remaining participants or acquired by the partnership. The law and the charter determine in which cases the share passes to the partnership and how it is alienated further. The composition of participants and the size of shares are recorded in the constituent documents and the registration data of the legal entity.

The changes primarily concern management. Votes at the general meeting are recalculated based on the new shares, and decisions requiring a qualified majority may become easier or harder to pass. If the departing participant held a position in the executive body, their powers terminate and a replacement is needed. Contracts and powers of attorney issued by them on behalf of the partnership require review and, if necessary, re-issuance.

• Hold a general meeting and formalise the decision on the transfer or buyout of the share
• Amend the charter and the information on the composition of participants
• Register the changes with the justice authorities through the Public Service Centre
• Update the register of participants and internal documents
• Review the powers of the management bodies and powers of attorney
• Bring the accounting and tax records in line with the new shares

Restoration of documents and statuses upon a participant's withdrawal from an LLP

If the documents on a participant's withdrawal from an LLP are lost, the participant or the partnership may request duplicates through the Public Service Centre: the application is submitted at the place of registration of the legal entity or through the electronic government portal, with an identity document and confirmation of the applicant's authority. A duplicate of the charter and a certificate of state registration (re-registration) are issued by the registering authority, while the minutes of the general meeting are kept by the partnership itself and restored from its documents.

If the registration of the withdrawal has not been completed — the transaction on alienation of the share has been formalised, but the changes have not been registered with the justice authorities — the participant is still listed as a member of the partnership, although in fact they have withdrawn. Restoration begins with obtaining up-to-date information on the composition of participants from the justice authorities; if the information differs, an application to make changes is submitted through the Public Service Centre with supporting documents.

• Obtain from the justice authorities up-to-date information on the composition of participants and on the presence of a record of changes.
• Submit an application to the Public Service Centre for the issue of a duplicate of the charter and a certificate of state registration (re-registration) of the legal entity.
• Collect the documents confirming the participant's withdrawal: an agreement on the alienation of the share, a general meeting resolution, a calculation of the share or an agreement.
• If registration is incomplete, submit through the Public Service Centre an application to amend the information on the legal entity with a corrected set of documents.
• If registration is refused, eliminate the ground for refusal and submit the documents again, attaching the written refusal of the justice authority.
• If the information on the composition of participants is inaccurate, apply to the justice authorities to correct the record, providing evidence of the participant's actual withdrawal.

Checklist: how to complete a participant's withdrawal from an LLP without losses

It is more convenient to follow a participant's withdrawal from an LLP step by step using the table: it shows the sequence of actions, the documents and the control points where mistakes most often arise. A transaction with a share is certified by a notary, and changes in the composition of participants are registered with the justice authorities.

The checklist begins with a review of the constituent documents and confirmation of the right to the share. Before the transaction, the participant determines to whom and on what terms the share is transferred: to another participant, to a third party or to the partnership itself. The set of consents, offers and subsequent notifications depends on the chosen structure.

Particular attention is required for settlements and compliance with the pre-emptive rights of the other participants. If the procedure is breached, the transaction can be challenged and the registration suspended. Each step is recorded in writing.

• Check the charter and the information on the share in the registration data
• Identify the buyer of the share and obtain the necessary consents of the participants
• Comply with the pre-emptive right of the other participants to purchase the share
• Prepare the agreement and have the transaction with the share certified by a notary
• Submit the documents for registration of the changes to the justice authorities
• Check the final extract and the new information on the composition of participants

A transaction with a share is notarised, and changes in the composition of participants are registered with the justice authorities.