What if You Have to Remove a Member of Your LLC?

There are a lot of differences between an LLC and a corporation, but one of the major differences is in structure and governance. As a general rule, corporations are run by shareholders and through a board of directors. They may, but are not always, actively involved with the company and may, but don’t have to, even be employed by the company.

But LLCs are different—there are no shareholders or any board of directors. LLCs are run by its members, the people who have some ownership stake in the company. Often, members are also active daily participants in the business.

When Members Aren’t Up to the Task

That means that while it’s uncommon for a corporation’s shareholders to not be carrying their weight it is possible for an LLC’s member to not be up to the job, or to be lax in their duties—or worse, such as when a managing member violates his or her fiduciary duties to the LLC.

And when that happens, the other members of the LLC may think about removing that member—why should a member who isn’t doing the work, or worse, who is actively hurting the LLC, reap the benefit of being an owner or member of the LLC?

Look at the Governing Documents

Like any legal entity, your first step is to review your operating agreement or management agreement, the most common documents that set out the rules of the LLC much like bylaws would do for a corporation. They often will have provisions that relate to member removal.

After that, you will want to look at whatever documents that particular member signed, when he or she became a member to see if they address removal.

Voluntary Buy Outs

In some cases, whether because the member agrees or because the governing documents permit, the member may be easily removed, but the LLC will have the obligation to buy back the member’s interest—something the LLC may or may not be able to afford to do.

The soon-to-be-removed member’s interest in the LLC, which is being purchased by the LLC, may need to be appraised, to get an accurate buy back value.

Going to Court

If the member doesn’t want to leave, you will have no other option but court action. The court will look to the governing documents also, to see if the member should be removed. If no such documents exist, the court will default to Florida’s LLC laws, which are pretty broad and non-specific when it comes to when a member can and cannot be removed.

Often, when lawsuits are filed to remove a member of an LLC, that member ends up countersuing. The countersuit will likely allege mismanagement or fraud or some other wrongdoing by the LLC—things that, if the judge believes it, could result in the involuntary dissolution of the LLC.

Legal problems with your LLC? Let the West Palm Beach commercial litigation lawyers at Pike & Lustig help you throughout your case.

Source:

leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0605/Sections/0605.0602.html