Rights and Responsibilities of LLC Members

The term "member" refers to an individual or an entity that holds a membership interest in a limited liability company (LLC). The members own the LLC, just as shareholders own a corporation. But the rights and responsibilities of LLC members are very different that corporate shareholders. LLC members can directly manage the company and can receive allocations of revenue, tax benefits, and losses that differ from tthe percentage of their ownership interests. 

The LLC’s initial members are admitted at the time of formation. While money is frequently contributed in exchange for a membership interest, the contribution can consist of any tangible or intangible property including promissory notes, services performed, or contracts to contribute money or perform services in the future.

The LLC’s operating agreement defines how new members are admitted to the LLC, including the requirement of consent from the existing members and the type of consideration that can be provided in exchange for the membership interest. In the absence of a provision to the contrary, most state LLC Acts provide that all of the existing members must consent to the admission of a new member. The operating agreement should also set forth the circumstances under which a member may withdraw, resign, or be expelled from the LLC. If there is no operating agreement, or if the operating agreement doesn’t address these issues, the law of the formation state will govern.

Members Can Directly Manage the LLC

But, unlike a corporation where the shareholders virtually never directly manage the company, LLC members may or may not manage the business and its affairs. Whether the LLC is managed by the members or by managers selected by the members depends upon the LLC's operating agreement. If there is no operating agreement, or the agreement is silent on this issue, the state's default provisions apply. In most states, the default is member-managed.

Members Receive Financial Rights

By virtue of acquiring an interest in a limited liability company, members receive certain financial rights. These financial rights include the right to share in allocations of the company’s profits and losses. Members also have the right to share in distributions of the LLC’s assets during its existence and when it dissolves and liquidates.

The exact nature of the financial rights, such as whether they will be shared equally, or based on capital contributions or some other criteria, is generally set forth in the operating agreement. The state laws have default provisions stating how these financial rights will be allocated in the absence of a provision in the operating agreement.

Members Have the Right to Vote

Members of an LLC also have the right to vote, unless the formation state permits non-voting membership classes and the operating agreement provides for non-voting members. The scope of their voting rights depends upon the type of management of the LLC (member-managed or manager-managed) and the terms of the llc operating agreement. Members in member-managed companies have the right to vote on all matters affecting the LLC’s business and affairs—from the highest-level strategic decisions, down to the day-to-day operating decisions. In a manager-managed company, however, members have limited voting power. They can generally elect and remove managers and vote on certain major changes such as an amendment to the operating agreement or articles of organization, the admission of a new member, or a merger or dissolution. Absent provisions in an operating agreement, voting rights are determined by the LLC laws in the formation state.

Members May Have Right to Inspect Records

Some states require an LLC to maintain certain records. Some also give LLC’s members the right to inspect these records. The required documentation often includes:

  • the name and address of each current member
  • a copy of the articles of organizations (and any amendments)
  • copies of the LLC’s federal, state and local income tax returns (if any) for the three most recent years
  • a copy of the operating agreement currently in effect
  • copies of financial statements for the three most recent years.

Other states do not require record maintenance, but provide that members must be given access to information concerning the LLC’s business necessary for them to properly exercise their rights and perform their duties. As with many other default provisions, most state LLC statutes permit the operating agreement to override some or all of these requirements.

Members May Have Dissenters’ Rights

Dissenters’ rights, also known as the right to an appraisal, is the right to sell a membership interest back to the LLC for the fair value of the interest, if the LLC enters into a transaction that would alter the character of the member’s investment, without the member’s consent. This kind of transaction would include a merger, a sale of all the company’s assets, or a conversion into another kind of entity.

Some LLC Acts specifically grant dissenters’ rights to the members, while others do not. This is one area of law where a corporation’s shareholders rights are far more defined. Some Acts provide that the LLC may grant this right in the operating agreement. If dissenters’ rights are granted, the procedure the members have to follow to assert the right should be set forth in the operating agreement.

Members May Have Right to File a Derivative Suit

Members may also have the right to bring a derivative action. This is a suit brought by a member on behalf of the LLC to protect it from wrongs committed against it by management or others. Although the suit is brought by the member, the action belongs to the LLC. As a result, if the member wins the lawsuit, the damages awarded by the court will go to the LLC.

There are certain prerequisites that a member must meet in order to maintain a derivative suit. These include having been a member at the time the alleged wrong was committed and having first demanded that the LLC bring the suit itself.

Some statutes specifically provide members with the right to bring a derivative suit. Where the statute is silent a member may, or may not have a common law right. It is up to the state’s courts to decide that. Again, this is an area where corporate law is much clearer.

Liability of Members Depends Upon their Role and Actions

Members are not liable for an LLC’s debts or obligations. Members are, however, obligated to make required capital contributions. The operating agreement may set forth the penalties for failing to do so. A member who votes for an unlawful distribution is personally liable to the LLC for the portion of the distribution that exceeds the maximum amount that could have been lawfully distributed.

A member in a member-managed LLC, or a member who is also a manager, may be held liable for breaching the fiduciary duties owed to the company and its members. Members may also be held liable for breaching a provision of the operating agreement— such as by withdrawing without following the procedures set forth in the agreement.

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