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Rights and Responsibilities of LLC Members

Rights and Responsibilities of LLC Members

Excerpt from The LLC Handbook.

The term member refers to the individual(s) or entity(ies) holding a membership interest in a limited liability company. The members are the owners of an LLC, like shareholders are the owners of a corporation. Members do not own the LLC’s property. They may or may not manage the business and affairs. Initial members are admitted at the time of formation. Additional members may be admitted upon the conditions set forth in the operating agreement. In the absence of a provision to the contrary, most Acts provide that all of the existing members must consent to the admission of a new member. The operating agreement may also set forth the circumstances under which a member may withdraw, resign, or be expelled from the LLC.

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.

Right to Vote

Members of an LLC also have the right to vote. The scope of their voting rights depends upon whether the LLC is being managed by its members or by managers. Members in member-managed companies may vote on all matters affecting the LLC’s business and affairs. 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.

Member Inspections

Some states require an LLC to maintain certain records, and provide that members have a right to inspect these records. These records include the names, addresses, contributions, and shares of profits and losses of each member, the names and addresses of managers, and certain tax returns. LLCs can expand or reasonably restrict the members’ right to inspect books and records in their operating agreements.

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 members dissenters’ rights, while others do not. Some Acts provide that the LLC may grant this right in the operating agreement.

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.

Liability of Members

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 any 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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