Saturday

What Does LLC Mean When Being Sued by One of the Partners for Part of the Business?

A limited liability company, also called an LLC, has the management flexibility and operational structure of a partnership. This means, in effect, that the owners, known as partners or members, can withdraw from the partnership at will. Best practices advises LLC owners to plan for owner withdrawals at the outset of the business by putting an operating agreement in place with buy/sell provisions. If a dispute arises, however, and the owners can't agree how to equitably separate themselves, the issue must be resolved in court.

Governing Law
An LLC is formed under state law. The state where the company filed its articles of organization has a Limited Liability Company Act (LLCA) that controls the formation, operation and dissolution of the business. When a business is formed as an LLC and one of the owners sues for his share of the company, it means that the suit and all matters pertaining to the dispute will be governed by the provisions in the state's LLCA.
Judicial Intervention
In an owner dispute that ends up in court, the LLC business form means that the judge has the power to resolve the dispute in line with the provisions in the state's LLCA and through the application of equitable principals. In fact, the judge is the final arbiter of all matters that cannot be resolved among the members themselves.

Operating Agreement
An LLC entity type means that the judge will first look to any operating agreement that the owners have adopted, orally or in writing, before he applies the provisions of the LLCA. A state's LLCA contains mandatory provisions and default provisions. Most management issues addressed in the act are considered default provisions and kick in only if there isn't an operating agreement in place to address the situation. One of the benefits of the LLC form is this type of management flexibility. Owners are allowed to contract between themselves and set owner buyout provisions or any other rule that will control owner disputes.

Judicial Remedies
The LLC form means that the judge will grant one of two remedies to an owner who sues to withdraw his equity interest from the company, absent any specific provisions in an operating agreement. Depending on the provisions in the state's LLCA, the judge will either order the company to buy the disgruntled owner out at a fair value established by the court or the judge will dissolve the company completely and order assets liquidated and distributed. Some states allow both remedies, while other states allow one or the other.

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