It’s Time to Breakup: A Guide to Expelling an LLC Member

Breaking up is hard.  It’s usually not pretty.  What started out as a seemingly perfect business partnership has now grown toxic and trust has been lost.  If you start a business with others, it is necessary to be prepared for the relationship to sour at some point. In some ways, this is simply because the nature of business tends to bring out certain qualities in certain people.  The main goal of most business ventures is maximizing the return on investment – altruistic and honorable motives can quickly be replaced by selfishness, greed, and dishonesty.  

 

Whatever the reason for the deterioration of the owners’ relationship or damage to the business, there may come a time when it is necessary to expel a toxic or harmful member from your LLC. LLC members can be expelled through several different methods. 

 

Expulsion Based on an Operating Agreement 

 

Arguably the simplest method to expel an LLC member is with a prearranged plan in an operating agreement. The operating agreement is the essential governing document for an LLC. This document lays out the terms by which the LLC will be governed and controls the entity’s operations. An operating agreement should also spell out the procedure for expelling a member.   

 

Expulsion Based on the Revised Act: The Default Method 

 

In the event that your LLC lacks a provision within your operating agreement on expulsion, or lacks an agreement altogether, LLCs will default to the rules outlined in the Florida Revised Limited Liability Company Act (the “Revised Act”). The Revised Act specifies the conditions under which it is possible to expel an LLC member. Expelling a member from an LLC under the Revised Act is similar to procuring a divorce; as with a divorce, you need to cite “grounds” for the separation.

Under the Revised Act, an LLC member can be expelled if the other members vote unanimously to remove the member and one of the following circumstances applies:  

 

(1) keeping the person as a member would result in illegality for the business itself 

 

(2) the member’s entire interest in the entity has already been transferred to the member, unless this transfer of the interest came about from a charging order or for a security reason 

 

(3) the member is itself a separate entity which has been dissolved already. 

 

The Final Option: Expulsion Based on a Court Order 

 

The final remaining method for expelling an LLC member is to obtain a judicial order. You can obtain a judicial order to expel a member whenever that member engages in certain wrongful conduct. Wrongful conduct which can lead to expulsion via court order includes the following: 

 

(1) The willful commission of a material breach in the business’s operating agreement 

 

(2) A breach of fiduciary duty 

 

(3) The willful performance of wrongful conduct which negatively impacts the LLC 

 

(4) The willful performance of acts related to the LLC or the LLC’s activities which renders the continued preservation of the member unreasonable 

 

It is essential for the LLC to have experienced business litigation counsel guiding the litigation process and advising the LLC on expulsion procedures.   

 

Schedule a Consultation with The Frazer Firm for More Information

Expelling an LLC member is never an easy thing. In some cases, the member is a friend, or even a family member. Doing so can be quite challenging. The experienced business attorneys at The Frazer Firm have experience litigating LLC member disputes and drafting LLC operating agreements that protect the LLC against future wrongdoing.  Contact The Frazer Firm to explore ways to protect your business or pursue claims on its behalf.