Multi-member LLCs always have to grapple with the issue of dealing with an unruly, unlawful or otherwise dysfunctional partner. Unfortunately, LLC members sometimes fail to address the procedure for removing or expelling an unruly LLC member in their operating agreement. That being said, although establishing a removal procedure through an operating statement is ideal, LLC partners can still expel a member using the updated default rules within Florida’s Revised Limited Liability Company Act (“Revised Act”).
In this post, we will go over the two “routes to expulsion” provided by the Revised Act, and then highlight the importance (and the benefits) of creating a removal procedure within your own operating agreement. As we will see, the two routes provided by the Revised Act are simple on the surface, but a bit more complex when we dive down deeper. And, the benefits of establishing a removal procedure in an operating agreement can be very significant.
Two Routes: Unanimous Consent & Judicial Expulsion
Under the default rules of the Revised Act, Florida LLCs can pursue two different avenues to expel an unruly member: unanimous consent by the LLC members, or judicial decree. Unanimous consent is seemingly as straightforward as it sounds: LLC members can literally vote to expel a member, and if the vote is unanimous then the member may be removed. The full reality, however, is a bit more complicated, because the default rules only allow for removal via unanimous consent under certain conditions.
In order to expel a member via unanimous consent, one of three conditions must be present:
- The LLC must not be able to carry on its business lawfully with the target member;
- The target member is a corporate entity which is presently dissolved; or
- The target member has already transferred its entire interest in the LLC.
These conditions create a somewhat substantial hurdle to using the unanimous consent avenue. There may be situations, for instance, in which members may prefer to expel an uncooperative member, but are unable because the uncooperativeness doesn’t jeopardize the lawful status of the business.
By comparison, dissociation by judicial directive may be more availing. If an LLC lacks an established procedure for expelling a member, then it may apply to the appropriate court to expel the member by court order. As with unanimous consent, however, there are hurdles which must be met:
- The member must engage in conduct which adversely affects the LLC in a significant (or “material”) way;
- The member must consistently or deliberately commit a material breach of the operating agreement or violate his or her LLC duties as prescribed under the Revised Act itself;
- The member engages in behavior which makes a continuing professional relationship with the LLC impracticable.
One thing readers should keep in mind is that “expulsion” in the context of a judicial directive doesn’t mean that all ties between the member and the LLC are severed. On the contrary, it means that the member is removed from any sort of participation in the management of the LLC’s business affairs. The removed member may still retain certain interests or rights with respect to the LLC. This is important to remember, because judicial expulsion may be more limited in scope than many might assume.
The Importance of a Well-Crafted Operating Agreement
Although these default rules have some complexity, there can be little doubt that they are beneficial to LLCs which lack an established procedure for removing members. As a general matter, LLCs should always include a procedure for expelling members within their operating agreement. Unfortunately, many LLCs lack this type of procedure, and quite a few lack an operating agreement altogether!
If LLC members create their own procedure via an operating agreement, they can place whatever conditions they prefer in the procedure. This can be highly beneficial, because there may very well be situations in which all LLC members wish to expel a member, but those situations may not be provided for under one of the default rules. In a way, a privately developed procedure via an operating agreement gives LLCs more control over the fate and structure of their company. If you can avoid falling back on the default rules, this is always advisable.
Contact the Business Attorneys at The Frazer Firm to Discuss Your LLC
As with so many things in business law, the likely outcome of any given issue depends greatly on the particular facts involved. If you are contemplating forming a multi-member LLC or have questions about the conduct of a member in your existing LLC, it is imperative that you seek the guidance of experienced business attorneys. Contact The Frazer Firm and schedule a consultation with the experienced LLC dispute litigation and LLC business formation attorneys to discuss your LLC legal issues.
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