Forced Member Capital Contributions

Your LLC has been formed and competing in the business world. Oops, things have not gone as smoothly as the business plan predicted. The LLC needs an additional infusion of capital to survive. Perhaps your LLC has been wildly successful and needs an additional capital infusion to grow. You basically have two options at this point for equity investment in the LLC: (a) sell an LLC ownership interest to a new member (or existing member) that dilutes all other members or (b) require all existing LLC members to kick in new capital in amounts proportionate to their ownership interest. It's often difficult to bring new members into an existing LLC. There's a limited market for closely held small business interests. The problem with option (b) above is what happens when less than all members vote for new capital contributions. Unless the operating agreement provides for forced member contributions with a less than unanimous vote, many state LLC statutes prohibit the practice. Below are a few sample statutes.

• California Corporate Code Section 17200(b): "Unless the articles of organization or operating agreement provide otherwise, no member shall be required to make any additional contribution to the limited liability company." Link.
• Florida Business Code Section 608.4211: "(2)A promise by a member to contribute to the limited liability company is not enforceable unless it is set out in writing signed by the member. * * * (4) Unless otherwise provided in the articles of organization or the operating agreement, the obligation of a member to make a contribution or return money or other property paid or distributed in violation of this chapter may be compromised only by consent of all the members." Link.
• New York LLC Act Section 502(b): "Unless otherwise provided in the operating agreement and except as provided in section six hundred five of this chapter, the obligation of a member to make a contribution or to return money or other property paid or distributed in violation of this chapter may be compromised only by consent of all the members." Link.

Thus, when forming an LLC, remember that in most states an LLC member cannot be required to make capital contributions absent the member's consent unless a written operating agreement sets out such a right on the part of the LLC. If your operating agreement will allow the majority of the LLC members to force a minority of members to make additional capital contributions after formation, then you should also address what remedies are to be available to the LLC in the event of a breach of this duty (i.e., penalties? attorney fees? forced sale of LLC interest?).