Wednesday, August 26, 2009

Who is master of the ship?

Question: With a DE LLC, since LLC agreements are not required, how do you determine who are the authorized persons acting on behalf of the LLC if there is no LLC agreement? Is the person who executed the certificate of formation the only person responsible for the entity in the absence of any operating agreement? Kayla, DE.
Response: A run on Delaware questions lately. I'm not sure what you mean by "responsible". I take it from the question that is an LLC of which you are NOT a member and, thus, you want to know how to go about discovering the identity of the members. The individual who signs the certificate of formation may or may not be a member of the LLC. How do you tell who the members are when there is no operating agreement? In some states, an annual report is filed listing the members. However, I do not believe Delaware LLCs list the members in any annual filing. The best evidence absent both an operating agreement and annual filing with the secretary of state's office is the most recent federal tax return (usually IRS form 1065 when there is more than 1 member and IRS form 1040 when 1 member). Unfortunately, tax returns are privileged information that the government does not divulge. You would need to get this type of information directly from an LLC member. You might want to contact the Delaware Secretary of State's office and ask them if there is a mechanism to find out through their office the identity of the members of a Delaware LLC.

Monday, August 24, 2009

Kicking out the deadbeat member

Question: We formed a Delaware LLC in June 2006. We have no operating agreement, nor are our 3 members recorded. Two of us file our schedule K-1's listing us at 45% each and the 3rd at 10%. Can the (2) 45% members remove the 10% member for lack of participation and contribution? If so, how can this legally be accomplished? Tracy, CA.
Response: This is a frequent question / complaint in LLCs. The root of the problem lies at the inception of the LLC. Frequently, members are given LLC ownership interests based upon future promises of sweat equity (i.e., services). Greatly complicating the process is the the situation where the LLC member neglected to enter into a written operating agreement. Let's break down the problem.

Is there a promise to perform services by the deadbeat member? I assume the promise was oral. Oral operating agreements are allowed in Delaware. See § 18-101(7). The issue is enforcement of an oral promise to perform services. Delaware Statute § 18-306, Remedies for breach of limited liability company agreement by member. covers that topic. Basically, it states that the operating agreement may provide the penalties for failure to comply with its terms. What happens if there is an oral or written operating agreement that does not contain terms setting forth the penalties for breach? I think your remedy in that case is to sue for monetary damage (i.e., the amount by which the failure to comply with the agree has damaged you).

Can you involuntary kick the deadbeat member out of the LLC? I don't think so unless there is a provision in the operating agreement stating what services are to be performed and, also, that the penalty for failure to provide said services is removal as a member of the LLC.

Can the two 90% members jointly pass a written LLC operating agreement that contains the necessary provisions? No. The initial LLC operating agreement has to be unanimous.