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.

1 comment:

Anonymous said...

what if you started the llc and you added memebers on to asure them that they were getting their money back,but know their trying to take over and that was not the plan,it was @my attroneys office when the llc was done,but if you look on sec state i am still sole ownership and the operating agg. has not been done because now they refuse to.i am 50% and husband and wife are 25% a piece and the agreement has not happen name is on the lease by myself and on the bank notes. need some advise to what to do