Evaluating LLC Owner Disputes

Evaluating LLC owner disputes requires us to get a full picture of the business operated through the LLC, its revenues, when it was formed, its management structure, and all the characters involved with the LLC. Certain questions come up over and over again:

Is there an Operating Agreement?

When an LLC gets formed, the members must enter into an operating agreement setting forth all matters dealing with the LLC’s internal operations and the LLC members’ rights and obligations. The operating agreement may have important provisions for your current LLC owner dispute. So we must review the operating agreement. We would also ask to review the LLC’s articles of organization, which is the document that was originally filed with the Secretary of State when the LLC was formed.

Even if you don’t have a document that starts with “operating agreement”, you may have other written agreements and documents that could qualify as an operating agreement.

Sometimes there is an operating agreement, but it was not formally executed. Under certain circumstances, this could also be a valid and enforceable agreement.

If there is no operating agreement, as is often the case with small businesses, your LLC owner dispute is governed by the New York LLC laws. These laws are the default rules if there is no operating agreement or the operating agreement does not include a particular situation.

How much of that LLC do you own?

We would determine how much of the LLC you own vis a vis the other LLC members. This determines a lot of questions since the majority can often overrule the minority member’s wishes. Sometimes it is clear by just looking at the operating agreement. Other times it is not so clear, and we would look at any other understandings between the LLC members. Was there ever anything in writing about who owns what? Are there tax returns, permits, or official documents listing you as an owner with a certain percentage?

See also “How to determine LLC Ownership Percentage.”

Who are the other Owners?

It is important to understand the cast of characters involved in your LLC Dispute. Give us a full picture of the other owners. What motivations could they have to exclude you from the LLC? What are their financial resources? What is the history of your relationship with the other LLC members?

What are your Goals?

Any legal strategy must consider your personal goals in resolving the LLC owner dispute. Do you just want out and wish the other partners buy you out? Do you want to regain your management position? Do you want to receive what is rightfully yours, for example, a piece of the profits of the LLC?

Possible Legal Strategies to resolve LLC Owner Disputes

Letter Writing and Negotiation

After we take full stock of your LLC owner dispute situation, we may decide to approach the other members with a letter laying out our position and desired goals. Sometimes this gets the ball rolling, and constructive negotiations ensue.

If you are the majority owner, there may be ways to restructure the LLC and possibly oust problematic minority members without bringing a lawsuit.

Bringing a Lawsuit against the other LLC Members

If negotiation fails or seems fruitless, we may bring a lawsuit on your behalf. LLC owner dispute lawsuits often have one or more of the following claims:

Breach of Contract

If the wrongful conduct of the other LLC members is in breach of the LLC operating agreement, we can bring an action for breach of contract and ask for damages or specific performance.

Breach of Fiduciary Duties

LLC members owe each other fiduciary duties, which means they owe each other the “utmost duty of loyalty and honesty.” They cannot steal money or other assets from the LLC, compete against the LLC, or do anything else that would be considered dishonest or disloyal.

Bringing a breach of fiduciary duties claim requires that one carefully distinguishes between direct claims by the disgruntled LLC member and claims brought derivatively on behalf of the LLC. Courts will dismiss causes of actions if a direct claim is brought as a derivative claim and vice versa or if the two are intermingled.

Suppose a breach of fiduciary duty claim is directed at actions that harmed the LLC rather than the individual LLC member. In that case, the action has to be a so-called “derivative lawsuit” where the complaining LLC member sues the misbehaving members or managers on behalf of the LLC.  If such a lawsuit is successful, the misbehaving member or manager would owe the damages caused to the business, not the individual partner.  An example would be an LLC member stealing money from the LLC.  The other member can bring a lawsuit on behalf of the business, derivatively, against the stealing member.

Less frequently, the harm may not be to the LLC but directly to the disgruntled member. For example, if you are frozen out of your management position and are thus unable to manage the LLC, you would be personally harmed, and the claim would be a direct claim by you against the owner committing the breach of fiduciary duties by freezing you out of your rightful position within the LLC.

Access to Books and Records

As a limited liability company member, you have an absolute right to review the books and records of the LLC under §1102 of the LLC Law. Thus, a common lawsuit is a request for access to the books and records of the business. One or more business partners often exclude another LLC member from such access under dubious circumstances. Before bringing these lawsuits, you must formally ask the LLC for the records in writing. Then, when they refuse or just do nothing, a lawsuit for books and records can be started.

See also “Access to LLC Books and Records.”