Member Disputes in a Limited Liability Company: What Happens If You’re Voted Out?

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Article By: Marc Newman

A Leading Commercial Litigation Attorney in Michigan

Member Disputes in a Limited Liability Company: What Happens If You’re Voted Out?

Published on: August 21, 2020

limited liability company disputes
Anytime you start a business with other people, you can expect to have disputes from time to time.

However, some disputes between LLC members can become so serious that you need to consider leaving the business altogether or removing a member.

If your dispute with another LLC member has reached this level, it may be time to contact a business dispute lawyer in Michigan. A lawyer can help you understand your options and protect your business.

Common LLC Member Disputes

Disputes between members of a limited liability company can arise from a number of circumstances.

Responsibilities

Often, individuals who combine to create an LLC each have special skills to contribute. Perhaps one of you is familiar with the industry, another has accounting expertise, and another has sales experience.

Using each member’s special skills can help your LLC succeed. However, sometimes certain members start to feel like their contribution is more valuable or time-consuming than another member’s contribution. They may believe that they are entitled to a greater share of the business or that another member should take on more responsibility.

This can lead to tension and disputes among LLC members.

How to Distribute Profits

Another common area of contention relates to how profits should be used and distributed. Members may disagree about whether to reinvest profits in the business or distribute them to members. They also may disagree about whether to treat individual members as employees with a salary or how much that salary should be.

Nothing deteriorates relationships as quickly as disputes over money. These kinds of disputes may make it extremely difficult to work with the other members of the LLC. Or they may lead to the dissolution of the business altogether.

Malfeasance

A member’s unethical conduct may also lead to limited liability company disputes.

Each member of a limited liability company owes fiduciary duties to the other members and to the LLC. This means that they must act in the best interests of the LLC and not put their individual interests above those of the company. Members can violate their fiduciary duties by doing things like:

  • Taking an LLC opportunity for themselves;
  • Participating in another business that is competing with the LLC;
  • Failing to account for the use of LLC resources;
  • Misusing LLC assets or funds; or
  • Grossly mismanaging the LLC.

 

These types of actions can drastically affect your business and need to be addressed swiftly.

Additionally, if you learn that an LLC member has engaged in wrongful or illegal conduct that makes it impractical or impossible to continue in business with them, you may need to take action.

How to Prevent Limited Liability Company Disputes

The best way to avoid LLC member disputes is to have a thorough operating agreement. Your operating agreement can address details such as:

  • Members’ voting rights;
  • Whether certain issues need to be decided unanimously;
  • The authority each member has to act on the company’s behalf;
  • How profits will be shared and distributed;
  • What responsibilities each member will have;
  • What decision-making authority each member will have;
  • What capital or other contributions each member will be expected to make; and
  • Circumstances where a member may be expelled.

 

By addressing these types of issues when you form your LLC, there will be little room for argument when a dispute arises. Your operating agreement should consider potential future disputes and either resolve them at the outset or establish a mechanism for resolving them.

You should seriously consider having an attorney draft your operating agreement. Each member should employ their own attorney to review the agreement and ensure that it protects their interests.

How to Remove a Member or Manager

Under Michigan law, LLC members can remove a manager for cause. However, a member can neither withdraw nor be expelled unless the operating agreement allows it.

Most operating agreements include provisions dictating circumstances where a member can be removed. This may require a vote of other members. It may also require the members to show that expulsion is justified.

If you are not in a position to legally remove a member but you feel that continuing in business with them is impossible, you could try to negotiate a buyout. If your disputes have made it difficult to operate the business together, the member may be willing to leave with the right incentive.

If you can’t remove the member or negotiate a buyout, you may want to consider dissolving the LLC altogether. Although this may mean the end of your business, there are circumstances where LLC member disputes become so toxic that continuing to operate a business together is simply impossible.

What to Do If You’re Voted Out of an LLC

If the other members of your LLC are attempting to remove you, either as a manager or a member, review your operating agreement carefully. If the other members lack justification to expel you or have not followed the correct procedure, you may be able to prevent them from voting you out. You may also have a cause of action against them for breach of contract or breach of their fiduciary duties.

If you are voted out of an LLC, you may be entitled to compensation for your interest in the business. Again, you should review your operating agreement carefully. The operating agreement may require the members to buy you out. However, some operating agreements state that a member removed for cause forfeits their membership interest.

If you are facing expulsion from your LLC, it’s important to contact a business dispute lawyer as soon as possible. They can review your operating agreement and help you protect your rights.

How The Miller Law Firm Can Help You

If you need help resolving a dispute with members of your limited liability company, contact The Miller Law Firm today. For nearly 25 years, our firm has focused on complex business dispute resolution. We have helped businesses of all types and sizes, both in Michigan and around the United States, and we can help you too.

Call or contact us today to tell us about your LLC member dispute and learn what we can do for you.

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