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Getting rid of an LLC member in your business can be difficult without an effective operating agreement

It may seem hard to believe, but there’s a chance you and your fellow members in your limited liability company may not always get along. In fact, the relationship may get to the point where the majority of the members in the LLC wants to expel a member. As Lee Corso says frequently on ESPN Gameday, “Not so fast, my friend.”

 

You probably do not need an business attorney to set up your company. Preparing and filing Articles of Organization is relatively straightforward.

Where your business lawyer earns his money is by advising you on the many other facets of your business. For example, if you have multiple members of your LLC, you MUST have  an operating agreement which includes “buy-sell” provisions. Without such agreements, governing your business just became that much more difficult. Therefore, it is crucial that you consult with an experienced business lawyer prior to business startup.

If your LLC does not have an operating agreement that includes a “buy-sell agreement,” or if the operating agreement does not address expulsion or dissociation, then we must refer to the statute. The Virginia Code provides that any member may ask the court to “dissociate” or “expel” another member if that member:

  1. Engaged in wrongful conduct that adversely and materially affected the business of the limited liability company;
  2. willfully or persistently committed a material breach of the articles of organization or an operating agreement; or
  3. engaged in conduct relating to the business of the limited liability company which makes it not reasonably practicable to carry on the business with the member.

Although expulsion divests that member of his right to participate in the management and affairs of the company, it does not divest the expelled member of his financial interest in the profits and losses of the company. Therefore, if the member does not voluntarily agree to the expulsion, you must file a lawsuit in order to meet your goals. Obviously, because attorneys’ fees and transaction costs are now added to the mix, that procedure will be expensive and time-consuming.

Many of us starting a business are only thinking of the opportunities, not the pitfalls. When setting up your company, it’s important that you and your business attorney discuss both the best and worst case scenarios so your company documents can fit your needs.

Tarley Robinson, PLC, Attorneys and Counsellors at Law

Williamsburg, Virginia

 

John Tarley

John Tarley

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John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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Filed under: Business Planning, General Interest, John Tarley, Merger & Acquisition, State & Federal Litigation by John Tarley

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