Q: I am the manager of a limited liability company. There is a minority member who continually causes problems, objects to steps we need to take and interferes with the profitable operation of the LLC. What can we do to stop or prevent his disruptions?
N.G. Culver City
A: Review the LLC’s operating agreement and articles of organization. What do they provide with regard to (a) his conduct and (b) any rights to dispose of or deflect that member’s behavior? Does he have authority or right to disrupt, object or prevent?
The operating agreement also might set forth a mechanism you are to follow when disputes arise, such as mediation prior to suing, or arbitration rather than court action.
You say this person is a minority member. Can you and one or more others out-vote him and thereby take the actions that are beneficial?
A statute of importance here is California Corporations Code Section 17706.02(e). It provides authority to expel a disruptive member through court action. You can readily find Section 17706.02(e) online.
Finally, is there a mechanism by which to buy this guy out and get rid of him in that manner (and is there any interest in doing so)?
Q: We formed an LLC in part because it can shield us from personal liability. Can you explain how that works, and what would have to be shown for that protection to be unavailable?
M.J., Long Beach
A: California Corporations Code Section 17703.04 is a key statute. Bottom line, there is a liability shield because the debts and obligations of the LLC belong to the LLC, not to its members or its managers merely because they are part of the entity. So if a third party obtains a judgment against the LLC, that does not mean that party can then collect the sum from you.
There are instances in which the LLC shield can be compromised, or, as it is sometimes described, “pierced.” If you engage in your own wrongful conduct (such as a negligent misrepresentation), you may wind up with liability even if the transaction was handled through the LLC.
There is also potential alter ego liability, which turns on two primary factors: (a) No separateness between the LLC and you, which essentially means there is a unity of ownership (the LLC is effectively you); and (b) If the LLC shield were honored, it would promote an inequitable/unjust result.
To avoid alter ego liability, do not commingle your and the LLC funds, do not treat the LLC’s bank account as if it were your account, do not pay personal obligations with LLC money, make sure to maintain sufficient business records, and do not treat the LLC as an instrument or conduit for your personal benefit.
Starting a business
The California Secretary of State’s office has a helpful link that addresses “starting a business in California”: sos.ca.gov/business-programs/business-entities/starting-business-checklist.
Ron Sokol has been a practicing attorney for more than 40 years, and has also served many times as a judge pro tem, mediator, and arbitrator. It is important to keep in mind that this column presents a summary of the law, and is not to be treated or considered legal advice, let alone a substitute for actual consultation with a qualified professional.