LLC Dispute Lawyer

by | Oct 25, 2021

An LLC is a unique form of corporate entity. It combines the benefits and protections of a corporation with those of a partnership or sole proprietorship. Limited liability companies provide their owners with limited personal liability for the debts and obligations incurred by the business as well as pass through income taxation as compared to corporations which are taxed separately from their owners.

Dispute resolution between LLC member is one of the most challenging aspects of having an LLC. This happens when one member of the LLC attempts to force another member out of the LLC. 

What happens when LLC members disagree?

Disagreements over how to run a company, called disputes, commonly occur in LLCs composed of one or more members. Because the disputes ultimately involve business and profit, that is, no one wants to be losing money, disputes between members may be settled easily by working them out through mediation. Conversely, unresolved disputes may lead to lawsuits.

In a member-managed LLC, members have direct authority either to elect someone other than the initial manager as the new manager of the LLC or to remove the current manager. If the members cannot agree on a new manager, then the members can file a lawsuit to dissolve and liquidate (or sell) the LLC’s assets and distribute the funds (called an “action for dissolution”).

A lawsuit by one or more LLC members against other member(s) of an LLC that is not managed by managers is called a “member fight” because the members are fighting each other. Such lawsuits can be very expensive and time consuming.

One way to avoid member fights is to have an operating agreement and specify how manager decisions will be made and who has the authority to make such decisions. Disputes may be decided by unanimous written consent, majority vote, or by the manager’s control.

LLC Formation and Governance  

There are some unique formation issues with LLCs which complicate the process of governance. These issues can down the road lead to disputes. It’s very important that business owners understand that an LLC is governed by a written operating agreement.

The rules for organizational structure and decision making are laid out within the operating agreement between the members. If you fail to comply with these provisions, you may be waiving rights which you would otherwise have had and exposing yourself to unnecessary liability.

What is an Operating Agreement?

An LLC’s membership is governed by a written operating agreement. The operating agreement, among other items, outlines each member’s capital contribution, powers, and duties within the firm. If you do not have an operating agreement, and you should find yourself in court where you and another member have a dispute, the Michigan limited liability company act. MCL 450.4101 et seq, will be applied by the court and fill in for the operating agreement. The best course of action is to have an operating agreement that is tailored to your particular LLC and its members.

The operating agreement is separate from the articles of organization filed with the state to form the LLC. Not following and adhering to provisions contained under the operating agreement can lead to disastrous results for you and the business.

One potential pitfall in this process occurs when two members disagree about something major relating to the running of their LLC. Without an operating agreement, these types of disagreements could cause a problem which cannot be easily resolved.

There are many reasons why you should revisit your operating agreement as often as possible to make sure that it is relevant and up to date with your business practices. Failure to do so may lead to serious legal problems for the company.