Happens When LLC Members Disagree?

by | Jan 31, 2022

If there’s a disagreement within the LLC, you must go through a formal process of having it arbitrated or mediated. Which won’t be easy, and it will cost money. In that case, each member would retain an attorney to represent them as they try to resolve their conflict out of court.

A recent decision by a state court has highlighted some of the problems with LLCs that cross status. Specifically, it ruled on a case where members of an LLC taxed as an S-Corp sued each other for not following through with their business plan. Unfortunately, the court couldn’t offer guidance because the operating agreement was blank on this matter.

If the operating agreement is blank, or, as in this case, the voting agreement is not clearly defined, then it is complicated for members to resolve disputes within an LLC. So, what’s a member of an LLC to do?

The best advice is to look at any business decision and decide who should be responsible for each. Is it the manager, an employee, or a board member? Each solution will have its pros and cons, but clearly defined lines of responsibility will make life easier for members if they ever disagree.

If they disagree or need to part ways, a member of an LLC should have a written plan on how they will split up the business. If they don’t, what used to be a simple process could become complicated and lead to costly litigation.

In this situation, it’s best to get your operating agreement or buy-sell agreement reviewed by an attorney familiar with the changing nature of small businesses because even the best-intentioned friends can have an unpleasant business dispute.

Who decides an LLC?

That seems like a simple question, but it isn’t. No provision in the LLC statutes says who makes decisions; you either will have an operating agreement, or your members will make decisions through unanimous consent.

What if there is no unanimous consent? Then “the member or manager with authority to manage the limited liability company” makes the decisions for the LLC. But can you remove that manager? The statutes don’t say.

It is one of these “nothing in this act shall be deemed to supersede or modify any other law” sections so that it could mean your operating agreement controls or state law controls. So that means if your operating agreement allows removal, you may be able to remove that manager.

Can LLC members sue each other?

Yes, they can. You can sue your co-member or his manager for violating the operating agreement, or you can file a derivative suit against those who control the company and benefit from any violations of law.

What if LLC members want to terminate their business relationship?

If there is no unanimous agreement, then you have two choices: buy the departing member out or file a suit for dissolution and accounting. You can’t just kick him out like you could if you formed as a corporation.