What Laws Exisit to Protect a Member of an LLC From Bad Intentions of Other Members?

by Terry Masters

The conduct of limited liability company, or LLC, owners, known as members, is governed by state law. Each individual state has a limited liability company act, LLCA, or something similar, that establishes legal standards that apply to the conduct of members in relation to other members. If a member feels others are not acting in the best interest of all, there are legal avenues available to resolve the dispute or allow the dissenting member to exit the company.

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State Law

Each state's LLCA gives members the right to come to and create an agreement about how the company will operate. Any dispute between members that is not covered by a prior agreement is covered by the default provisions of the law. State law establishes that business decisions must be made by majority vote of the owners. If a dissenting member does not agree with the vote, the law enables him to exit the company and receive fair value for his interest. Some states allow a dissenting member to request judicial dissolution of the company if he wants to exit or if he suspects waste or mismanagement. These laws exist so that a member is not forced to remain in partnership with others and can receive fair compensation when he withdraws.

Contract Law

LLCs are modeled after partnerships, which traditionally operate by owner consent, rather than government regulation. Each state's LLCA gives members the power to reach a majority agreement among themselves regarding how the company will be run. The operating agreement is an enforceable contract that supersedes the default provisions of the LLCA. If the bad intentions of other members violate the company's operating agreement, those members can be sued in civil court for breach of contract and specific performance.

Criminal Law

If the bad intentions of other members reach the level of illegal acts, prosecution under state or federal criminal law can follow. The criminal code of most states protects people from fraud, theft and threats to person or property, among other things. The caveat in the case of LLC member disputes is that the law will first look to resolve the issue as a contract matter under the provisions of the LLCA. This means if a member claims theft of company assets, for instance, the law prefers that the issue is handled under the waste and mismanagement provisions of the LLCA, rather than as a criminal matter.

Tort Law

There are a number of civil laws that protect people from the injurious conduct of business partners. As long as the conduct falls outside the provisions of the operating agreement, and the buyout and dissolution remedies of the state LLCA, an injured member can bring a civil suit against the others. The types of actions that are possible depend on state law, but typically include defamation, interference with contractual relations, breach of fiduciary duty and other actions that redress personal injuries.