Consequences of Breaking an LLC Operating Agreement

By Anna Assad

The members, or owners, of a limited liability company are bound by the rules and provisions of the company's operating agreement. The agreement usually details the LLC's internal procedures, like the policies for distribution to and funding from members, and also any penalties for members who break the agreement.

Termination of Employment

Your employment with the company may end as a result of breaking the operating agreement if you are a member with an active role in daily business functions. Expelling a member from an LLC entirely is complicated in some states, so barring you from working as an employee for the company permanently or for a fixed period of time is sometimes used as a penalty for lesser agreement violations.

Personal Liability

You may become personally liable to the LLC for breaking the operating agreement, specifically if the violation involves a distribution to you. Some states do not permit distributions in an amount that would render the company unable to pay its creditors or violate the operating agreement. If such a distribution occurs, you become liable to the company for the amount of money or assets you received. You are generally allowed to rely on the LLC's own financial records to determine whether or not a distribution is allowed.

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Loss of Interest

The percentage of interest in the LLC you own can be impacted by an agreement violation, particularly if your violation involves the amount of money or property you were supposed to invest in the LLC as a member. Your interest may be reduced, subordinated to that of other members or forfeited entirely. The operating agreement may direct the sale of your interest to another member or you may have to take out a loan with the other members to pay the amount you owe the LLC over time.

Expulsion

An LLC's operating agreement can direct your expulsion from the company as member due to a transgression. Most states require the operating agreement spell out the circumstances that result in the termination of a member, like behavior that is harmful to the company. Without expulsion provisions in writing, you may have the right to sue the other members in court for breach of fiduciary duties if you are terminated.

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LLC Liability Limits

References

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What Happens if You Breach an LLC Operating Agreement in California?

Unlike a corporation, which must have a board of directors, the members of an LLC are free to determine how an LLC will be structured and operated through executing an operating agreement. In California, an LLC member who breaches an LLC operating agreement is liable to the LLC for any economic consequences resulting from the breach.

Iowa Limited Liability Company Act

The Uniform Limited Liability Company Act is a set of laws that governs the filing standards and some business aspects of a limited liability company (LLC) in Iowa. The laws are found in Chapter 489 of the Iowa Code. Although the act allows the LLC's operating agreement to manage the company's internal affairs and practices, some requirements in the legislation specifically apply to all LLCs in the state.

Buyout Options for LLC

In a Limited Liability Company, or LLC, with more than one member, it often makes sound business sense to have a buyout option, also called a buy-sell option. The buyout option is an agreement between the members that states what will happen when one member wants to leave the company, dies or goes bankrupt. The buyout option is often included as part of the LLCs operating agreement, which is the contract that governs how the LLC operates.

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