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

By Salvatore Jackson

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.

Operating Agreements

In California, an LLC must draft and execute an operating agreement in order to submit an articles of organization and create an LLC. An operating agreement is a contract formed among LLC members that governs how the LLC will be managed. A typical LLC operating agreement contains provisions pertaining to the type of business an LLC may engage in, the economic actions that an LLC member may take and the grounds for dissolving the LLC. An LLC operating agreement also typically contains procedures for adding and removing LLC members, as well as setting forth the grounds under which an LLC member may properly withdraw from the LLC.

Typical Breaches of LLC Operating Agreements

A typical breach of a California LLC operating agreement is when a member attempts to wrongfully withdraw from the LLC. Wrongful withdrawal from an LLC is when an LLC member submits written notice of withdrawal from an LLC at a time period not permitted by the LLC operating agreement. A member may also breach an operating agreement when he takes an economic action not permitted by the operating agreement. Other breaches may include a breach of the duty of loyalty or care that is owed by LLC members.

Ready to start your LLC? Start an LLC Online Now

Consequences

Typically, an LLC member that breaches a California LLC operating agreement is liable for any negative economic consequences that result from the breach. For instance, most LLC operating agreements require a majority vote of LLC members to make a non-routine economic decision such as the purchase of real estate. If an LLC member were to agree to purchase real estate on behalf of the LLC without conducting a vote of LLC members, this would constitute a breach. If the real estate were to subsequently depreciate in value, the breaching member would be personally liable to the LLC for any economic loss. If the real estate were to appreciate in value, however, the LLC member would be in breach but would not likely have to pay any penalty to the LLC.

Wrongful Withdrawal

If an LLC member breaches the operating agreement by wrongfully withdrawing from an LLC, the LLC member is still permitted to withdraw and receive her fair share of LLC assets. However, a wrongfully withdrawing member is not entitled to demand an immediate liquidation of the LLC and payment of her share. Additionally, any economic loss caused by the breach may be charged against the share received by the wrongfully withdrawing LLC member.

Ready to start your LLC? Start an LLC Online Now
How do I Get Out of an LLC Partnership?
 

References

Related articles

How to Remove a Member From an LLC

It may sometimes become necessary to remove an owner of an LLC, particularly if the management of the LLC has irretrievably broken down. However, the default provisions of the Uniform Limited Liability Company Act, or ULLCA, on which the LLC acts of all 50 states and the District of Columbia are based, does not allow LLC members to vote out other LLC members. Unless the LLC's articles of organization or the operating agreement allows members to vote out members, an LLC member may only be removed if he submits written notice of withdrawal to the LLC.

The Responsibilities of a Trustee Under California Law

The primary purpose of a trust is to provide for the transfer of property to named beneficiaries without the court involvement required with a will. Due to the lack of court oversight, the possibility exists for the person in charge of the trust, called the “trustee,” to use the trust property for improper purposes. The California Probate Code requires the trustee to administer the trust according to its terms and to the provisions of state law, which impose specific responsibilities and duties designed to prevent trustee misconduct.

LLC Managers vs. Members

When you create a limited liability company, the owners are referred to as its members. By virtue of holding a membership interest in an LLC, you have the right to actively participate in the management of the business. Alternatively, the LLC may hire non-member managers to oversee the daily operations as employees of the company. However, a member may also hold a management position similar to that of an employee.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Does LLC Mean Incorporated?

A limited liability company is a legal business entity similar to a corporation. Although formation requirements are ...

Does the State of Florida Require LLC Tax Return

Under Florida business law, all businesses that wish to conduct significant economic activity in Florida must register ...

Consequences of Breaking an LLC Operating Agreement

The members, or owners, of a limited liability company are bound by the rules and provisions of the company's operating ...

If a Party to a Divorce in California Violates a Court Order: Can They Be Held Accountable?

California courts, like the courts in all states, have the power to issue orders to the parties in a lawsuit, including ...

Browse by category
Ready to Begin? GET STARTED