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.
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.
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.
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.