Rights and Liabilities of LLC Members

All LLC members have the right to obtain any information relating to the LLC. LLC members are not liable for an LLC’s debts or obligations. LLC members do not own the property of the LLC, and they may or may not manage the business and its affairs.

Author: Brad Nakase, Attorney

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An individual or entity that has a membership interest in a limited liability company is referred to as a member. Members own an LLC, just as shareholders own a corporation. That said, members are not the owners of the limited liability company’s property. Depending on their role, members may have say in the management of the business, or they may not. Initial members join the company when it is originally formed. More members may be added to the company based on the conditions laid out in the limited liability company’s operating agreement. Most agreements state that all existing members have to consent to the addition of new members, though there may be provisions which provide an exception to this. In general, the operating agreement will also outline the situations in which a member may resign, withdraw, or be removed from the limited liability company.

In this article, our California LLC attorney will discuss LLC members rights as follows:

1. Limited Liability Protection

2. LLC Member Financial Rights to Profits

3. Right to Vote

4. Right to Inspect LLC Records

5. Dissenter’s Rights

6. Right to File Derivative Action

7. Can LLC members be liable for LLC debt?

Limited Liability Protection

In all states, having an LLC will protect owners from personal liability for any wrongdoing committed by the co-owners or employees of an LLC during the course of business. Entrepreneurs form LLCs to avoid personal liability for the debts of a company they own or are involved in. The main LLC protection deals with any liabilities or debts the business incurs. Limited liability protection means that your personal assets cannot be seized to pay for debts and financial obligations of the LLC.

LLC Member Financial Rights to Profits

An LLC member has financial rights to share in allocations of the company’s profits and losses. State rules provide for the allocation of LLC profit according to each member’s percentage of ownership interest. By default, LLC profits are split according to ownership percentage—if you own 50% of the LLC, you get 50% of the profits. A member also has the right to have a share in asset distribution during the company’s existence and when it liquidates and dissolves. The operating agreement will generally outline the nature of these financial rights, indicating whether profits and losses will be split equally and whether they will be based on capital contributions or any other criteria. States have laws that provide default provisions, indicating how financial rights will be divided when no requirement exists in a company’s operating agreement. An LLC’s profits must be allocated among its members every year.

Right to Vote

An LLC member also enjoys the right to vote. A LLC member’s voting right is weighted, or proportionate, basis is decided by a member’s ownership share. The extent of an LLC member’s voting rights is contingent on whether the company is run by managers or members. In member-managed companies, members can vote on any matter related to the company’s affairs. However, in a company that is manager-managed, members have more limited voting ability. In general, they can remove and elect managers, as well as vote on major changes like amendments to the operating agreement, a dissolution or merger, and the adoption of a new member.

LLC members are always permitted to vote on the following:

Making amendments to the operating agreement.
Calling for a merger or a dissolution
Admitting new members to the LLC
Removing managers
Electing managers
Making amendments to the operating agreement.

Right to Inspect LLC Records

Specific statutes in the California Corporations Code provide shareholders the right to inspect bylaws, accounting books, records, minutes and financial statements. A LLC member has the right to inspect and copy the LLC’s LLC’s books and records.during normal hours of operation. Corp. Code § 17704.10 provides LLC members the right to information.

Certain states mandate that a limited liability company keep specific records. Members have the right to examine these records, which include the addresses, contributions, names, and shares of losses and profits for each member of the company. Also included are the addresses and names of managers and tax returns. A limited liability company can restrict or expand its members’ rights to study these records by putting provisions in the operating agreement.

Dissenter’s Rights

Dissenters Rights is an LLC law enabling a dissenting member to receive a cash payment equal to the fair value of their shares if the company management undertakes a significant transaction with which an LLC member does not agree or consent. In general, dissenters’ rights are rights granted to shareholders to require the corporation to buy their shares for cash at an agreed-upon price, or if they and the corporation fail to agree, at an appraised price. Dissenters’ rights, also known as the right to an appraisal, is the right to sell a membership interest back to the LLC for the fair value of the ownership interest. For example, if the LLC were to reorganize, the members that do not vote for the transaction, whether they fail to vote or explicitly vote against it, would be entitled to demand a cash payment based on the fair market value of their interest in the LLC if the transaction is approved.

Right to File Derivative Action

Members of an LLC are also granted to right to file a derivative suit. If the LLC has suffered harm, but the LLC fails to sue (due to managerial inaction, indifference, or even culpability), a member can sue derivatively on behalf of the LLC. This occurs when a member brings an action in place of the company to protect it from managerial wrongdoing. This means that even though the member brings the suit, it belongs to the company. If the member wins in court, then the LLC is awarded any damages. However, a member must meet certain requirements in order to bring such a suit. They must have been a member at the time of the alleged wrongdoing and must have first requested that the LLC bring the suit itself.

The general rule is that the members of the LLC are not personally liable for the obligations of the LLC. Only the LLC is responsible for the debts and liabilities incurred by the business—not the owners or managers. This means that company owners, also known as members, are not responsible for paying LLC debts. Therefore, as a member of an LLC, you aren’t personally liable if your business can’t pay its debts. If the corporation or LLC cannot pay its debts, creditors can typically only go after the company’s assets and not the owners’ assets.

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