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Will Your Company Sink or Swim if One Owner Wants to Abandon Ship?
By: Donna Ray Berkelhammer. This was posted Thursday, April 2nd, 2009
Loading ...The North Carolina Business Court recently ruled in Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC; v. Brewer that the NC Limited Liability Company Act does not permit a member of a limited liability company (“LLC“) to voluntarily withdraw from the company unless there is a written agreement that permits it. Even to me, this sentence sounds dry and cryptic.
But it has staggering implications for limited liability companies that do not have operating agreements or other written agreements between the members.
For companies without operating agreements, this case means that if one member wants to leave the company, the company must dissolve, liquidate its assets, and pay all members their proportionate share of the proceeds. The other members would have no ability to maintain the company, no matter how small a minority member desired to leave. One dissatisfied member can bring down the house of cards.
As a practical matter, members want to leave companies all the time, and members generally come to a buy-out that saatisfies everyone. But business breakups can be like divorces. The parties become emotional and irrational, the negotiations become personal and nasty, and the former partners do not agree on the buyout terms/price. The only legal remedy available under North Carolina statutes (which will be applied in the absence of a written agreement) is dissolution of the company and distribution of the assets.
An operating agreement is not required under North Carolina law, but every business law attorney strongly recommends one, for situations just like this.
A good operating agreement will supplement the general provisions in the Limited Liability Act with a wide range of business issues such as: the identities of initial members; present and future capital contributions; the respective members’ shares of profits and losses; distributions of cash and other assets; the identity of managers and their powers and duties; indemnity agreements between managers and members; buy and sell provisions among members, including the circumstances under which a member can voluntarily leave or transfer his/her membership interest; and tax treatments of various LLC transactions and operations.
If you have formed a multi-member LLC without an attorney, use this case as a wake-up call to protect yourself with a written operating agreement. The same goes for multi-shareholder corporations without shareholder agreements.
Tags: business divorce, corporation, dissolution, liquidation, LLC, members, North Carolina Business Court, North Carolina Statutes, operating agreement, shareholders, shareholders agreement, voluntary withdrawal
