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Ask a Lawyer -- Corporations
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Brought to you by MedLawPlus.com®-- Corporate Bylaws and initial board of directors resolution Price: $14.99 (free trial) |
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Question: Two years ago we formed an LLC with five equal share partners. This year we became a Sub S corporation. Unfortunately, other than agreeing orally to equal pay, we have no other partnership agreements,buy/sell, non-compete or operating agreements. Now, three of the partners wish to remove another partner for lack of performance. Can a majority of partners remove another without an operating agreement? If no, do the three partners have any recourse? Response: If you are now an S Corporation, the term "partners" is out the window. Also, the term "operating agreement" no longer applies to your business as these contracts are only prepared for LLCs. You are all shareholders. Has a board of directors been elected or appointed? I would assume so. Based upon the comments in your question, I will also assume that bylaws have not been adopted. If there is no buy-sell agreement in place, then the other shareholders cannot force a minority shareholder to sell. However, that would not protect that shareholder's employment with the corporation. The bylaws set forth the authority of each officer of the corporation. Without bylaws, I do not think the president of a corporation would have the authority to fire a shareholder/employee who, I assume, is also an officer of the corporation. However, the authority to fire a shareholder/employee would surely belong to the board of directors. It is my understanding that Michigan is an "at will" employment jurisdiction Link; therefore, absent an employment contract to the contrary, any employee can be discharged by the corporation. A caveat to the forgoing would be the existence of an oral agreement or understanding among the corporation's owners that each shall be entitled to employment with the corporation for so long as he or she remains a shareholder. The long and the short: (a) without a buy-sell, a minority shareholder cannot be removed and (b) without an employment agreement providing to the contrary, a shareholder / employee can be fired by the board of directors. Retain a local attorney experienced in corporate law and go over the facts of the situation in detail. There are potential issues not discussed above regarding relations between majority and minority shareholders. Submitted: 8-28-2006; Mark, Michigan Response: 9-3-2006; JJR Add A Comment |
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