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Ask a Lawyer -- LLCs
LLC Question 11
Question: I have an LLC in California. There are 3 members: 56%, 41%, and 3%. I am the 56% member. I want to buyout my 41% member but we do not have a buyout agreement. He does not know I want this and when I present it to him I need to know what possible options I have depending on his reaction. If he wants to accept the buyout what should i offer him? If he does not want to accept the buyout or wants too much money what are my options and what are his options? Just for your information, There was no cash investment by the 41% member at the start of the business. Can I force him out since I have the majority stake? Can me and the 3% member force him out with a 2/3's member vote? Thanks for any advice.
Response: Your issue is complicated and a full response would not be appropriate (nor possible) in this setting. I assume from the question that there is a written operating agreement but this document does not have a provision for the forced removal of an LLC member. Absent a buy-sell provision in the operating agreement, I am unaware of any provision in California law allowing for a forced sale of a minority member's interest in the LLC to the majority.
As to involuntarily removing a member when there is no provision in the operating agreement to so, I am not aware of any provision in the California Corporate Code that would allow you to accomplish this. The closest option for involuntary removal (assuming no buyout) is dissolving the LLC (and then reforming a new LLC absent the 41% member). If the LLC does not provide for another vote level, a simple majority in interest of LLC members voting to dissolve the LLC is required. California Corporate Code Section 17350(b). If you vote to dissolve the LLC, the LLC shall be wound up. First all liabilities (debts) shall be paid off, then
the remaining assets shall be distributed among the members according to their respective rights and preferences as follows:
(1) To members in satisfaction of liabilities for distributions
pursuant to Section 17201, 17202, or 17255.
(2) To members of the limited liability company for the return of
their contributions.
(3) To members in the proportions in which those members share in
distributions.
California Corporate Code Section 17353(a). If you are serious about removing this member completely from the business, you really should sit down with a California attorney experienced in corporate / LLC matters to discuss in detail how these options shall play out.
Your question contained potential confusion about how voting is done in LLCs. Most LLC operating agreements provide for voting in interest which means that the members vote in proportion to their interest in the profits and losses of the LLC. If there is no operating agreement or it is silent on the issue, then voting is done by interest of the member in LLC profits.
Voting by members may be on a per capita, number, financial interest, class, group, or any other basis. If no voting provision is contained in the articles of organization or written operating agreement:
(1) The members of a limited liability company shall vote in
proportion to their interests in current profits of the limited
liability company or, in the case of a member who has assigned his or
her or its entire economic interest in the limited liability company
to a person who has not been admitted as a member, in proportion to
the interest in current profits that the assigning member would have,
had the assignment not been made.
(2) Any amendment of the articles of organization or operating
agreement shall require the unanimous vote of all members.
(3) In all other matters in which a vote is required, a vote of a
majority in interest of the members shall be sufficient.
California Corporate Code Section 17103.
Submitted: 1-23-2005; Austin, California
Response: 1-26-2005; JJR
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