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Ask a Lawyer -- LLCs
LLC Question 115
Question: I am a managing partner in a NJ LLC. We have an operating agreement that we never got around to signing, so we're riding the state statutes for now. The LLC provides construction and licensed engineering services. I'm the only partner in the original LLC with an engineering license. Business is good, especially on the engineering side, so good I can't keep up. I set up a second LLC on my own to pick up any spillover work that falls off my plate. It's staffed with some relatives and friends who'll do the engineering part time (they all have day jobs or are retired). So anything that comes in the original LLC's door that I don't have time to handle will be subbed to my second LLC, and the work completed by this pool of part time professional engineers. The second LLC invoices the first LLC, the first LLC marks it up and invoices the client. Do I owe anything to my partners from the original LLC? The deliverables to the client (drawings, opinions, etc) are still being submitted on letterhead from the original LLC. This second LLC is basically a subcontractor. There's no competition going on, because this spillover work is coming from the original LLC. If my partners in the original LLC choose to say no to some inquiries - thinking that they're eliminating the spillover work - can the second LLC go after the work, and if so is anything owed to the original partners?
Response: It's an inherent conflict of interest to be managing member of one LLC that contracts with a second LLC of which you are also a member. In the area of corporate law, there is a concept called the corporate opportunity doctrine which basically states that officers and directors owe a fiduciary duty to the corporation and that all related business opportunities they come across while acting on behalf of the corporation belong to the corporation. In the majority of states, LLC members owe fiduciary duties of loyalty to one another and to the LLC. The facts related above are troubling. I'd hire a lawyer to represent you personally (i.e., not the LLC) in this matter. The ideal course of action would be to make the above information known to all members and reach agreement on the issue as part of a comprehensive operating agreement. The members of the original LLC can agree to allow you to be a member of the second LLC with which the original LLC contracts. Conflicts of interest in the business arena are waivable upon informed consent.
Submitted: 6-30-2007; David, NJ
Response: 7-15-2007; JJR
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