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Ask a Lawyer -- LLCs
LLC Question 120
Question:
In an LLC, can a partner dissolve the company and reincorporate the business by himself providing the same service to the same customers? .. Basically, offer the LLC's customers a different price plan or incentive and continue the business under a new name or corporation?
Response: Can a current LLC member compete with the LLC? In most states, the answer is decidedly "no". Members of an LLC are held to owe a fiduciary duty of loyalty to one another which precludes competition against the LLC. I could not find anything in the Texas LLC Act on the issue of fiduciary duties of members. Also, I could not locate a Texas on this point for LLCs. However, the LLC form of ownership is derived from partnership law. Under common law, Texas partners owe each other a fiduciary duty of loyalty. See Fair Treatment of Minority Owners, Hirsch and Collins (2006) at page 4. Thus I think the issue is open question in Texas. Best to seek the opinion of a local attorney on the subject.
Can a member resign from the LLC, open a new business, and then compete with his or her former LLC? As long as there was no noncompete agreement entered into that precludes competition after departure from the LLC, I do not think this would be a problem as a general rule.
Your question asked about a move to dissolve the LLC by one member. I cannot respond given the lack of further information: i.e., whether there is an operating agreement that deals with dissolving the LLC, the percentage of ownership of the LLC member who wishes to dissolve the LLC, etc.
One final thought. It has been my experience that partners / LLC members who wish to leave and compete with their old organization quite often talk to the customers of the old organization to secure business before they depart. Thus, even though the member is now gone from the old organization, there might have been a violation of fiduciary duties prior to the departure.
Submitted: 08/09/2007; Leann, Texas
Response: 08/09/2007; JJR
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