In the beginning of a company, the founders often start out well. The team gets along and there is often no discussion about what the company will do if the team stops working well together, reaches a point of impasse, or if it needs to remove a partner. However, this should be one of the key conversations that owners have from the outset and at regular intervals during the life of the company. No matter the industry, it is important to discuss key business issues that could arise later. This is truly why an LLC operating agreement is necessary. An LLC operating agreement is the business operating agreement that helps limited liability companies, single or multi-member, to determine how their company will operate in key situations. This is similar to a shareholder agreement in a corporation, yet has a very strong focus on the operation of the company.
LLC Operating Agreement vs. State Default Corporate Rules
Often members of a limited liability company (LLC) do not consider the consequences of not having a fully developed operating agreement. When creating an operating agreement, a key provision to include is how the LLC will remove members. In the U.S., if an operating agreement is silent as to how a member will be removed, then the state default corporate rules will apply. For example, the Florida default rules for LLC law can be found in the Florida Revised Limited Liability Act.
Generally, any change to the members of an LLC are done pursuant to the terms of the LLC operating agreement. The operating agreement should set forth the how, why and when a member of the LLC could be removed. When drafting the operating agreement, the members should decide the circumstances and terms when a member can be removed. It need not be, only when the LLC is dissolved, rather multiple sets of circumstances can be elaborated. Ultimately, it gives the members the power to decide how they would like to exit or to remove a troublesome member. However, not all companies include such language in their operating agreement. Any language that is later disputed, yet not included in the operating agreement, is decided by default state law.
Removal of a Member in Florida
If not decided in the operating agreement, removal of a partner is decided by Florida law. Some options include the following.
Member Voting on Organizational Changes
Assuming the Articles of Incorporation or Operating Agreement have voting procedures set forth for member removal, members may vote for removal with respect to their proportion of
the then-current percentage or other interest in profits of the LLC owned by all members. 2 Florida Corporations Manual § 17.29 (2019). The affirmative vote or consent of the majority-in-interest of members is required to undertake an act, which would include member removal. Fla. Stat. § 605.04073 (2019). If voting is successful and in accordance with the Articles of Incorporation or Operating Agreement, the member can be compelled to submit the written resignation form. 2 Florida Corporations Manual § 17.29 (2019).
Unanimous and Involuntary Expulsion
Another way to remove a member from an LLC could be through involuntary expulsion, also known as involuntary dissociation. Involuntary expulsion is typically used when members are trying to remove a troublesome member that will not voluntarily leave. Involuntary dissociation, or dissociation by expulsion, can occur under one of two circumstances.i First, the operating agreement can prescribe a method by which a member may be involuntarily expelled.7 However, absent a method for expulsion in the operating agreement, the members may unanimously vote to expel a member.ii Expulsion by unanimous consent is only available if the LLC cannot lawfully carry on its activities with the expelled member; the expelled member has transferred his or her entire transferrable interest in the LLC; or the expelled member is a corporation or other entity that is dissolved.iii Thus, expulsion by unanimous consent under the revised act arguably only applies to unruly members to the extent the lawful activities of the LLC can no longer be carried on.iv If a company can argue that the acts of the member to be expelled rise to the level of resulting in illegal operation, then this may be an option available.
If these provisions are not included in the Articles of Incorporation or Operating Agreement, the other members of the LLC can unanimously consent to the member’s expulsion if certain conditions are met under the Florida Revised Limited Liability Company Act. Fla. Stat. § 605.0602 (2019). However, expulsion by unanimous consent is only available to the members if: (1) it is unlawful to carry on the LLC’s activities with that person as a member; (2) the member’s entire transferable interest in the LLC has been transferred, unless it was a transfer for security purposes or pursuant to a charging order; or (3) the member is an entity that has been dissolved. Id
The most amicable solution to removing a member is likely conducting a buyout, which could potentially allow for business relations in the future, even if those relations are not in the same LLC. Further, this could prevent long-term litigation and judicial intervention, which may be more financially conservative even if a higher purchase price is paid. As with many other member guidelines, provisions governing buyout procedures are generally required to be listed in an Operating Agreement or Articles of Incorporation. 3 Florida Corporations Manual § 35.40 (2019).
The members wishing to remove a single member may seek a judicial order calling for removal due to wrongful conduct. Fla. Stat. § 605.0602(6) (2019). Expulsion by judicial order is proper when the member has: (1) engaged in wrongful conduct that adversely and materially affects the LLC’s activities and affairs; (2) willfully or persistently committed a material breach of the LLC’s operating agreement or breached the fiduciary duties of loyalty or care; or (3) engaged in conduct relating to the LLC’s activities and affairs making it not reasonably practicable to allow the member to continue as a member. Id. As with the unanimous expulsion option, successful enforcement would be contingent upon demonstrating wrongful conduct. A review of the member’s conduct and the LLC’s operating agreement may be enough to satisfy the requirements for a judicial order.
As a last resort, if managing the LLC has become an unattainable goal due to a member conflict, and the member isn’t willing to withdraw, petitioning the court for a judicial dissolution of the LLC is an option. Fla. Stat. § 605.0701 (2019). This option is typically only desirable when the LLC is no longer able to operate as a business due to conflicts among members.
When drafting an operating agreement for an LLC it is important to make sure the agreement establishes how the LLC can remove a member. If LLC is silent as to how to remove a member then the state law will apply. In Florida, the Florida Revised Limited Liability Act default rules will govern the process for removing a member from the LLC. The Florida Revised Limited Liability Act covers the process of removing troublesome members and how members can remove them. Florida allows for members to be removed in a variety of ways if an LLC does not establish the process in the operating agreement. If you have more questions, or would like a complimentary consult, contact our managing attorney today at [email protected] or via phone at 352.389.5577. We would love to meet you and learn how we can best be of service!
i. Dennis A. Nowak & Caitlin M. Trowbridge, Involuntary Expulsion of Troublesome Members Under Florida’s Revised LLC Act, Fla. B.J., January 2017, at 8
v. Fla. Stat. §605.0602(6)