Most jurisdictions throughout the United States establish similar minimum rights that LLC members retain by virtue of their membership in the business. However, these same jurisdictions provide the LLC with great flexibility to enhance or restrict those rights in an operating agreement drafted by the LLC's members.
Each LLC member has a management interest in the business in addition to a financial interest. This allows the member to actively engage in the management of the business and vote on the firm's business matters. However, the operating agreement may restrict the level of management participation a member may have. For example, some agreements provide that the LLC is to hire a non-member to manage the business. In this situation, a member has no recourse for a limitation on her allowable management participation. When members do participate in the business, the LLC may not provide additional compensation to that member for services. The only exception is where the LLC places all management authority with specific members.
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All LLC members have the right to receive distributions of business profits. Although states do not require an LLC to distribute earnings, there are minimal restrictions on an LLC’s discretion in deciding to issue one. Under no circumstances may an LLC make a profit distribution that causes it to be insolvent or create an excess of liabilities over assets. Most jurisdictions view insolvency as an LLC’s inability to pay its debts as they become due in the ordinary course of business. However, a future contingent liability is not a factor in determining the appropriateness of a distribution. If a distribution is made in violation of either requirement, the manager or member authorizing such distribution is personally liable to the LLC and other members for the improper amount.
An LLC member has the right to access any and all information that relates to the LLC. By providing reasonable notice, a member may inspect and copy any record the LLC retains that relates to its financial position, business transactions or other material matter. With this right also comes the duty of a member who has capacity to provide this information to make it available to other members. However, this right does not extend to requests that are so unreasonable that it causes major disruptions to the operation of the business.
LLC members may dissociate from the business for any reason and at any time. However, a member may incur personal liabilities to the LLC and other members if the dissociation violates a method or timing requirement in the operating agreement. A person’s right to participate in managing the business terminates at the time that person dissociates, and the person no longer owes the LLC and its members any fiduciary duty. If the operating agreement does not include a non-compete clause, the lack of fiduciary duty allows the former member to open a new company that directly competes with the LLC.
- “Wiley CPA Exam Review Volume 1”; O. Ray Whittington, Ph.D.; 2010
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.