Monahan Law Firm Logo

What You Need to Know About Expelling an LLC Member

Updated: May 16, 2023

Est. Reading: 5 minutes

A limited liability company statute or LLC is a business entity that offers limited liability protection to its members. This protection shields the personal assets of LLC members from the debts and obligations of the company, which can be beneficial in the face of legal or financial challenges. Consequently, there are specific situations for expelling an LLC member from the corporation.

In general, the LLC agreement or operating agreement will outline the specific conditions under which the grounds for expulsion of a member can be authorized. These thresholds for expulsion may include neglecting to fulfill their duties as outlined in the agreement, participating in illegal activities, material breaches, bad faith in business affairs, not paying dues or fees, and/or other breaches of contract that put the company at risk. The terms for expulsion were established before forming the LLC, and all members should sign off on them

For more information, contact our experienced Arizona business attorney Patrick Monahan today!

Strategies for Managing Membership Issues in Your LLC

When a member of an LLC is expelled, there can be serious implications for the business and its operations. The implications of an LLC member's expulsion will vary based on the wording of the operating agreement. If the agreement does not prohibit it, the remaining members may continue to operate as usual. The remaining business partners could even potentially transfer ownership to new members if desired.

LLC with other LLC-related terms around it

In an LLC operating membership, including clear guidelines about expulsion can provide clarity for members on the rules and limitations that must be followed in company matters such as management rights, the appropriate use of company expenditures, and company funds. Courts typically uphold the decisions made in these agreements, underscoring the importance of addressing this issue early on. Consulting legal professionals and carefully planning and regulating member dismissals can help protect all parties involved.

The Dissociation of an LLC Member May Occur Involuntarily

The involuntary dissociation of a limited liability company member can be a difficult decision to make. Fortunately, some standards and expectations have been set by the state supreme court which helps owners and members alike determine when this situation is unavoidable. For a member to be expelled from an LLC, certain structural circumstances must be present, such as an ongoing deadlock, or serious wrongful conduct such as misappropriation of company funds. A deep personality conflict alone is not basis enough to sever ties between members for the court to intervene in such cases.

Learn More: How to Start Your Own LLC Business in Arizona

Additionally, LLCs should also consider their operating agreement when it comes to making decisions about removing a member from the organization. Establishing these expectations ahead of time can help prevent disagreements from escalating and help owners avoid having to face an involuntary dissolution of their company down the line. Of course, severe situations may arise which necessitate swift and direct action; however, incorporating standards into the operating agreement should always be done with care, setting out explicit pathways for handling disruptions among parties without needing external arbitration on complex issues matters.

LLC Members May be Subject to Expulsion by Court Order

Under certain conditions, courts may order the expulsion of an LLC member. Status-based criteria for dissociation generally create fewer problems than conduct-based grounds. In the event of bankruptcy or dissolution of an entire company, for example, it is fairly easy to plan and follow the rules set out in the Limited Liability Company Agreement. The situation can become more complicated if wrongful conduct or deadlock prevents the Corporation from continuing normal operations. These disputes between members can endanger long-standing business relationships and further disrupt family dynamics.

When there is no provision dealing with the standards for member dissociation due to poor conduct, Limited Liability Law standards should be consulted as an avenue for expulsion instead. Usually, this will take place after careful consideration by the court to ensure that all parties involved are treated fairly according to the laws and regulations of their jurisdiction. This process must be as unbiased as possible while ultimately upholding justice under such circumstances.

Guidelines for Expelling an LLC Member

The standards for dissociating from an LLC are outlined in the Uniform Limited Liability Company Act, adopted in 20 states and DC. These standards guide courts in deciding on an LLC's application to expel a member. LLCs in different states can rely on criteria such as wrongful conduct or breach of contracts, duties, or obligations. 

an LLC operating agreement

Although designed to protect LLCs and their goals, this kind of expulsion power is only used as an absolute last resort for a company at risk. Before any decision is made, thorough research into both parties’ situations and activities must be undertaken so that any collective loss or personal financial damages can be avoided as far as possible while respecting everyone’s rights in this process.

Dissociation can Occur as a Result of Inappropriate Behavior

According to RULLCA guidelines, the main expulsion trigger is if an individual's actions are hurting the company. Examples of misconduct may involve misappropriation of assets, criminal conduct, competing with the company, or breaching duties of loyalty or care. Wrongful conduct constituting dissociation may also include transferring assets in the unjust enrichment of a controlling member or manager. Misusing proprietary information is not allowed as it jeopardizes other members’ interests.

It is key to remember that members do not have inherent rights to participate in decisions affecting the business and therefore if any wrongdoing is suspected from this privileged position, then there is due cause to extend and apply the principle of dissociation. This ensures that these responsible parties are held accountable for their inappropriate behavior which can only serve to both protect and strengthen the law’s prevention of wrongdoing.

A Breach of Contract can be Grounds for Termination of a Partnership

The ability to expel a member of an LLC largely depends on the terms outlined in the operating agreement that governs the LLC. Generally, members of an LLC cannot be expelled without good cause, such as a breach of conduct or other violation of the operating agreement.

Quick Tips: What questions should you ask a lawyer when forming a business?

A breach of contract can be grounds for termination of a partnership. This may include failing to make payments or contribution obligations, engaging in prohibited competitive activities, or failing to fulfill other duties as outlined in the operating agreement. It is important to note that potential causes of action against a member should be clearly outlined in the operating agreement so that all parties are aware of their responsibilities and how they may be held accountable if they fail to meet them.

Look at the Operating Agreement

The Operating Agreement is a helpful starting point for expelling a member from an LLC as it contains information on member rights, duties, and rules related to expulsions, such as culpable conduct, illegal conduct, or oppressive conduct. It is important to note that LLCs are highly customizable legal entities, and each one could have different rules regarding when a member can or cannot be expelled. Therefore, it is important to understand the specific provisions of an LLC’s Operating Agreement before taking any corporate action.

an LLC document on a clipboard

In conclusion, it is important to note that all LLCs must abide by state laws, and the expulsion of a member without good cause may violate these laws. Therefore, the best way to determine when an LLC member can be expelled is to look at the Operating Agreement, research the applicable state laws, and determine if there are sufficient legal issues to pursue expulsion.

Call Monahan Law Today for Your LLC Needs!

Are you an LLC member looking for legal advice for expulsion? You need to call Monahan Law today! Our team of experienced professionals can help you with any questions or concerns you may have about the process of expulsion from an LLC.

Our company recognizes the challenges and stress that come with being expelled from an LLC. As a result, we are committed to safeguarding your rights throughout the process. Call Monahan Law today and get your case started with us!

Share :
Attorney Patrick Monahan

Patrick Monahan

Patrick Monahan is the managing partner of Monahan Law Firm, PLC. Patrick began his legal career practicing real estate, construction, and general business litigation.
Text Us
tagphone-handsetmap-markerclockcrossmenu linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram