Governing documents of an LLC, the “operating agreement,” should provide detailed information on how most ownership disputes within the business should be dealt with by a fellow member.
An operating agreement should identify the responsibilities of each member and the first course of action to be taken to resolve a dispute. Alternatively, an operating agreement may provide that the members are not liable to each other for wrongdoing. Members of an LLC should discuss dispute resolution when establishing the business or updating the LLC’s operating agreement. This is an essential consideration as the business starts to grow and more members are brought in.
Some states have laws in place that may override an operating agreement provision or take the place of an operating agreement if the operating agreement doesn’t state one way or another how to govern a member’s wrongdoing, or if there is no operating agreement in place. Generally speaking, laws usually favor an LLC member’s ability to seek remedy if a member has been wronged by another member.
So, as a first step, review your operating agreement to determine if it explains how and when legal action might take place between members. Also, check all the state laws where your LLC is organized to determine if the LLC agreement will control, or if the state law will govern how the dispute will be handled should a member seek to bring legal action against another member. If you are not sure what laws apply or you do not understand the language, consult a professional; an hour consultation or a review of your operating agreement may save a lot of frustration and money later.
For a corporation, the bylaws work like the operating agreement of a limited liability corporation.
Shareholders in a corporation are the owners, and interests generally align. Understandably, disputes among shareholders may arise about the company’s direction and spending.
Disputes among shareholders can occur when a minority shareholder believes a majority shareholder has made a decision that has negatively impacted the minority’s interests and abused the minority’s rights.
A majority shareholder owns more than 50% of the shares of the corporation and, essentially, can control important decisions affecting the corporation.
For example, shareholders have a right to review corporate books and records that affection the corporation’s governance and finances. If a majority shareholder prevents another shareholder’s access to such records, a lawsuit could be filed to compel access to the records.
Majority shareholders have fiduciary duties to minority shareholders, where the corporation’s well-being should not be secondary to the majority shareholder’s personal business interests. For example, the majority shareholder should not compete with the corporation or interfere with business opportunities for the corporation.
All in all, all business owners have an obligation to perform their duties in good faith and not cause the business harm, or damage the ownership interest of co-owners. Disputes generally arise where a co-owner perceives a fellow owner has failed to do so, and governance documents should provide how such situations are dealt with by owners.
The information provided does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information may not constitute the most up-to-date information. Links are only for the convenience of the reader, A. Ferraris Law, PLLC and its members do not endorse the contents of the third-party references.
Ferraris Law, P.L.L.C.
333 N. Wilmot, Suite 340
Tucson, Arizona 85711
Email: info@aferrarislaw.com
Tel. (520)282-4201
Tel. (520)282-4201
