Rights of a Departing Member of an LLC

[PlayingDoctr]

My question involves business law in the state of California.

The scenario is this:

In a 2 member LLC, (Members A and B), Member B decides in November to leave the company. December 1st is Member B's last day of work (Member B gives Member A less than two weeks notice that they have accepted another position elsewhere).

The two members verbally and in email agree to a buyout amount of $24,000 for member B paid out over the course of a year ($2,000 per month).

Member A gets the company lawyer to draw up the agreement. Member B starts their new job. Member B has little communication during the next couple of weeks save to do a few things like deposit a check to the company account that was sent to them instead of to Member A's address.

During December, Member B takes their first payment of $2,000. This is less than the monthly payout they would have normally taken as a active working partner.

When the agreement is finished being drafted, member A sends it to member B for a signature. Member B has retained council at this point to review the agreement. Council for Member B does not like the agreement (for the primary reason that Member B's council thinks the agreement should be between the two members, but the contract as written as being between the LLC and Member B, which protects Member A in case the company fails) and due to the disagreement the agreement remains unsigned.

QUESTION:

1. As Member B has not signed the contract yet, they are still legally a 50% member in the LLC. Are they within their rights to take additional funds from the company (they still have access to a company checkbook and the company cannot create another bank account until Member B is taken off the LLC) on top of the $2,000 payment they are currently taking (Remember, Member B is not working at the company any more and has taken a full time position elsewhere.)

[Mr. Knowitall]

During December, Member B takes their first payment of $2,000. This is less than the monthly payout they would have normally taken as a active working partner.

And he understood that this was the first payment on the buyout? And he accepted it as such? And he made no claim that he was entitled to a greater amount based upon the absence of a signed contract? And both under the operating agreement and bylaws there is a distinction between the amount to be paid to an "active working partner" as opposed to the amount an owner is to receive simply by virtue of ownership? The amount paid to and "active working partner" is compensation for work performed, and is treated as a payroll expense?

Coun[se]l for Member B does not like the agreement (for the primary reason that Member B's coun[se]l thinks the agreement should be between the two members, but the contract as written as being between the LLC and Member B, which protects Member A in case the company fails) and due to the disagreement the agreement remains unsigned.

I'm not sure how Member A is protected. Do you mean that Member A doesn't want to be personally responsible to pay the $24,000 because he may simply choose to close up shop and leave the debt unpaid? If so, I can see why Member B's attorney would be concerned. Given that Member A is acquiring the interest of Member B, it makes sense for Member A to be the one paying for that interest. The LLC doesn't own itself.

As Member B has not signed the contract yet, they are still legally a 50% member in the LLC. Are they within their rights to take additional funds from the company

If you're stating that under the bylaws, members of the LLC have the right to a percentage of the profits or have the right to take a draw against their membership interest, it would appear that Member B continues to have those rights as he continues to hold a membership interest. If you're trying to ask something else, please clarify your question.

[PlayingDoctr]

And he understood that this was the first payment on the buyout? CORRECT And he accepted it as such? CORRECTAnd he made no claim that he was entitled to a greater amount based upon the absence of a signed contract?CORRECT And both under the operating agreement and bylaws there is a distinction between the amount to be paid to an "active working partner" as opposed to the amount an owner is to receive simply by virtue of ownership? NOThe amount paid to and "active working partner" is compensation for work performed, and is treated as a payroll expense?UNSURE HOW TO DEFINE


I'm not sure how Member A is protected. Do you mean that Member A doesn't want to be personally responsible to pay the $24,000 because he may simply choose to close up shop and leave the debt unpaid? If so, I can see why Member B's attorney would be concerned. Given that Member A is acquiring the interest of Member B, it makes sense for Member A to be the one paying for that interest. The LLC doesn't own itself. Member A did not choose to buy out Member B, but as Member B is leaving, the only options are close up shop or take over. The concern from Member A is that the departure of Member B will cause enough harm to the business that Member A may have trouble keeping it going in the long run and as such it is possible that the company will shut down. If that is the case, then Member A does not want to have to continue to pay Member B for something that not only does no longer exist, but specifically does not exist because of Member B's actions

If you're stating that under the bylaws, members of the LLC have the right to a percentage of the profits or have the right to take a draw against their membership interest,CORRECT it would appear that Member B continues to have those rights as he continues to hold a membership interest. Okay, so what is to prevent Member B from never signing anything, doing anything, and continuing to take a 50% share of the business? Where does fiduciary responsibility come in? If you're trying to ask something else, please clarify your question.