First, what is a member dispute? And why does an LLC need to have specific rules for how members can dissolve their company? LLC is one of the most popular legal structures in business today. An LLC member is basically anyone who has a stake in it, either as a manager or as an investor.
For example, let’s look at Slip and Fall as a type of premises liability claim. Premises liability cases are personal injury claims where the at-fault party is responsible for an accident and a plaintiff’s injuries. In premises liability cases, the negligent party can be the property owner, landowner, or property manager. But what happens when there is a partnership within an LLC, and the members disagree on the responsibility for the slip and fall claim? Likely, there will be a member dispute.
Often, LLC owners do not get along, and legal action needs to happen. That legal action is called a “member dispute.”
Common disputes in an LLC involve money, responsibilities, and unethical conduct. LLC members may disagree about how often and how much profit should be distributed. If negotiations fail, LLC members can hire a neutral third party skilled in dispute resolution to help mediate the dispute.
If members within the LLC have a dispute, you have to consider if you have the legal grounds to sue the co-member.
There are legal actions that a member can take against a fellow member regarding a legal dispute within an LLC. If one member is causing problems, then there are legal remedies that a manager has available. These legal remedies help protect members’ legal interests, the legal interests of the organization, and all legal rights to which you may be entitled.
However, if a co-member simply refuses to contribute their share on an LLC matter, legal action might not be necessary. In legal terms, there’s no legal ground for a legal suit unless it violates the implied covenant of good faith and fair dealing.
According to the State of Michigan Law regarding LLCs, “MICHIGAN LIMITED LIABILITY COMPANY ACT
Act 23 of 1993
AN ACT to provide for the organization and regulation of limited liability companies; to prescribe their duties, rights, powers, immunities, and liabilities; to prescribe the powers and duties of certain state departments and agencies; and to provide for penalties and remedies,”.
*Note: All content within this article is meant for informational purposes only and is in no way a replacement for professional advice or support. Seek immediate and appropriate care from a professional when necessary.
Does Michigan require an operating agreement for LLC?
Michigan does not require you to submit an Operating Agreement to form an LLC. However, every LLC should have an Operating Agreement that establishes the rules and structure of the business.
Fortunately, an operating agreement, a foundational document, dictates the processes for decision-making, how profits and losses are allocated, and what happens when disagreements arise. It essentially acts as a pre-nuptial agreement for business partners. Without it, resolving disputes can become complicated and contentious, often leading to prolonged negotiations or costly legal battles.
Members can also consider implementing a buy-sell agreement, which outlines how members can exit the company and how their shares are reassigned or bought out. This can serve as a valuable tool to facilitate smooth transitions and reduce conflicts related to ownership stakes.
If mediation and other resolution strategies are unsuccessful, members may need to resort to arbitration or litigation. These more formalized legal approaches can provide a definitive resolution but can also strain relationships further and impact the LLC’s day-to-day operations.
Regular communication, clear expectations, and a structured protocol for handling disputes can prevent minor disagreements from escalating. It’s beneficial for LLC members to review periodically and, if necessary, update their agreements to ensure alignment with current business goals and dynamics.
Ultimately, having a well-crafted operating agreement and being proactive about conflict resolution can significantly enhance the chances of a harmonious and successful LLC partnership. Whether in Michigan or elsewhere, the principles of good communication and solid agreements are universal in steering clear of debilitating disputes.
Can an LLC sue one of its members?
Not all LLCs have an operating agreement. Unfortunately, many LLCs form without drafting any sort of contract about the rights and duties of the parties. In those cases, members of an LLC can only sue one another if they can prove that they have been personally harmed apart from the other members or the business.
By legal definition, legal action is not legal ground for a legal suit unless it violates the implied covenant of good faith and fair dealing. The implied covenant of good faith and fair dealing is an agreement that all legal entity members will abide by and perform on. It also means that they will not create legal issues or grounds for legal suits.
If you have legal grounds to sue them within the legal covenants and agreements of the legal entity, you may consider legal action against your co-member.
On the flip side, when an LLC has done something wrong, there are times when legal action can be taken against them by another outsideparty.
Unless the legal action is successful, legal fees to take action against an LLC may be more than what would have been won. When another party takes legal action against an LLC, they are referred to as a claimant. If you are involved in legal action with an LLC, one or more company members are claimants. Legal claims against an LLC can be taken by or against:
- A legal entity (LLC)
- A legal person (such as an individual member of the legal entity, if applicable)
If legal action is successful, claimants may receive compensation from the other party. The amount of their compensation will depend on the legal action.
What happens when members of an LLC disagree?
In conclusion, while mediation and structured communication can often resolve issues amicably, legal action remains an option for unresolved conflicts. Ultimately, establishing clear guidelines through an operating agreement can significantly enhance harmony and successful collaboration within an LLC, reducing potential disruptions and fostering long-term business stability.
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