For purposes of this post, we want to talk about the rights and duties of LLC “members” without regard to whether an individual qualifies as a “member” – more on that another day.
The rights and duties of LLC members fall into three basic categories:
- Rights and duties that are mandatory under Mass. Gen. Laws c. 156C (“MA LLC Statute”) and, therefore, cannot be waived or modified by an operating agreement;
- Rights and duties that are provided by the MA LLC Statute as a default, but can be waived or modified by an operating agreement; and,
- Rights and duties that may be provided for in an operating agreement that are not the subject of a mandatory or default rule under the MA LLC Statute.
While an LLC should have a comprehensive written operating agreement that defines the rights and duties of members, if the operating agreement is too brief or nonexistent, the MA LLC Statute will provide a number of statutory and default rights, duties and rules.
This post only touches on category number one, above; namely, the statutory rights of members under the MA LLC Statute. I will discuss each of these categories in later blog posts, so check back often.
Statutory rights of LLC members include the right to information, the right of limited liability, the right to resignation, the right to vote or petition for dissolution, the right to contribution and the right to dissent.
Information
Under section 9 of the MA LLC Statute, members have a right to inspect and copy, at their own expense, at an office of the LLC in Massachusetts, the following: a current list of LLC members and managers and their addresses; a copy of the certificate of organization and any amendments; copies of the LLC’s federal, state, and local tax returns or reports for the previous three years; copies of the operating agreement and any amendments; copies of any financial statements of the LLC for the previous three years; and unless set forth in the operating agreement, information about the contributions of members, their rights to receive distributions, and events that would cause the dissolution of the LLC.
Under section 10 of the MA LLC Statute, upon written demand, members also have the right to receive “true and full information regarding the state of the business and financial condition of the [LLC]”; “promptly after becoming available, a copy of the [LLC’s] federal, state and local income tax returns for each year”; and such “other information regarding the affairs of the [LLC] as is just and reasonable.”
It is important to note that these rights can be made subject to reasonable restrictions established in an operating agreement to prevent disclosure of confidential information, unfair competition or other improper use of the information; however, the MA LLC Statute cannot be overridden in its entirety by an operating agreement with respect to the right to the basic information outlined here.
Limited Liability
Under section 22 of the MA LLC statute, members are not personally liable for the debts, obligations, or liabilities of an LLC solely by reason of being members (unless the “corporate veil” can be pierced, but more on that another day). In addition, under sections 11 and 63(b) of the MA LLC Statute, members are protected when they rely in good faith on the provisions of the operating agreement, records of the LLC, and information and reports of managers, members, and others with professional expertise who have been selected with reasonable care by or on behalf of the LLC.
Resignation
Under section 36 of the MA LLC Statute, members have the right to resign by giving at least six months’ notice to the LLC and to other members and managers, regardless of whether the operating agreement prohibits or restricts their resignation. The resignation would terminate the voting and information rights of the member but would not affect his or her economic rights or require a redemption of his or her interest in most cases.
Dissolution
One hundred percent of the members (or fewer if provided in the operating agreement) can decide to dissolve and liquidate an LLC under section 43 of the MA LLC Statute, and a single member can petition for the LLC’s dissolution by a court under section 44 “whenever it is not reasonably practicable to carry on its business in conformity with the certificate of organization or the operating agreement.”
Under sections 70 and 71, added to the MA LLC Statute by the legislature in 2008, the Secretary of the Commonwealth may dissolve an LLC (domestic or foreign) if the LLC has failed to file its annual report with the Corporations Division for two consecutive years, or if the secretary determines that the LLC has become inactive. In either case, the LLC has ninety days following notice to take corrective action or dispute the Secretary’s determination. Under section 72, also added in 2008, the Secretary may revoke a foreign LLC’s ability to conduct business in the Commonwealth for similar reasons.
Right of Contribution
A member liable for return of a distribution made in violation of the operating agreement (that the member voted for or assented to) has a right to contribution under section 35(b) of the MA LLC Statute from each other member or manager who voted for or assented to the violative distribution, and from each member who received the distribution knowing that it was made in violation of the operating agreement.
Dissenter
Under section 60(b) of the MA LLC Statute, the exclusive remedy of a member who objects to a consolidation or merger is the right to resign as a member. In such event, the resigning member has the right to receive distributions, if any, with respect to such member’s interest.