Monday, August 3, 2020

Does an LLC Member Have Absolute Power to Withdraw From The LLC?

Does an LLC Member Have Absolute Power to Withdraw From The LLC?

       Peter Mahler, in his blog New York Business Divorce, has on July 27 posted a piece titled Does an LLC Member Have Absolute Power to Withdraw From the LLC?; HERE IS A LINK to that posting. In this piece, Peter organizes and summarizes a recent multiparty exchange amongst members of the Committee on LLCs, Partnerships and Unincorporated entities with respect to the question of whether a particular member of an LLC has the unfettered right to withdraw from the company. This discussion is definitely worthy of review for at least two reasons. First, I provide insights from some of the top thinkers in the field. Secondly, it highlights the significant distinctions that exist between the various LLC Acts all with respect to this important right (or its absence).

       I skipped out on participating in this discussion because Kentucky is atypical in the way this question is handled. Under the Kentucky LLC Act, in a manager-managed LLC, a member has no right to withdraw from the LLC.  That is to say, member status is not revocable unless a right to do so is otherwise set forth in the operating agreement. In contrast, in a member-managed LLC, a member, after due notice, does have the right to withdraw from the LLC. This distinction on the right to withdraw has its roots in the Kentucky LLC Act's provisions with respect to fiduciary obligations. In a manager-managed LLC, the members, as members, do not owe fiduciary duties to either the LLC or the other members. In contrast, in a member-managed LLC organized in Kentucky, and subject to contrary private ordering in the operating agreement, each member owes a duty of loyalty to the LLC and a duty of care to both the LLC and the other members. Ergo, in a Kentucky organized member-managed LLC, each member is subject to fiduciary obligations. All other fiduciaries in business organizations, whether they be directors of a corporation, general partners in a limited or general partnership or governors of the statutory trust, have the right to withdraw from those positions and thereby bring about the prospective termination of those fiduciary obligations. In the context of a Kentucky organized member-manager LLC, the members are likewise afforded that capacity to terminate their fiduciary status. Note, however, that the withdrawal by a member in this circumstance only terminates their position as a member. The resigning member becomes their own assignee, and there exists no right, unless set forth in a written operating agreement, to compel a liquidating distribution.

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