Duties and Rights of Members of Limited Liability Companies

by Marianne Sorensen

Members of a limited liability company (LLC) have duties and rights that are in many ways comparable to those of a partner in a partnership. The operating agreement of the LLC can impose further obligations upon the members.

Fiduciary Duties

If a member of an LLC is also a manager of the LLC, then that member is in a position of trust. To protect other owners of the LLC, these members owe the LLC the duty of loyalty and the duties of care.

The duty of loyalty prevents a member from competing with the LLC in another business. A member must refrain from dealing with a person or business with interests adverse to those of the LLC and must account for any benefits received from use of LLC property or from the winding up of LLC affairs.

The duty of care requires a member to refrain from grossly negligent, reckless, or intentional misconduct.

The duties of loyalty and care are similar in partnership law. Managers of an LLC who are not owners are held to the same standard. However, a member who is not a manager of an LLC is not bound by the same duties, since such a manager is not involved in the day-to-day activities of the company

Indemnity and Contribution Rights

The Uniform Limited Liability Company Act (UCCLA) provides that a member must be reimbursed for payments made on behalf of the LLC and indemnified for liabilities incurred by the member during the ordinary course of the LLC’s business. These rights are similar to those provided to partners in a general partnership. However, most state statutes do not address indemnity rights. Similarly, the ULLCA provides that members are required to make contributions according to the agreement of the owners of the company, which is similar to rights provided in partnership laws. An operating agreement will often set forth such indemnity and contribution rights

The default rules regarding distributions to members differ among the states. Some states provide that members receive a share of distributions in the same proportion as their contributions to the LLC (pro rata distribution). Other states, including those that have adopted the ULLCA, provide for equal distribution among the members (per capita distribution). These provisions can be altered in the operating agreement.

Transferring Interests

A member may transfer his or her financial rights to profits and losses, and the right to receive distributions, in all states. However, a member cannot transfer full ownership interests, such as those related to the right to manage the company, without unanimous agreement of all of the other members. Rights related to transferability of interests can be modified in the operating agreement.

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