A limited liability company (“LLC”) is a common form of doing business today. When members (meaning the owners) of an LLC are not getting along, the members usually agree to dissolve the LLC and distribute its assets. In certain circumstances, dissolution may not be an option. In that situation, a disgruntled member may elect to withdraw (or dissociate) from the LLC. The member will no longer be actively involved with the LLC but the LLC can continue to do business.
“Dissociation” typically means the voluntary withdrawal of a member from an LLC, but it can also occur involuntarily when the other members vote to expel a particular member. A member can voluntarily withdraw from an LLC at any time. So long as there is no prohibition in the operating agreement against withdrawal, then the withdrawal will be a proper dissociation. A member can still withdraw if there is a prohibition on withdrawal, but the other members will be able to take certain actions against the withdrawing member as detailed in the operating agreement.
Once a member withdraws (or dissociates) from the LLC, the LLC remains in business and does not dissolve. A dissociated member continues to hold an economic interest in the LLC for the same ownership interest percentage as their former membership interest. A dissociated member has a right to share in the LLC’s profits and losses and if the LLC ever dissolves, the dissociated member will be entitled to their respective share of any assets distributed to the members.
A dissociated member does not have any right to participate in the management or operation of the LLC. The dissociated member does not have any voting rights in the LLC. A dissociated member no longer has any fiduciary duties to the LLC.
A member may want to dissociate from an LLC when that individual strongly disagrees with the LLC’s management and operation and when the member knows that they do not have enough of an ownership interest to force dissolution of the LLC. A member may also consider dissociation if the member is unable to negotiate an adequate buyout of their membership interest by the other members. Although a dissociated member no longer has any management or control of the LLC, they also no longer have any fiduciary duties to the LLC. This may allow the dissociated member to pursue other avenues and interests and possibly even to compete with the LLC (which the member would not be able to do otherwise as it would likely breach their fiduciary duties to the LLC).
If an LLC member finds themselves in a situation where they cannot get along with the other members and strongly disagrees with the LLC’s actions, then dissociation is one of several remedies that the disgruntled member should consider.
This article is written by Patrick Casey, who is a business attorney with the L&G, LLP law firm in Monterey. You may reach the author at (831) 269-7114 or at firstname.lastname@example.org.