Expelling, or disassociating, a Colorado limited liability company member may become necessary. Disagreements among LLC members about management, growth, and the direction of the business may lead to the conclusion that a member should disassociate from the LLC. Here’s what to look at when trying to expel or disassociate a member from a Colorado LLC.
The Operating Agreement as Authority to Expel an LLC Member
The governing document of the LLC is usually the Operating Agreement. If the Operating Agreement includes a provision to expel or disassociate a member of an LLC, the procedure must be followed.
This may include a voluntary or involuntary disassociation, the procedural acts necessary (usually a vote of the majority members), and a mechanism for the payment of the membership interest of the disassociated or expelled LLC member. The Operating Agreement may limit the ability of the LLC to disassociate or expel a member so there usually must be an objective basis to take this action.
The Governing Law Specified in the Operating Agreement
While the LLC may operate in Colorado, the law that applies to the legal relationship between the members and the LLC may be governed by the law of another state. Several states have enacted the Revised Uniform Limited Liability Act (the RULLCA). The Act allows an LLC to disassociate or expel an LLC member.
For instance, Florida allows a member to be dissociated from an LLC upon the occurrence of certain limited events. In addition, Florida allows an LLC or a member to petition the court for an Order expelling the LLC member. This is limited to when the LLC member engages in certain wrongful acts. Virginia, Illinois, and several other states also have enacted disassociation and expulsion provisions for LLC members.
A Buy Out of the LL
C Member’s Interest
The remaining members of the LLC can buy out the other member’s interest in the LLC if the member has an interest in selling. There may be a mechanism for valuing this in the Operating Agreement or you may hire a business valuation expert (here’s a business valuation expert I’ve used).
A Last Resort
If the Operating Agreement does not include a provision allowing for the disassociation or expulsion of an LLC member and Colorado law applies, there is no mechanism under Colorado law to expel the LLC member.
If a member dies or is adjudicated incompetent, the member’s economic interest is transferred to the member’s successor or guardian; however, the successor will not have the full rights of a member unless the Operating Agreement provides otherwise.
The only option may be a claim for dissolution of the company. There may be other claims against the LLC member brought by the company in a derivative action.