What are the rights of LLC members?

An LLC is a legal entity created by statute. Therefore, the rights of LLC members are governed by statute. The rights and responsibilities of managers of an LLC are also controlled by statute. While the members of an LLC can change some of these by agreement, some of these cannot be changed even by agreement.

Duties Owed by Managers and Members

The default position under Colorado law is that certain duties are owed by managers of a manager-managed LLC and members of a member-managed LLC. These duties are outlined in §7-80-404 through §7-80-408 (however, some of these may be modified upon agreement by the members). The duties include:

  • The duty to account to the LLC and hold as a trustee for the LLC any property, profit or benefit;
  • A prohibition of conducting the business of an LLC to benefit those having an adverse interest in the LLC;
  • A prohibition of competing with the LLC;
  • A duty of care to conduct the business of the LLC without engaging in gross negligence, recklessness, intentional misconduct or a knowing violation of the law.

In addition, every member of an LLC has a good faith and fair dealing obligation owed to the LLC. This is a much broader duty as it applies not just to managers or members in a member-managed LLC. It applies to all members regarding of their position or ownership interest.

Rights of Managers and Members

Colorado law provides that there are certain rights that managers and members of an LLC enjoy unless otherwise provided by agreement of the members. These include:

  • The right to lend money and transact business with the LLC;
  • The right to reimbursement and indemnification from the LLC for acts taken on behalf of the LLC;
  • A right to inspect the books and records;
  • A right to a formal accounting;
  • The right to act as an agent of the LLC for the purpose of carrying on the business of the LLC.

In a member managed LLC, all members participate in the decision-making process of the LLC. Each member is an agent of the LLC and each member has a vote in business decisions. Each member has the authority to make decisions on behalf of the company, however, contracts and loan agreements must be approved by a majority of the members. If a manger or the LLC refuses to enforce a claim or right of the LLC, a member may the right to initiate a derivative action to enforce the rights of the LLC. In some cases, if the members are incapable of agreeing on the conduct of the business, a court can order a forced dissolution of the LLC.