David H. Schwartz
for LLC Members in California
Limited Liability Companies may be member-managed or manager-managed. Particularly in manager-managed LLCs, where members are basically passive investors, but not infrequently in member-managed LLCs as well, access to records required to be kept by the LLC is denied by the manager having possession of such records. In general, members have a right to inspect and copy the records each LLC is required by statute to maintain, although there are certain limitations to that right.
Information the LLC is Required to Maintain
Corp. Code § 17701.13 states that an LLC is required to maintain in writing the following information at all times:
- A current list of members with current contact information
- List and name of each manager with current contact information
- Federal, state, and local income tax information for the past six years
- Articles of the organization complete with all amendments
- Operating agreements and amendments
- Financial statements
- Books and records related to the internal affairs of the company
California Corporations Code § 17704.10
California Corporations Code § 17704.10 allows members of a limited liability company to inspect and copy the records that the LLC is required to maintain as listed above. Members can submit a formal written request for the information outlined in Code § 17704.10. If the request is not honored within 30 days, a $25/day penalty may be imposed, payable to the member(s) making the request.
Each member has the right to inspect and copy the LLC’s records during normal hours of operation. Any request or inspection may be made by the requesting person or the person’s representative, agent, or attorney. This information should be updated and accessible at any time the partnership is in effect. This right also applies to a transferee of a membership interest in an LLC.
A member or transferee also has the right to a written copy of the LLC's federal, state, and local income tax returns for each year promptly after becoming available.
There is a caveat, however, that the LLC may require a member or transferee to show a purpose reasonably related to his or her interest as a member or transferee. In situations where the manager or member controlling the records believes the requesting member's purpose for the records is to harm the LLC or its business, such requests are often refused. In that situation, it may require a court determination as to the right to the records.
Failure to Comply with the California Corporation Code
Under the current code, the court may enforce the LLC to mail or deliver the requested information. Members may use their full rights to file a complaint if the LLC does not comply with the code.
Waiver Not Enforceable
The Code goes on to explain that no member can draft a provision that waives or limits the member inspection rights. Therefore, the LLC must provide all requested information to the members regardless of any internal agreements or attempts to exempt a person or information from the inspection rights.
Penalties for Non-Compliance
If the court discovers that the LLC's failure to provide access to the requested records without justification, the court may award compensation to the person or entity bringing an action against the LLC. Penalties may also include attorney’s fees and other legal costs. In practice
How Legal Counsel Can Help
Where the right to inspection and copying of LLC records by a member (or manager) is contested, a business litigation attorney can assist in helping the requesting party or the party resisting disclosure develop a record that will support that party's position in a lawsuit to compel access to the records and present that record effectively to the court. A good business litigation attorney, on the client's instruction, will also seek to reach an agreement with the other party on a compromise that the client can live with and will avoid the cost of litigation in court.
Work with An Experienced Business Litigation Attorney in San Francisco, California
The Law Offices of David H. Schwartz, Inc. offers comprehensive legal services for companies involved in corporate litigation cases. With over 45 years of experience, attorney David H. Schwartz possesses the skill and knowledge needed to help you fight for your rights. Individuals or companies who need legal representation can contact the firm for a free consultation with a business litigation attorney in San Francisco, CA. The Law Offices of David H. Schwartz, Inc. represents clients in the San Francisco Bay Area and with clients throughout the great State of California.