What Are My Rights as a Minority Member of an LLC?
A limited liability company (LLC) is a great business entity type to consider when starting a business. An LLC provides liability protection for its owners because this business structure separates owners’ personal assets from the business.
Many of those who become owners, called “members,” of an LLC do not understand their rights, especially when they own less than 50% ownership and are considered “minority members.”
If you are a minority member of an LLC and do not understand what your rights are or need legal assistance to enforce your rights, reach out to the Law Offices of David H. Schwartz, INC. The business litigation attorney in San Francisco, California, serves LLC members throughout the San Francisco Bay Area as well as San Mateo, San Jose, Oakland, Santa Clara, and Alameda County.
Understanding Minority Members in an LLC
An LLC is a popular choice among small business owners in California and across the United States. According to the Insurance Information Institute, California accounts for the largest number of business entities in the entire country.
The owners of an LLC are called the “members.” A member of an LLC is much like a shareholder in a corporation. LLC members are broken down into two categories: majority and minority members:
A minority member holds less than 50% of the company’s capital interest. A minority member can be either an individual or an entity. However, a member must own a minority stake in the LLC in order to be considered a “minority.”
A majority member holds more than 50% of the company’s capital interest. A majority member can be either an individual or an entity. If a minority member, who owns a minority stake, acquires more capital interest and now holds more than 50% of the company’s interest, they are considered a majority member.
Minority and majority members act as the legal owners of the company without owning the LLC’s property and without being responsible for the debts and claims of the business.
Rights of Minority Members
Just because you are a minority member of an LLC does not mean you do not have any rights. Some of the rights of minority members of an LLC include:
Financial rights. By acquiring an interest in an LLC, regardless of its amount, a member automatically receives financial rights, including the right to share in allocations of the LLC’s profits.
Right to vote. Minority members of an LLC also have the right to vote. The scope of voting rights depends on the company’s structure. For example, if the LLC is managed by its members, members of the company can vote on all matters affecting the company’s business operations and affairs.
Member inspections. Generally, members of an LLC, regardless of the percentage of their capital interest, have a right to inspect certain records maintained by the company. These records include the shares and contributions of each member, the profits and losses of each member, tax returns, the names and addresses of members and managers, and other records.
Dissenters’ rights. Dissenters’ rights are commonly referred to as the right to an appraisal. It means that the member has the right to sell their capital interest back to the company for fair value when certain conditions are met (e.g., the LLC enters into a transaction that would affect the member’s investment).
Derivative action. Generally, members of an LLC have the right to bring a derivative action, which is a lawsuit brought on behalf of the LLC to protect the company from the alleged wrongdoing committed by other members or the management.
The LLC can either expand or restrict some of the above-mentioned (and other) rights of minority members in their operating agreements.
How Do I Protect My Rights as a Minority Member?
Generally, the protection of your rights as a minority member of an LLC should begin with reviewing the company’s operating agreements. Before you invest in a company and become a member, you need to know what you are getting into. The LLC’s operating agreements will outline the rights and responsibilities of members, which is why you should review the agreement to make sure that your rights are adequately protected. Since the agreement may contain legalese, it is a good idea to review the agreement with an attorney to ensure the protection of your rights.
You Have Rights—Fight For Them
If you feel that your rights as a minority member of an LLC are being oppressed or violated, the attorney at the Law Offices of David H. Schwartz, INC is here to help. The business litigation attorney helps minority members fight for their rights and ensure that they are treated fairly by majority members. Contact the law firm today to schedule a consultation and discuss your legal options.