Another LLC member has just sued me. What are my options?

You have been doing your best in your small business, but things have not worked out.  You followed the rules of the operating agreement, maybe not to the exact letter of the law, but who is perfect.  You thought that winding down operations of the business was going to be the last of your worries, but then the guy who didn’t really do much but complain all along serves you with lawsuit, despite your best efforts.  What is the point of the LLC formation and all of your efforts to follow it if it doesn’t protect you when you need it?  Well in fact it does.

 

There are three protections that will help you in this situation.  First, the type of suit that your disgruntled business partner has filed, is rightly considered to be a derivative suit.  A derivative suit has its basis in ownership of the company.  The shareholders, when they think that the company hasn’t been run well can file a derivative suit against the management.  But the protection afforded to management, and the rest of the ownership of the company is that first, the disgruntled shareholders must present the claim to the management of the company and the company has the option of whether to pursue the claim or not.  Those shareholders who have not presented the claim to the company have no right to pursue it in court.

 

The second way for management to protect themselves is to follow the operating agreement, or the contract, that the members have between themselves.  That means having meetings, keeping the minutes, getting the required minimum votes for decisions out of the ordinary course of business and performin responsibilities as outlined in the Operating Agreement.  Most agreements say that members will not be liable to one another unless they are involved in fraud, gross negligence, or willful misconduct.  This way, as long as members act reasonably, fairly, and in the best interests of the company, they will be protected from liability associated with their actions on behalf of the company.

 

The third way their actions are protected is through what is called the business judgment rule.  The business judgment rule says that as long as the process to make the decision was adequate, and management informed themselves properly regarding the decision, then the courts will not second guess the decisions made.  The courts would rather leave business judgments to the businesses as long as they determine that the proper processes were followed.

 

So if you have done your part and acted reasonably within your capacity as a member of your LLC, you should be able to protect yourself from frivolous lawsuits brought by disgruntled business partners.  Check with your local counsel to see how these three solutions can work for you and if you have any other options that your state legislature has provided to businesses.

 

Photo By: Moyan Brenn