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Involuntary Dissociation with Florida LLCs

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Newly formed LLCs in Florida run the risk of drafting an operating agreement that is missing key elements, like what to do when the LLC members reach a deadlock. Even if your LLC does not have an operating agreement that discusses how to remove a member, Florida’s Revised Limited Liability Company Act (the Act) does. Effective January 1, 2015, section 605.0601, Florida Statutes, covers the power to dissociate or expel a member.

Events that can cause dissociation or expulsion (“expulsion”) include:

  • Some event in the LLC’s operating agreement that can result in expulsion occurs;
  • The member’s interest is transferred during a foreclosure sale;
  • The LLC undergoes a merger or interest exchange which leaves the person no longer a member; and
  • The LLC dissolves.

Judicial Expulsion of a Member

Judicial expulsion is the involuntary removal of a problem member upon application to the court by another member or the LLC. Expulsion is requested because the member in question engaged in “wrongful conduct” that “adversely and materially” affected the LLC, the LLC member persists in willfully committing a material breach of the operating agreement, or the member violates his or her membership duties under the Act.

Courts also have the discretion under the Act to order expulsion if the member does something that no longer makes it practical to carry on business activities and affairs with this person as a member. This option tends to be helpful when unforeseen situations emerge after forming the LLC and there is no remedy noted in the operating agreement.

Expulsion by Vote of the Members

If the operating agreement lacks a method for expulsion, and the LLC cannot lawfully carry on day-to-day business with the member in question, the remaining members can unanimously vote to expel a member.

Rights and Obligations of Expelled Members

The word “expulsion” would suggest that an involuntary removal of a member means total and full termination, along with any rights. Under the terms of the Act, expulsion does not automatically mean the member is banished or ousted. Judicial expulsion means the member’s rights are limited — he or she cannot participate in managing the LLC’s affairs. This makes sense since the member’s participation is what is causing the dispute in the first place.

No matter whether a member is expelled by judicial explosion, unanimous vote, or the member voluntarily steps down, the member is no longer allowed to participate in management activities. A removed member is entitled to distributions, only at the time they would have normally received them. It is important to note that expelling a member does not relieve him or her of any existing liabilities, debts, and/or obligations that are owed to the LLC or other members.

When Should You Retain a Florida Bar Board Certified Business Litigation Lawyer?

It is important to have a forced buyout provision in your operating agreement, especially because an expelled member can reap financial benefits from the LLC without being bound by any fiduciary duties. Interpreting the duties, rights and remedies under the Act can be difficult, which is why you need to seek guidance from a skilled Florida business lawyer experienced in cases often referred to as “business divorces.” The attorneys at McCabe Rabin, PA are board certified business litigation attorneys with substantial experience in representing LLCs, managers and members in LLC member disputes. Contact our office at 561.659.7878 to schedule a consultation.

Resources:

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0600-0699/0605/Sections/0605.0601.html

floridabar.org/news/tfb-journal/?durl=%2Fdivcom%2Fjn%2Fjnjournal01.nsf%2Fc0d731e03de9828d852574580042ae7a%2F1d938b1136807b478525809600518175

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