When Can an LLC Member Be Expelled?
Expulsion of an LLC Member
Under the Florida Revised LLC Act (the “Revised Act”), an LLC member can be expelled only in three ways: (1) the LLC operating agreement provides for member expulsion under certain criteria; (2) the other members unanimously consent to the expulsion of a member and the member has engaged in unlawful activity or transferred his or her membership interest; or (3) a court expels the member for wrongdoing. Here are the three ways to expel an LLC member in more detail:
First, if the LLC operating agreement provides for expulsion under certain circumstances, a member can be expelled if any of those circumstances has occurred. Fla. Stat. § 605.0602(4). In other words, if the members of an LLC have negotiated certain remedies for member-expulsion in their operating agreement, a court generally will enforce the terms of the operating agreement. Fla. Stat. § 605.0602(4).
Second, a member can be expelled by the unanimous consent of the other members if any of the following conditions occur: (a) it would be “unlawful to carry on” the LLC’s activities and affairs if the member were to continue as a member, or (b) there has been a transfer of the member’s entire transferable interest in the LLC (other than for security purposes or pursuant to a charging order). Fla. Stat. § 605.0602(5).
While the statute does not define what it means by “unlawful to carry on” the activities and affairs of the LLC, one interpretation is that it would be justified to expel a member when the member has been engaged in criminal activity such that his or her continued membership would jeopardize the ability of the LLC to continue operating legally, e.g., a member of a pharmacy business who is selling drugs to customers without a prescription. Another interpretation is that a member’s prior criminal or disciplinary history would make it illegal to continue the LLC’s primary business, e.g., a member who has been barred by the SEC from the securities industry cannot be a member in a securities broker-dealer.
As mentioned above, the other way for an LLC member to be expelled by a unanimous vote of the other members is when a member’s entire interest has been transferred to a third party other than for security purposes or pursuant to a charging order. In other words, the member is no longer a member because the member’s ownership interest was fully transferred, thereby extinguishing the member’s interest in the LLC.
Third, a court can expel an LLC member in appropriate circumstances. In a direct action by the LLC or another member, a member may be expelled because that member (a) has engaged in wrongful conduct that has affected adversely and materially the LLC’s activities and affairs; (b) has willfully or persistently breached the LLC’s operating agreement or breached statutory fiduciary duties of loyalty or care; or (c) has engaged in conduct relating to the LLC’s activities or affairs such that it would not be reasonably practicable to carry on the LLC’s business with the member continuing. Fla. Stat. § 605.0602(6).
In sum, under specified circumstances, the members of a Florida LLC can expel another member pursuant to the terms of the operating agreement, for unlawful activity by the member, or after the member has transferred his or her interest. Likewise, a court may expel a member for wrongful conduct, willful breaches of the operating agreement or fiduciary duties, or conduct that makes it not reasonably practicable to operate the LLC with the member continuing.
Do you need more information about expelling the member of a Florida LLC or need to hire an experienced Florida LLC attorney? If so, call 561-6597878 0r 877-915-4040.