Due to the potential for oppression of minority members of limited liability companies (LLCs), the State of Wisconsin has developed a comprehensive set of laws governing LLCs. While these laws set forth default principles of LLC management and operation, these default principles can be over-written by written agreement between the members.
Wisconsin Minority Member Default Principles
A minority member of an LLC is a member that holds less than 50% ownership of the company. Section 183 of the Wisconsin Statutes sets forth the default principles for LLC management and operation. Within these statutes, certain rights are set forth for minority members, including:
- Voting Rights. Section 183.0404 states that “If management of a limited liability company is reserved to the members, an affirmative vote, approval or consent by members whose interests in the limited liability company represent contributions to the limited liability company of more than 50% of the value…of the total contributions made to the limited liability company.”
- Allocation of Profits and Losses. Section 183.0503 provides that “If the members do not enter into an operating agreement or the operating agreement does not so provide, profits and losses shall be allocated on the basis of value…of the contributions made by each member.”
- Access to books and records. Section 183.0405 establishes the minority members’ right to inspect the books and records of the LLC. Specifically, the section states that “upon reasonable request, a member may, at the member’s own expense, inspect and copy during ordinary business hours any limited liability company record required to be kept…and, unless otherwise provided in an operating agreement, any other limited liability company record, wherever the record is located.”
Because of the fact that these default principles can be over-written by an operating agreement, an LLC’s operating agreement should contain provisions that address the rights and remedies of members in the event of in-fighting. Often, this is not the case though. The vast majority of LLC operating agreements are not equipped to address many of the most common causes for dissension among the owners, such as:
- a member’s lack of work effort,
- refusal to participate in a capital call,
- use of company funds for personal expenses,
- acting outside the scope of the member’s authority, and
- self-dealing or oppressive acts at the hand of the majority owner.
Using Better Operating Agreements
If you are considering creating an LLC, even with someone with whom you have extensive experience, it is imperative to create a well thought out operating agreement. Members of an LLC should focus on drafting a comprehensive operating agreement that clearly defines the rights and remedies of members and covers all the bases if internal dissension arises.
It’s quite common, especially for LLCs developed between friends, to use standard boilerplate-type agreements that one can find on the Internet. The problem with this tactic is that these boilerplate operating agreements generally fail to adequately address the rights and responsibilities of members in the event that things start going wrong. And, since many LLCs are starting on a tight budget, few members feel the need to spend the money to hire an attorney to ensure the operating agreement is useable.
At a minimum, consideration should be given to the inclusion of provisions that provide for mediation, arbitration, or some other form of cost-effective alternative dispute resolution in the event of internal strife.
Pull the Plug Provisions
Members should also discuss the inclusion of what’s known as “pull the plug” provisions. These provisions provide members the right to liquidate membership interests, sometimes without cause and sometimes only with good cause. These types of provisions provide the dual incentive of providing a remedy to a marginalized member as well providing motivation to all of the members to promote harmony in the organization rather than be forced to buy-out a member. Without such provisions, the minority member’s only recourse is to try and convince a court that the complained-of conduct is so significant that dissolution is appropriate
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If you are considering starting an LLC, do yourself and your company a favor and talk to an experienced business attorney at Kerkman Wagner & Dunn about drafting a custom operating agreement that will adequately suit your business needs. Contact us today to speak with us.« Previous PostNext Post »