New Rules on Withdrawing from a Limited Liability Company

California’s limited liability company (LLC) law was updated when the California Revised Uniform Limited Liability Company Act (RULLCA) went into effect on January 1, 2014.  The California RULLCA is found in California Corporations Code, sections 17701.01 et seq.  One of the many changes to LLC law made by the RULLCA deals with how an owner (member) of an LLC can withdraw (dissociate) from the LLC.

In general, a member can withdraw from an LLC at any time for any reason, whether the member is permitted to do so or not under his or her agreement with the LLC.  The withdrawing member need only give notice of his or her intent to withdraw.

A member can be deemed to have withdrawn wrongfully in two basic scenarios.  One is when the withdrawal is prohibited by an express provision in the LLC’s operating agreement.  The other scenario involves withdrawal prior to the termination of an LLC and the member either withdraws voluntarily, the member is expelled pursuant to judicial order, the member becomes a debtor in bankruptcy, or when the member (when an entity) is itself dissolved.  If the member’s wrongful withdrawal causes the LLC and the other members to incur damages, under the RULLCA the withdrawing member is liable for such damages in addition to any other liability that may be owed by such member to the LLC or other members.

There are other events under California’s RULLCA that could result in a given member being deemed dissociated from the LLC.  Such other events include any event that is set forth in the operating agreement as resulting in a member’s dissociation.  A member can also be expelled according to the terms of the operating agreement for expulsion of a member.  In the event of death or incapacity of an individual who is a member, such member is deemed dissociated upon death or incapacity.

The consequences of dissociation are as follows.  The dissociated member can no longer participate in the management and operation of the LLC.  When the LLC is managed by the members, the dissociated member’s fiduciary duty to the LLC and other members terminates upon dissociation.  But the dissociation does not relieve the dissociated member from any liabilities or other obligations that were incurred prior to dissociation.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.  This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.  For more information please visit my website at http://www.palacioslawoffice.com.

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About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit www.PalaciosLawOffice.com to learn more.
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