Dissociation of LLC Member Does Not Discharge Them from Liability to LLC Members

Limited liability companies can be tight-knit operations.

The owners, or members, are usually friends or associates that decided to go into business together.

They liked the ease of operation of the LLC so they chose that over a corporation.

But even the best business relationship can come to an end.

When an LLC member leaves the company it is called a “dissociation.”

That has an amicable, almost noble, sound to it but there are serious consequences when an LLC member dissociates from the company.

And dissociation can occur for many reasons.

A member can dissociate at any time, whether it is rightful or wrongful.

So, let’s say that the operating agreement requires that a member can only dissociate afrer the company has reached certain milestones.

But a given member needs to leave the business for personal reasons before the agreement allows it.

This is a wrongful dissociation under the operating agreement but the LLC member has the power to nonetheless dissociate.

For a wrongful dissociation, the other members or LLC itself would have a claim against the wrongfully dissociating member for breach of contract.

Breach of the operating agreement is not the only way a dissociating member can wrongfully leave the company.

Wrongful dissociation can occur involuntarily when the member becomes a debtor by filing for bankruptcy protection.

Or if the member is itself a corporation or partnership, for example, and it terminates or is dissolved, that is also considered a wrongful dissociation of that member from the subject LLC.

If the LLC member dissociates wrongfully, regardless of the means, the wrongfully dissociating member is liable to the LLC and other members for any damages that may be suffered as a result of the wrongful dissociation.

Damages could arise in a wrongful dissociation case if there was a funding requirement that was due when the member dissociated and the member failed to make the capital contribution.

An LLC member can also be expelled from the LLC. In such event, the member is deemed dissociated too.

The bases for expelling a member from the LLC are limited.

One way is when the other members agree unanimously to expel a member due to such member having transferred all of their interest in the LLC.

Or the members can agree unanimously to expel a member when it would be unlawful for the LLC to continue to operate with such member.  This could occur if the member being expelled is not licensed in the field of business that the LLC operates and all members must be licensed for that field.

Another way is for the LLC to obtain a court order to expel a member when the member is engaging in wrongful conduct that adversely and materially affects the LLC’s activities.

These are a few examples of how a member can be expelled from an LLC and end up being dissociated.

Other ways that a member can be deemed dissociated include obvious scenarios such as death of a member who is a natural person.

Regardless of the path to dissociation, once a member is dissociated, the rights and obligations of the dissociated member are immediately affected.

The dissociated member’s right to vote or make decisions for the LLC terminates.

The dissociated member’s fiduciary duties to the LLC terminate for events that occur after dissociation.

The dissociated member’s interest in the LLC becomes immediately a transferee’s interest (with only a simple proportional profits and losses interest).

Finally, just because a member dissociates, regardless of the reason or basis for that, the dissociated member is not discharged from liabilities or debts or obligations owed to the LLC or other members that were incurred prior to dissociation.

Becoming a member in an LLC is a serious commitment and dissociation does not relieve the dissociating member from liability, whether the dissociation is voluntary or not.

References: California Corporations Code sections 17706.01, 17706.02, and 17706.03.

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 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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