How to Remove a Member From an LLC in NJ
Knowing how to remove a member from an LLC in NJ is important when you operate a company.3 min read
Knowing how to remove a member from an LLC in NJ is important when you operate a company. According to the Limited Liability Company Act in New Jersey, a member can be removed from an LLC in certain situations.
One reason a member can be removed from an LLC is if they engage in wrongful conduct that materially and adversely affects the business of the limited liability company. The scope of conduct must be included when the case is being reviewed, such as misappropriation of opportunities or assets, a breach of duties, or competition within the company. This could also include a transaction that's one-sided and favors a controlling manager or member. It may also include proprietary information being misused.
The main issue is that wrongful conduct that would lead to dissociation is the manager or member had control over the welfare or interests of others. Members who are in an LLC that is manager-managed, such as shareholders in a corporation, will then have the right to participate in daily activities and discussions of the company.
Only when the owners are in charge of management is it mandatory for them to look after the interest of others. This means when a member has a fiduciary responsibility to other members or the company, their wrongful conduct can be cause for dismissal.
The modern presumption for an LLC is that if the business has managers who are in charge of business decisions, the members then have the legal rights to not get involved in the interest of the additional owners. An LLC is based on a contract, so it can't be assumed that the parties in that contract owe each other anything other than fulfilling the obligations they originally agreed to.
Under Which Circumstances Do the New Jersey LLC Laws Apply?
A member can be removed if they persistently or willfully performed a material breach against the operating agreement. One of the main principles of LLC law is that members of the company must be able to attend to their affairs as they see appropriate. Whatever agreement they come to must be put into the written contract.
That said, it's not surprising that a breach of the contract, whether in the past or present, is grounds for expulsion for the offending member. Another reason for removal is if the member participated in conduct where it doesn't make sense for them to continue business with the company.
After Dissociation, What Are the Former Member's Rights?
When a member gets dissociated, that doesn't automatically give them the right to sell their shares. Unless it's ordered otherwise by a court, the member will become a transferee under the Revised Uniform Limited Liability Company Act (RULLCA). That means the former member can maintain their interest and get distributions when they're paid out. As a transferee, they have none of the following:
- Management rights
- Rights to get information
- Rights to object to any changes in the agreement that would dilute their interest
Steps to Remove a Member of an LLC
To remove a member from an LLC, you'll want to look at your current operating agreement to see if there are legitimate reasons to do so. If there are no particular reasons listed in the operating agreement, look at the state's business code to see what the statutory grounds are for removing a member. Keep in mind that the operating agreement replaces legal recourse, so any reason for removing a member is void if it's stated otherwise in the operating agreement.
After a meeting is called consisting of all the members, a vote should be cast to remove the member. You may need to reach a universal agreement, where all members agree on removing the member, or get majority approval. If you can't get the requisite approval, the member cannot be removed from the LLC.
All the dividends must be paid out on the shares the member owns, as well as any money in the future that the member is entitled to according to the operating agreement. If your agreement doesn't define guidelines for how to pay out a former member, state law may require you to buy them out.
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