LLC Rights: Everything You Need to Know
LLC rights are outlined in the company's operating agreement created by the members and listed in the company's articles of organization.4 min read
LLC rights are outlined in the company's operating agreement created by the members and listed in the company's articles of organization. The members in an LLC can be other LLCs, corporations, and individuals. Along with the protections and privileges the LLCs provides its members, each member has individual rights.
Financial Rights of an LLC Member
It is important for members to understand the rights and responsibilities associated with being a part of a limited liability company (LLC). Members of an LLC carry certain financial rights which are typically outlined in the company's operating agreement. For example, members have the right to share in the distribution of the entity's profits and losses. They also have the right to a share in the allocation of the company's financial assets during its existence, liquidation, and dissolution.
The operating agreement will specify whether the financial assets will be shared equally or based on members' capital contributions. Fortunately, state laws do have default provisions in the event that an operating agreement hasn't been created by the members of an LLC.
Voting Rights of LLC Members
All members of an LLC have the right to vote. However, the extent of their voting rights is determined by whether the company is managed by the managers or members. When members manage an LLC, they may vote on all issues relating to the business. When the managers run the company, members have very limited voting power. Nonetheless, members are still permitted to vote on the following:
- Making amendments to the operating agreement.
- Electing or removing managers.
- Admitting new members to the LLC.
- Calling for a merger or a dissolution.
Member Inspections in an LLC
There are states that require an LLC to keep specific records. All members have the right to access and inspect these at any time. The records may include the following information:
- Member names.
- Member contributions.
- Member addresses.
- Shares of profits or losses of each member.
- Names, addresses, and certain tax returns of managers.
It is important to note that an LLC's operating agreement may broaden or restrict members' rights to inspect company books and records.
LLC Members Liabilities
A member or manager may be held liable for violating any financial obligations to the LLC or its members. Additionally, members may be held liable for breaking any provisions in the operating agreement, such as withdrawing funds without following the protocol outlines in the agreement.
A Member's Right to Distributions
Every LLC member has the right to collect distributions of company profits. It's not a state requirement to distribute earnings, and the decision is usually left for the members. However, under no circumstance may an LLC decide to make a profit distribution that would cause the company to go bankrupt or generate an excess of liabilities over assets.
A Member's Right to Information
All members have the right to obtain any information relating to the LLC. By simply providing appropriate notice, a member can copy and inspect any LLC records that may relate to their business transactions, financial position, or any other relevant matter. Along with this right comes the responsibility of the member who is in charge of providing this information and making it accessible to all other members. It is important to note that this right does not allow a member to make any unreasonable requests that would cause any major disruption to the business.
A Member's Right to Dissociate
A member of an LLC has the right to dissociate from the entity at any time for any reason. However, personal liability to other members or the LLC may incur if the separation violates a timing requirement or responsibility outlined in the operating agreement. An individual's right to manage the business ceases at the time of the member's dissociation. Additionally, the person no longer has any fiduciary duty or owes contributions to the LLC.
What Kind of Information Is an LLC Required to Keep?
As outlined in section 17058 of the California Corporations Code, LLCs are required to retain the following information:
- Member names with the last known residential or business address.
- Member equity contribution.
- Each member's allocation in the net income.
- Manager names with the last known residential or business address.
- A copy of the following documents:
- Articles of organization.
- Local, state, and federal income tax returns for the prior six years.
- Operating agreement and amendments.
- Power of attorney.
- Financial statements for the prior 6 years.
- Records and accounting documents related to the internal affairs of the business for at least the last four years.
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