John Cunningham: Limited liability corporations can be like marriages - incompatibleBy JOHN CUNNINGHAM
May 25. 2013 1:52AM
Two-member LLCs are like marriages. The biggest problems of two-member LLCs are not usually LLC business or financial problems, as severe as these may sometimes be. The biggest problems are those that involve member incompatibility.
There are presently about 48,000 New Hampshire LLCs. IRS filing statistics indicate that while about 55 percent have one member, a good 40 percent have only two. Only about 5 percent have three or more.
The New Hampshire Business and Industry Association committee that drafted the Revised New Hampshire Limited Liability Company Act was aware that, next to single-member LLCs, the more than 19,000 New Hampshire two-member LLCs and the many tens of thousands of two-member LLCs that will be formed in future years were by far its key constituency.
The drafting committee sought to deal with this problem in two ways. First, it sought to ensure the mandatory and default rules of the revised act addressed as comprehensively and wisely as possible the LLC legal problems likely to arise between the members of two-member LLCs.
Above all, we sought to address all of the fiduciary issues likely to arise between these members, since we knew that it is these problems that are the greatest single destroyers of two-member LLCs. Fiduciary issues include, above all, issues concerning the members' duties toward one another to work carefully and to be loyal. As I've written before, the revised act contains, in Sections 106 through 117, the most comprehensive and, in my view, the most commonsensical fiduciary rules of any U.S. LLC act.
The second thing our committee did to meet the needs of our two-member LLC constituency was to provide dispute resolution provisions in the revised act that, if the members of these LLCs simply couldn't work with each other any more, would provide them with the fairest possible resolution of their deadlock in the New Hampshire courts.
The main anti-deadlock provision in the revised act is Section 104, entitled "Judicial Removal of a Member." Section 104 permits any member of a multi-member LLC, including a two-member LLC, to request a New Hampshire court to remove another member:
. If the other member has breached or may breach a duty to the LLC.
. If the other member has engaged or may engage in any other conduct that has injured the LLC or may injury it.
. If the other member has engaged or may engage in any conduct that makes it difficult to carry on the activities of the LLC - including, for example, being hopelessly difficult to work with.
Furthermore, Section 104, III permits New Hampshire courts, in resolving disputes between LLC members, to exercise tremendous discretion. For example, assume that Member A of AB, LLC, New Hampshire two-member LLC, asks a court to remove Member B for incompatibility. Section 104, III gives the court the right to remove Member B; but also to make Member A buy out Member B; and also, believe it or not, to remove Member A!
In view of the almost unlimited discretion of New Hampshire courts under Section 104, III, I'm hoping that neither Member A nor Member B will ever want to invoke Section 104 unless they absolutely have to. Instead, given the risks to both of them under that section, I'm hoping the section will force them to somehow work things out.
I can't resist one final point: What if, when they form their LLC, A and B, by themselves or with the help of an LLC lawyer, put together a comprehensive written LLC operating agreement and both of them sign it? If they do this, maybe they can avoid major disputes.
John Cunningham is counsel to the law firm of McLane, Graf, Raulerson and Middleton, Professional Association. He chaired the BIA committee that drafted New Hampshire's new LLC Act. His email is firstname.lastname@example.org, and his telephone number is 856-7172. He is available to make presentations about the new act to New Hampshire chambers of commerce and other New Hampshire business groups at no charge. You can download his free book on the new act at www.cunninghamonnhllcs.com.