I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.
Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?
Earlier this year, I wrote about how business founders who agree to split earnings from their venture can find that they have unintentionally created a general partnership (Beware the Unintended Partnership). The problem: Any partner can subject all of the partners to unlimited personal liability for partnership obligations!
This post provides an overview of how an unintended, or otherwise undesirable, California general partnership can be terminated.
Half or more of the partners can decide to wind up the business of the partnership and dissolve it (California Corporations Code Section 16801(1)).
Last month, I posted Your Business is Dead – Are You Liable for its Obligations?, which stated that, generally, once a business is dissolved, the owners will be personally liable for the business’s obligations only to the extent that the owners received distributions at the time of dissolution.
A significant exception to the foregoing rule, however, concerns company personnel who are responsible for making, but fail to make, withholding payments to the Internal Revenue Service.
Last month, I wrote about how to terminate a company’s existence by dissolution (How to Kill Your Company when that’s the Only Choice). Since then, people have asked me what their personal responsibility is under California law if the corporation or LLC had outstanding obligations at the time it was dissolved.
The LLC section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
Assuming that you go through the dissolution process properly and that you do not have any “alter ego” problems, your personal liability generally will be limited to the amount of any distributions that you received at the time of dissolution.
This limitation is set forth in Corporations Code Section 2011 with respect to corporations and Section 17707.07(a)(1)(B) with respect to limited liability companies.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Yesterday I wrote about ways that businesses with two equal owners can avoid management deadlocks (Resolving Small-business Disputes: The 50-50 Deadlock). Today I am writing about dissolution, i.e., termination of the company’s existence – the only reasonable outcome if a serious deadlock cannot be resolved.
LLC section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
The essence of the dissolution process for a California corporation is as follows: