Internal LLC Disputes

Internal LLC disputes can arise for various reasons, such as disagreements over the direction of the business, allocation of profits and losses, breach of fiduciary duties, or violation of the operating agreement. These disputes can be costly, time-consuming, and damaging to the reputation and performance of your LLC. Therefore, it is important to know how to prevent, manage, and resolve them effectively.

Types of Internal LLC Disputes

One of the first steps to resolving an internal LLC dispute is to identify the type of claim that you have. Depending on the nature and extent of the harm that you have suffered or the relief that you seek, you may have a direct claim or a derivative claim against another member or manager of your LLC.

Direct Claims

A direct claim is a claim based on your own right of action against another member or manager. For example, you may have a direct claim if another member or manager breached the operating agreement by failing to make a required capital contribution, or by taking an unauthorized action that harmed your interest in the LLC. In a direct claim, you are the plaintiff and you sue on your own behalf. You may seek damages, injunctive relief, or specific performance as remedies for your direct claim.

Derivative Claims

A derivative claim is a claim based on the right of action of the LLC against another member or manager. For example, you may have a derivative claim if another member or manager breached their fiduciary duty to the LLC by engaging in self-dealing, misappropriation, or fraud. In a derivative claim, you are the plaintiff but you sue on behalf of the LLC. You may seek damages, injunctive relief, or specific performance as remedies for your derivative claim. However, before you can bring a derivative claim, you must first make a demand on the LLC to take action against the wrongdoer, unless making such a demand would be futile or excused by law.

Deadlock-Breaking Mechanisms in LLCs

Another common source of internal LLC disputes is deadlock. Deadlock occurs when the members or managers of an LLC are unable to reach an agreement on a matter that requires their approval or consent. Deadlock can result in paralysis, inefficiency, and frustration for the LLC and its members or managers. Therefore, it is advisable to have deadlock-breaking mechanisms in place in your operating agreement.

Some examples of deadlock-breaking mechanisms are:

  • Buy-sell provisions: These provisions allow one party to offer to buy out the other partyā€™s interest in the LLC at a specified price. The other party can either accept the offer or buy out the offering partyā€™s interest at the same price.
  • Shotgun provisions: These provisions are similar to buy-sell provisions, except that the offering party does not specify a price. Instead, the other party can either accept the offer or make a counteroffer within a certain period of time. The offering party must then either accept the counteroffer or sell their interest to the other party at the counteroffer price.
  • Put/call options: These provisions allow one party to exercise an option to sell (put) or buy (call) the other partyā€™s interest in the LLC at a specified price within a certain period of time.
  • Mediation/arbitration clauses: These clauses require the parties to submit their dispute to a neutral third-party mediator or arbitrator for resolution. The mediator or arbitrator can help the parties reach a voluntary settlement or issue a binding decision.
  • Appraisal rights: These rights allow one party to demand an appraisal of their interest in the LLC by an independent appraiser and receive fair value for their interest upon exit from the LLC.
  • Dissolution rights: These rights allow one party to initiate dissolution proceedings for the LLC under certain circumstances, such as deadlock, breach of fiduciary duty, oppression, fraud, or illegality.

We Can Help You with Your Internal LLC Disputes

At Jurado & Associates, P.A., we have extensive experience and expertise in handling internal LLC disputes. We can help you with:

  • Drafting and reviewing your operating agreement to include effective deadlock-breaking mechanisms and dispute-resolution clauses
  • Negotiating and mediating with other members or managers to resolve your dispute amicably and efficiently
  • Litigating and arbitrating your direct or derivative claims in court or before an arbitrator
  • Advising and representing you in dissolution proceedings for your LLC

We understand that internal LLC disputes can be stressful and disruptive to your business and personal life. That is why we are committed to providing you with professional, personalized, and practical legal services that protect your rights and interests. Whether you need to prevent, manage, or resolve an internal LLC dispute, we are here to help you.

If you are facing an internal LLC dispute or have any questions about your rights and obligations as a member or manager of an LLC, do not hesitate to contact us today. You can reach us by phone at (305) 921-0976, or by email at [email protected].

Romy Jurado

Business & Immigration Lawyer to Entrepreneurs, Start-ups, Small Business and Foreign Investors. Romy Jurado grew up with the entrepreneurial dream of becoming an attorney and starting her own business. And today, she is living proof that dreams really do come true. As a founder of Jurado & Associates, P.A., a reputable business, real estate, and immigration law firm, Romyā€™s practice is centered primarily around domestic and international business transactions ā€“ with a strong emphasis on corporate formation, stock and asset sales, contract drafting, and business immigration. In 2011, Romy earned her Juris Doctor degree from the Florida International University College of Law. She is fluent in two languages (English and Spanish) and is the proud author of Starting a Business in the US as a Foreigner, an online entrepreneurial guide. Call 305-921-0976 or email [email protected] for a consultation.

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