A member-manager giving up their manager role to not breach fiduciary duties in an LLC?
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?
Additional information
Robin--Thank you for responding. I know my partner cannot repeat this business, but I can. Thus our valuations of it are extremely different. If he won't take my offer, I would rather dissolve it and start over. We have no buy-sell agreement, its skimpy boilerplate legalzoom stuff.
Dana--Thank you for responding. As noted above, our op. agreement is a tiny legalzoom thing, so why wouldn't I be able to resign as manager? If he wants to dissolve instead, great for me. If not, I start a strong competitor and still take 50% of profits. I have no insider info, its just websurfers coming to a website based upon ads I buy. Wouldn't that be a worthy risk to take if he woudln't take my offer or voluntarily dissolve?
Attorney answers (3)
Robin Mashal
Reputation Level 16
Answered almost 2 years ago.
Litigation Lawyer in Los Angeles, CA.
Disclaimer: The materials provided below are informational and should not be relied upon as legal advice.
I do not believe resigning as a manager will eliminate your fiduciary duties. You say each of you holds 50% of the membership interest, and if there are no other accounting issues between you, then your interests should be of equal value. Do you have a buy-sell agreement of sorts between you and the co-member? If you and your co-member can no longer get along, you should try to negotiate a price where either one of you would be willing to buy the other party's interst or sell your interest to the other side and walk away. If you cannot do this, you may need to explore dissolving the company. You should consult your own attorney to protect your legal rights.
Dana Howard Shultz
Reputation Level 15
Answered almost 2 years ago.
Limited Liability Company (LLC) Lawyer in Oakland, CA.
According to CEB's Selecting and Forming Business Entities, 2d ed., Section 11.19:
- As a member-manager, you have a fiduciary obligation to the LLC and the other member that, among other things, precludes having an adverse interest (which is what the competing store would be).
- Assuming that you can resign as manager while retaining your membership (one would need to look at the Articles of Organization and the Operating Agreement to determine whether and how this is possible), CA law would not impose a fiduciary duty on you, but courts have held in analogous situations (limited partners in partnerships) that a fiduciary obligation can exist under certain circumstances (such as access to confidential information).
In summary, I see no way you can compete with the LLC with complete safety. If you cannot agree upon a buyout amount, dissolution might be the best way to proceed - please see the post at the link below.
Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.
Dana Howard Shultz
Reputation Level 15
Answered almost 2 years ago.
Limited Liability Company (LLC) Lawyer in Oakland, CA.
1. With respect to the follow-up question, "[W]hy wouldn't I be able to resign as manager?":
My concern is that the Articles of Organization (apparently) state that the LLC is managed by all of the members. While I know of no statutory or case authority on this point, it may be that the only way for you to resign properly would be to amend the Articles to specify that the LLC is managed by one manager (the other member).
2. With respect to the follow-up question, "Wouldn't that be a worthy risk to take if he woudln't take my offer or voluntarily dissolve?":
That question cannot be answered here - it is one that you need to discuss in detail with your lawyer, and ultimately you, rather than your lawyer, will need to make the decision based on a risk / reward analysis.
3. Please pardon my criticizing use of an online service to form an LLC, but as stated in the post at the link below, I believe that approach, at best, makes sense only for a single-member LLC because the Operating Agreement often can be ignored. Your situation is a perfect example of why, in a multi-member LLC, the services of a qualified lawyer should be used
Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.
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