Legal Question in Business Law in California

Re: Remove Partner from LLC

By following the rules established in the company's by-laws, and in the CA Corporations Code and other regulations -- assuming the company by-laws were done correctly to start with.

Your statement of 'facts' indicates probable inappropriate actions,rules and definitions already in play, so get experienced counsel to deal with your desired actions and to clean up any potential mess, before you have serious legal and financial problems. Feel free to contact me if interested in doing so.

Re: Remove Partner from LLC

Do you have an Operating Agreement for the LLC? Does it say anything about buying-out a member?

Re: Remove Partner from LLC

First, and this isn't terribly important, but understanding it will help your future communications with lawyers, etc., LLCs don't have partners, they have members (and managers, who may also be members); and 99.9% of the time, LLCs don't have stock or stock certificates. I hasten to add that as far as I know, there is no legal reason why an LLC couldn't issue securities labeled "stock," but this would be very rare and in your case it's probably incorrect terminology.

The short answer to your question is that the relationships between members of LLCs are largely a matter of private contract. The LLC law assumes that people who get together to co-invest in an LLC will provide, by private contract, for methods for removing members or managers. Other than by means for removal set forth in the LLC's Operating Agreement or other contracts between the members, removal cannot be done at the whim of the majority. Membership in an LLC is not like membership in a club, and one cannot be expelled by majority vote, any more than General Motors can "kick out" one of its stockholders.

Note that Corporations Code section 17152(b) provides for removal of managers by vote of a majority in interest of the members, with or without cause, but subject to liability for damages if the manager was under contract.

As stated above, however, members cannot be removed in the same manner.

Many well-drafted LLC operating agreements provide that a member may be reduced in percentage ownership or removed as a member if he or she fails to do certain things, e.g., make capital contributions.

Issuance or non-issuance of pieces of paper like stock certificates or certificates of membership interest or whatever is unlikely to be of legal importance; if the 10% guy paid in his capital contribution or did whatever he was supposed to do to become a member, your or the LLCs failure to issue his paper is your fault, not his, and no court would expect him to bear the consequences.

In general, my advice would be to go back to the lawyer that drew up your operating agreement or other inter-member contracts and ask whether there is a basis in those agreements upon which the member can be stripped of membership. You did use a lawyer, of course?

Failing a legal (contractual) basis to throw out this member, which would probably require the LLC to return his/her capital contribution, you can (1) offer to buy him/her out, or (2) kick him/her out of management per Corps.Code 17152(b) and just bear with having this person as a minority member with no management role.