Asked And Answered: The key document to a LLC is the operating agreement. Make sure your attorney writes that document and that all members agree to it. Read on to see how sticky things get when you are running in the blind.
Question: What to do about a member of an LLC making unauthorized distributions to themselves?
Facts: I made a cash capital contribution to become a 20% member of an LLC where the other members each own 40%. One of the members immediately wrote herself a check for several thousands of dollars from this contribution claiming it was salary for her hours worked in getting the business off the ground. What can me and the other partner do about this? We did not discover this until after the fact. She also took cash withdrawals from the bank for over $1k. Can we dissolve her from the LLC? Are her actions illegal?
Answer: The first place you need to look is in a document called the "Operating Agreement". Most LLCs are created with such an agreement that specifies how the business is to be operated. Moreover this agreement will take precedence over the "default" laws provided by your state. For example, your state likely has a default law that distributions are proportioned the same as each member's percentage of shares to the LLC. Your operating agreement could change that to some other percentage and override the default state law. A common term in this agreement is when and how distributions are to be made. Whatever is written into your operating agreement regarding distributions is what you will have to follow. If such an agreement does not exist or does not contain any terms related to distributions then you will have to look to the corporate laws of your state to find your state's default law. Here in California the default law holds that an LLC may only make a distribution from its profits, you cannot put creditors at risk by making a distribution, and that all members are entitled to the distribution.
From the facts you presented the member in question acts would not be in accordance with the laws of California as it was a distribution made only to one member without the agreement of the other members. You could sue for a court order to require her to return the money. As far as removing her from the LLC again look to your operating agreement as it should specify how members are removed, otherwise look to your state’s codes on this subject.
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