LLC Members Need To Be Careful About The Language They Put Into Their Operating Agreement.
When you form a limited liability company (“LLC”), one of the more essential parts is drafting the operating agreement. Even more important when there is more than one member. An operating agreement is the legal document that outlines the members’ rights, responsibilities, obligations, and the LLC’s internal operating procedures and decision-making processes.
Issues arise when there is no operating agreement or if the members do not choose the agreement’s language carefully. As an example, TFC SRS Member LLC v. Shawmut LLC (Suffolk Superior Court 2284CV02114-BLS2) was a lawsuit that involved an LLC with two members, TFC SRS Member LLC (“TFC”) and Shawmut LLC (“Shawmut LLC”), who formed a company called ShawmutRS LLC (“SRS”).
However, the business failed, leading to a legal dispute between the parties. TFC filed claims against Shawmut for breach of its fiduciary duty. TFC alleged that Shawmut tried to compete against the LLC. The Court eventually dismissed the claims for breach of fiduciary duty because of the operating agreement’s language. The Agreement explicitly stated that no fiduciary duty existed between the members.
It is questionable why the members would put that language into an operating agreement. Still, because the language was there, the Court found no fiduciary duty owed to any member (i.e., any member could go outside the LLC and act against it). The Court had no choice but to dismiss those claims because the members freely agreed to it.
If you are creating an LLC with others, you must speak with an attorney and draft a good operating agreement that protects the LLC and its members’ interests. I can help you with this and ensure we create an operating agreement that works for everyone and protects all the members’ interests.