Members

How Do I Prove I am a Member of a California LLC?

Question:  Last year my friend and I formed a California limited liability company by filing Articles of Organization with the California Secretary of State.  He opened a bank account on which he is the sole signer.  Although both of us have been providing services on behalf of the LLC my “friend” now says that he owns 100% of the LLC.  How do I prove I own 50% of the LLC?

Answer:  Unfortunately your problem is one we hear about a lot.  It is a problem that can easily be avoided if all the members of a newly formed LLC would sign an Operating Agreement immediately after forming the LLC.  One of primary reasons to sign an Operating Agreement is because it identifies all the members and states the percentage of the LLC owned by each member.  The lack of a good Operating Agreement leads to member disputes and conflict.

The Articles of Organization of a California limited liability company does not contain the names of the members (owners) of the LLC so it is not helpful.  However, California law requires that the members of a newly formed California LLC file a Statement of Information with the California Secretary of State within 90 days of the date the LLC was formed.  If you or your friend filed this document it would be evidence that you are a member of the LLC.  Read “California LLC Statement of Information.”

If your LLC filed a partnership tax return or an S corporation tax return the names and percentage ownership of the LLC should be set forth in the tax return.  If you friend filed the tax return and didn’t give you a copy of the return your friend may not give you a copy of it now.

If you can’t resolve the situation your only recourse may be to file a lawsuit and ask the court to find that you are a member of the LLC.

By | 2016-07-03T16:52:53+00:00 April 3rd, 2016|Categories: CA LLC Formation, FAQs, How Do I, Member Disputes, Members|0 Comments

Problem if Sole Member is Not the Organizer of a CA LLC

Question:  I am to be the sole member of a new California limited liability company, but I did not sign the Articles of Organization as the organizer of the LLC.  Is that a problem?

Answer:  Maybe!  California Corporations Code Section Section 17704.01(a) states:

If a limited liability company is to have only one member upon formation, the person becomes a member as agreed by that person and the organizer of the limited liability company.

If the organizer of a single member LLC is the sole member then everything is good.  However, if the would be sole member of a single member California LLC (the “Prospective Member”) is not the organizer who signed the Articles of Organization filed with the California Secretary of State then:

  • The Prospective Member will never be a member of the LLC unless and until the Prospective Member and the organizer agree that the Prospective Member is the sole member.  The agreement should include the date the Prospective Member becomes a member and any conditions required by the organizer.
  • How does the sole member prove that the organizer agreed that he/she/it could be the member?
  • A prudent Prospective Member will obtain a written statement signed by the organizer that states that the Prospective Member is the sole member of the LLC as of a specified date.  Recommendation:  The Prospective Member must get a written statement from the organizer.  If the Prospective Member does not obtain a written statement from the organizer, how can the Prospective Member prove he/she/it is the sole member if challenged in court?

Warning to Entities and Trusts:  When a California LLC is to be owned by a sole member that is an LLC, corporation, partnership or trust most of the time the organizer is a person rather than the sole member.  To avoid the California Corporations Code Section Section 17704.01(a) problem the sole member should be the organizer that signs the Articles of Organization.  The California Secretary of State says:

  • If Form LLC-1 is signed by an entity, the person who signs on behalf of the entity should note their name and position/title and the entity name. Example: If a limited liability company (“Smith LLC”) is the organizer, the signature of the person signing on behalf of the Smith LLC should be reflected as Joe Smith, Manager of Smith LLC, Organizer.
  • If Form LLC-1 is signed by a trust, the trustee should sign as follows: ___________, trustee for ___________ trust (including the date of the trust, if applicable). Example: Mary Todd, trustee of the Lincoln Family Trust (U/T 5-1-94).

Practice Pointer:  If the organizer is not the Prospective Member the best way to solve this problem is to: (i) have a statement at the end of the LLC’s Operating Agreement that says the organizer authorizes the Prospective Member to be the sole member of the LLC as of the date the Articles of Organization were filed with the California Secretary of State, and (ii) have the organizer sign the Operating Agreement immediately under the statement.  This is something we do routinely when we know that the sole member was not the organizer.

By | 2016-12-13T21:20:06+00:00 August 2nd, 2015|Categories: CA LLC Formation, FAQs, Members|0 Comments

Missouri Court Holds Minority Member can Pierce LLC’s Veil

Recently, in Hibbs v. Berger, the Missouri Court of Appeals ruled that a 5% minority member can pierce the veil of the LLC.  This case shows how extensive the court’s power is in determining these types of cases.  All LLCs should be knowledgeable about veil piercing, and also what can be one to prevent it.

In Hibbs v. Berger, the plaintiff (Hibbs) was an ex-employee of Tavern Creek, an LLC.  The plaintiff had no voting or management rights in this LLC, which were split on a 50-50 basis between Tavern Creek and Wood Nuts, another LLC.  Tavern Creek and Wood Nuts appointed Taylor and Berger, respectively, as co-managers of Tavern Creek.  Though Hibbs had no voting rights or management rights, he did acquire 5% of economic interests when his employment agreement was revised (once Wood Nuts became 50% owner).

Soon after the new employment agreement in 2007, Tavern Creek experienced financial troubles.  Wood Nuts would assist Tavern Creek during these times by loaning Tavern Creek money.  Despite this, Tavern Creek was unable to recover, and defaulted on these loans.  Wood Nuts exercised its rights under the agreement of these loans, and  obtained all collateral as satisfaction in 2009.  During this time, Hibbs was working for Tavern Nuts.  He was not fully paid for his commission earned in 2007, and never paid for the commission in 2008.  In late August of 2008, Hibbs was terminated and then re-hired as an employee-at-will.  Hibbs then left Tavern Creek two months later.

In January 2010, Hibbs filed a claim against Berger and Taylor, in an attempt to pierce the corporate veil.  The defendants motioned for summary judgment, which was granted, but Hibbs appealed.  The Missouri Court of Appeals began by acknowledging that members of an LLC usually are not responsible for debts of the LLC.  Then, however, the court acknowledged a three-prong test that determines if the court will piece the business entity’s veil.  The parts of this test include:

“(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal

(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.”

After establishing the rule for veil piercing, the Missouri Court of Appeals specifically discussed if an LLC’s minority member can pierce the entity’s veil.  The court mentioned that this was a case of first impression, meaning that the Court of Appeals has not dealt with this type of case.  Because of this, the court looked to a case in which the District of Columbia Court of Appeals held that a minority shareholder is not prohibited from piercing the veil of the business entity.  The Missouri Court also stated that precluding a minority member from piercing the corporate veil would be unfair to those members.  For these reasons, the Missouri Court of Appeals held that the minority member of an LLC can pierce the entity’s veil, if the plaintiff meets the requirements set by the three-prong test.

Although it was eventually determined that this plaintiff did not meet the requirements to overcome summary judgment, the case provides an important lesson.  LLCs and other business entities should not assume that a member is unable to pierce their entity’s veil.  These managers must know the veil-piercing standard of their formation state, and take steps to ensure that a disgruntled member cannot hold the majority member(s) personally liable.

 

 

By | 2016-12-13T21:20:14+00:00 February 25th, 2015|Categories: Lawsuits, Members, Operating LLCs, Veil Piercing|0 Comments