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The Rights And Obligations Of Members In A Limited Liability Company

When establishing a startup, you may have thought about choosing the proper organizational structure for your organization. A business structure can be crucial in the growth and success of a company since it helps maintain order by streamlining managerial authority.

That being said, it’s essential to know how you intend to form your startup company. This is where the concept of a limited liability company (LLC) comes into play. It’s a type of business structure that protects owners or members from personal liability. In other words, they’ll not be personally liable for the debts and liabilities of the company.

But apart from protection against personal liability, an LLC company provides guaranteed rights and obligations to all organization members. A member of an LLC is a company owner holding a membership interest. However, it’s essential to note that members don’t own the property of a limited liability company.

To better understand how an LLC works, keep reading to learn about the rights and members of this legal structure.

Fiduciary Obligations

Typically, the members exercise fiduciary duties to the LLC. They have the responsibility of loyalty by acting in the organization’s best interests to avoid any conflicts. Likewise, the members also have a duty of care towards other members by performing their obligations with good faith and diligence. These can include: 

  • Attending meetings to make some business decisions; 
  • Not concealing or misrepresenting material facts to the creditors, vendors, and other third parties.

On the other hand, when a member in an LLC violates any fiduciary duties, they may be held liable to the company and other members. When a member breaches a provision in an operating agreement, they may also be held accountable for what happened. A typical example is withdrawing money without complying with the procedures outlined in the agreement.

However, suppose you’re forming an LLC in Alabama or wherever you may be, and you want to educate yourself more about the members’ fiduciary obligations. In that case, you may check some reliable websites for valuable information and guides.

Financial Rights

Your LLC gives its members certain financial rights by virtue of getting an interest in the organization. These rights can include:

  • Members are entitled to a share in the allocations of the organization’s profit and losses.  
  • Members are also entitled to a share in the distributions of the company assets throughout its existence, dissolution, and liquidation.

However, it’s important to note that LLC members’ financial rights aren’t equal at all times. The allocations and distributions of the assets are usually governed by the operating agreement entered into by the members and the organization. In the absence of a provision in the agreement, you can check your state laws on how the economic rights are performed under an LLC.

Inspection Rights

LLC members have the right and obligation to inspect some books and records kept by the organization. These documents can include the operating agreement, financial statements for the last four years, income tax returns, shares of profits and losses of each member, and many more.

Generally, the right to inspect the books and records is necessary to ascertain whether the owners and officers manage the company’s affairs appropriately. However, like the financial rights, the right to inspect isn’t absolute to all members. The LLC can either expand or restrict it depending on the agreement.

Tax Obligations

Since LLC’s tax treatment is like a partnership, the members need to report all their income, expenses, and losses on their individual tax returns. This process is called pass-through taxation, wherein the company passes through the business income to the LLC members. 

In such a case, each organization member has an obligation to make quarterly tax payments to the Internal Revenue Service (IRS).

Voting Rights  

Like the shareholders of a corporation, LLC members also have the right to vote on the decisions that can affect the company. However, the extent of their voting rights depends on whether the members or the managers manage the organization.  

For example, in a member-managed LLC, the members may exercise their voting rights on all matters that can significantly impact the business. In a manager-managed organization, the members’ right to vote is limited to some extent. They can only vote on specific changes, including the election and removal of managers, operating agreement amendment, merger, dissolution, and many more.

Right To Institute A Derivative Suit

LLC members can also exercise their right to commence a derivative suit. It’s a legal action initiated by a member on behalf of the organization. By filing a legal action, the members can safeguard the company from the unlawful acts committed against it.

On the other hand, it’s crucial to note that even if a member files the suit, the damages awarded by the court will go to the limited liability company. That’s because the action belongs to the organization.

Bottom Line

Establishing a limited liability company can be complicated, primarily if you don’t know where and how to start. Hence, to help you get started with the process, keep the information mentioned above to familiarize the rights and obligations of the members. By doing so, you can protect your organization and members’ interests while growing your business.

About Author:

Jenner Mitchell is a professional company formation adviser who is familiar with the different company formations, filing requirements, tax differences, business entities, and many more. She shares all her knowledge about these things by writing articles or blog posts online. During her free time, she loves hanging out with family and friends by going for a road trip.

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by Jenner Mitchell

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