The first, and in my opinion, best option is for you to formally withdraw from the LLC. If you do not have a written operating agreement explicitly preventing you from doing this, the law allows you to voluntarily withdraw from the LLC provided you give written notice to your co-member, which we will do through a letter to him or her or their attorney. You also need to resign as the registered agent of the LLC through the Secretary of State website. The law states that once you are disassociated from the LLC as a member, your fiduciary duties to the LLC end as of that date. This approach may allow you to start a new business without having to worry about any ties to LLC. This advice is subject to any prohibition in a signed written operating agreement.
A second option is to go to Superior Court and ask the court to either compel the co-member to disassociate from the LLC or to dissolve the LLC. N.J.S.A. §42:2C-46 allows a court to expel a member from the LLC if the member “has engaged, or is engaging, in conduct relating to the company’s activities which makes it ‘not reasonably practicable to carry on the activities with the person as a member’.” If there is such a finding under this statute, a court can order a partner to sell the company and his/her shares, and can award costs and fees to bring the application. In a similar manner, N.J.S.A. §42:2C-48 allows a court to dissolve an LLC when “it is not reasonably practicable to carry on the company’s activities in conformity with one or both of the certificate of formation and the operating agreement.” The court has more flexibility to remedy this situation under this statute, including appointing a custodian to wind up the business or entering an order of forced sale from one member to another. Moreover, if the court finds that a party acted “vexatiously, or otherwise not in good faith” it can award counsel fees and expenses to the other party.
I foresee two issues with this approach. The first issue is proving whether it is reasonably practicable to either dissolve the LLC or expel the co-member. The New Jersey Supreme Court recently heightened the level of evidence necessary to show this relief is appropriate. It specifically forbade lower courts from using this remedy when there is mere deadlock amongst the members. Not only are courts asked to look at the conduct of the member and whether the dispute precludes the members from working together, but also they now look at the financial situation of the LLC to determine whether the LLC is functioning profitably. In spite of a partner’s behavior a court may be unwilling under the law to find that either the LLC should be dissolved or the co-member expelled.
Moreover, the dissolution LLC statute allows a member to dissolve an LLC “on the grounds that the managers or those members in control of the company…have acted or are acting in a manner that is oppressive and will be directly harmful to the applicant.” An oppression analysis looks at the relationship between the majority and minority members and determines whether the minority’s expectations in running the business are frustrated by the majority. Something like refusing to distribute monthly profits, in the form of a check with tax deductions, to the partners is a potential unilateral attempt at unfair and impermissible leverage. While such a claim may be baseless, if you are acting in the best interests of the company by not making this distribution, a co-member through counsel may still set up this claim should litigation be brought.
To discuss your NJ LLC business matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ LLC Law Attorney