Frequently Asked Questions About NJ LLC Law
The list of questions generated by readers of this website are many. So, in response I created a page devoted to a small sampling of these questions together with a brief response. Should your question(s) not appear below, then call me to schedule a consultation. You’ll find me easy to talk to and very practical in my approach to LLC matters.
What Can I Do if a Co-Member Breaches Our Operating Agreement?
When a member wrongfully breaches the LLC membership agreement, his or her co- members may bring a lawsuit for damages for breach of contract. Similarly, a lawsuit may be brought by a wrongfully discharged or expelled member under the New Jersey Limited Liability Company.
If an LLC operating agreement has a fixed duration, an expulsion that occurs before the end of the term may be a breach of agreement unless it is done for good cause or is done in accordance with the terms of the LLC operating agreement.
Buying Out an Expelled LLC Member
When a member leaves the company because of expulsion and the business is to continue, the outgoing member must receive payment from the other members for his or her interest in the company, unless otherwise provided in the LLC membership agreement. The terms of payment should be agreed upon in advance.
As a Member of a New Jersey LLC, Can I Get My Investment Back?
A member is entitled to be repaid his or her investment, loans and contracts to the company after all other member liabilities are satisfied. Members generally agree to share profits and contribute to losses based upon each member’s contributions to the company as expressed in the LLC membership agreement. Absent express agreement, however, after capital contributions are repaid, members share profits equally and contribute toward the losses in the same proportion as each shares in the profits without regard to each person’s capital contributions. Again, absent contrary agreement, interest will not be paid to a partner for agreed upon capital contributions or advances to the LLC membership agreement. A member is entitled to receive interest on overdue repayments of capital contributions from the date repayment became due or on payments made in excess of the amount of the agreed upon contributions.
As a Member of a New Jersey LLC, Am I Personally Liable for the LLC’s Debts?
Members of NJ LLCs are not liable for the debts and obligations of their companies. This means that if the business is sued, your personal funds that are not invested in the business cannot be touched. Additionally, if another member of the LLC is sued in a non-business context, a judgment against them is not binding on your personal assets or the assets of the LLC.
What Actions Can a Member Take to Legally Bind a New Jersey LLC and the Other Members?
A member may not legally bind the company to something that he or she is not authorized to perform absent consent by the other members by agreement. On the other hand, a creditor who was unaware of the existence of the corporate entity when he or she extended credit to the company may recover economic loss from the member or his company.
As a Member of a New Jersey LLC, Am I Personally Liable for the Tortious Acts of Other Members?
When one forms an LLC with co-members, they are essentially allowing those co-members to act as agents for them within the scope of the business. Any acts committed outside the scope of the business by other members will not create liability on behalf of the business nor you personally. Additionally, unlike NJ partnership law, even if another member commits an unlawful within the scope of the business, you will not personally be held liable if you were not directly involved. NJ LLC law does not find members jointly and severally liable for a co-member’s actions. Only the co-member who committed the act and the LLC itself would be held liable, but you personally would not. One exception to this rule is if the member ratified or had direct knowledge of the tortious acts of the co-member, as NJ law finds this to be an exception to the immunity to personal liability.
A NJ LLC company is generally liable to third parties for the tortuous acts of its members. New Jersey permits recovery against the company and the offending member who is injured from a “wrongful act or omission of a member acting in the ordinary course of the business of the membership agreement or with the authority of his co- members.” A member is liable for damages caused to third parties to the same extent that the company would be for his or her own tortuous acts, negligence or actionable omissions.
As a Member, Do I Have the Right to Participate in All Votes?
Voting rights is one of the most important rights of an LLC member. As a member you have the right to hold special meetings and elect directors/managing members of the company. While there are many things that a member has the right to vote on, depending on what is written in the operating agreement, there may be some things that you do not such as day to day operations of the company. You would need to review the operating agreement, articles of formation, and/or bylaws for answers specific to your company.
What is Equity Financing?
Equity Financing is a way for the company to generate cash flow. It involves the LLC offering investors the option to purchase certificates in the company. This action then makes the investor a member of the LLC. The value of the certificate they own determines their interest in the company. There are 2 types of certificates; Common certificate, Preferred Certificate. Both have comparable meaning and purpose.
What is Minority Membership Oppression?
Minority Membership Oppression, as defined by NJ law, is action taken by a majority member(s) that frustrates the minority member’s reasonable expectation in the management, participation, or general affairs of the business.
Can a LLC Deem a Member’s Disassociation to be Wrongful?
Yes. The operating agreement may discuss if, how, and when a member can resign his/her interest in the company in order to receive back their capital investment. Surprisingly an agreement can be written to not allow a member to leave voluntarily. Doing so would result in a breach which can result in a lawsuit against the member who is trying to leave.
Can a LLC Continue to Operate After the Expulsion of a Member?
Whether or not an LLC can continue to operate after a member expulsion is determined by the membership agreement. Unless something is specifically stated in the agreement saying it cannot continue after an expulsion, then the LLC can continue to do business. NJ courts will generally honor whatever is written in the membership agreement.
What is a Provisional Director?
A Provisional Director can be appointed by a NJ Court to handle the company’s affairs if it is in the best interest of the company. This appointment can be made regardless of anything written within the bylaws, operating agreement, or any other governing documents. Once appointed the Provisional Director will have the same rights and authority as any elected director until the court removes them. Sometimes the members can vote on the removal of a provisional director, but even in those circumstances, the court must still approve it.
Can a Company Continue to Do Business During the Dissolution Process?
Yes. A company can continue to do business during the dissolution process. However, it cannot enter into any new business agreements during this time unless specified in the LLC membership agreement. Members also retain their authority to make decisions and act on behalf of the LLC and other members provided it is written in the membership agreement.
Fredrick P. Niemann Esq.
If you have any questions that you do not see answered above, or you have an LLC matter you would like to discuss, contact me personally. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns and protect your interests. You can reach me toll free at (855) 376-5291 or email me at fniemann@hnalwfirm.com
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey LLC Law Attorney