In many ways, forming a business with another person as a limited liability company (LLC) is a lot like getting married. Partners commit to one another and the state recognizes that commitment as creating a separate and distinct relationship under the law. State legislatures and judiciaries have created statutory and common law to govern LLCs and marriages. But what the law tries and often fails to address is that LLCs and marriages carry with them certain unstated and uncertain expectations that the parties, with or without realization, enter into without adequately addressing beforehand.
As lawyers, we want parties to put their agreements in writing. In marriages, prenuptial agreements are commonly used to document expectations regarding the marriage and what specifically will happen if the parties decide to divorce.
With LLCs, the same potential exists to properly document the parties’ expectations prior to or at the time of entering into the relationship. The LLC corollary to the prenup is the Operating Agreement. And similar to prenups, it is important in the Operating Agreement to address what happens if the relationship sours.
Under Idaho’s LLC Act, just because a relationship sours doesn’t mean the business ceases to exist and winds up. The members essentially have three choices under the Act: (1) continue the business despite the troubled status of the company; (2) one or more partners could opt to leave or “dissociate” from the LLC; or (3) one or more partners can petition the court for judicial dissolution. However, none of these options may be palatable for a range of reasons. Continuing to operate the business despite dysfunctional relationships among the partners is clearly sub-optimal. Why should a partner continue to contribute to the business while the other partner sits on a beach somewhere and still collects half of the profits? Let’s say that one partner is willing to leave, what should the partnership pay him for his interest in the LLC? It’s not fair to expect a partner to walk away from his economic interest in the partnership. Finally, the grounds for judicial dissolution under the statute are far from clear. The statute provides that a partner can petition the court to dissolve the LLC on the grounds that “it is not reasonably practicable to carry on the company in conformity with the operating agreement.” Idaho Code Section 30-6-701(d)(ii). Such “reasonableness” standard has yet to be delineated by the courts.
These are the types of “end of relationship” circumstances that must be considered and addressed in your LLC’s Operating Agreement. It is not sufficient to rely on the existing law to adequately address these circumstances, and so people should be encouraged to discuss their desires, understandings, and properly document their agreement. Perhaps the LLC, or the marriage, will continue to be a happy one that lives up to all the parties’ expectations, but it is prudent to consider beforehand how to end your business marriage if the time comes. For more information or questions about LLCs, please contact a member of our Business Group or call 208.344.6000.