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LLC Case Analysis

By: dmc-admin//December 6, 2006//

LLC Case Analysis

By: dmc-admin//December 6, 2006//

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The decision highlights a significant potential hazard in drafting dissolution provisions in the operating agreement for an LLC.

As noted, the original opinion was withdrawn. Save for a couple minor changes, the only difference in the original and the reissued opinions is the addition of paragraphs 15 and 16, which concern the difference between a sale of assets and the sale of interests, and the tax consequences.

Because of the dissolution provisions in this operating agreement, David will have at least two tax liabilities that can be avoided in similar cases in the future.

First, there is the Real Estate Transfer Fee. Assuming the properties are worth $5 million, that will result in a $15,000 tax liability. Had the operating agreement allowed for the transfer of one member’s interest to the other, without triggering dissolution, and the sale of the assets, this liability would not have been incurred.

Section 77.25(15s) exempts from the fee, in relevant part, transfers “Between a limited liability company and one or more of its members … if the transfer is for no consideration other than the assumption of debt or an interest in the limited liability company.”

The ultimate sale of assets from the LLC to David in this case will not satisfy this condition.

Second, there are the income tax consequences. We can only speculate how large those will be.

Related Article

LLC assets sold for oppressive behavior

The provisions here seem well-designed to prevent the problem. If one party offers to buy another out, he must make the offer high and fair enough that he is willing to accept the same amount from the offeree, if he can’t go through with the deal, for whatever reason. The provision prevents one party from low-balling another.

However, it fails to account for what happened here — extreme high-balling, with the intent to make buyout by either member impossible, and force dissolution of the LLC.

When clients want to form an LLC, it is unlikely that they will consider the facts in this case a possible scenario in their own case; they would hardly be going into business if they could foresee such a thing.

However, this case shows that it can happen, and operating agreements should be drafted so that the LLC can remain intact in cases such as this, despite oppressive behavior by one of the members.

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David Ziemer can be reached by email.

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