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Part 4 Hotel California: An LLC Operating Agreement Gone Wrong

What is an LLC Operating Agreement
By Tricia Dunlap Esq.
~2 minute read

Part 4 – LLC Education Series 

Hotel California: You Can Checkout but You Can Never Leave

Relatively early in my legal career, a new client arrived with a terrible dilemma.  About a decade earlier, he and his buddy decided to invest in real estate. His buddy contributed more money, so my client was the minority member of the LLCs – an especially dangerous position to be in. They formed several LLCsdownloaded boilerplate LLC articles of organization and operating agreements  from the internet, and bought houses.  They flipped a few and made some money.  They held a few as long-term rentals.  All was well until my client decided to punch out and retire in Mexico. 

Three years into retirement and about 10 years into the LLC ventures, my client wanted out.  But there was a problem.  His partner in the LLCs didn’t want to let him go and he had no right to leave. 

This post is # 4 in our LLC Education Series: 

  1. What Exactly IS a LLC, Anyway? 
  2. Operating Agreements – Essential to Your Success 
  3. The Perilous Position of Minority Members
  4. Hotel California:  You Can Checkout, But You Can Never Leave  
  5. Fiduciary Duties: The Responsibilities You Never Knew You Had

You’re probably thinking, “You’ve got to be kidding me.  In this day and age, we can end a marriage for no fault, but I can’t get out of an LLC? 

Yep, it’s true. 

Unless…

Unless you had a good lawyer at the start

A lawyer who knows that Virginia’s Limited Liability Company Act does not allow LLC members to resign their membership unless the LLC’s Articles of Organization or Operating Agreement permit it.   

The problem arises from two sources: 

1. Almost everyone who forms an LLC does so by using the online form LLC Articles of Organization available at the State Corporation Commission website.  The form Articles are fine, except all they do is set forth the bare minimum information required by law to form an LLC.  They do not include a clause that permits LLC members to resign.  So, if you are like almost everyone and used the SCC online form, then your Articles will not allow members to resign. 

2. Many people pay “save money” by purchasing an operating agreement from an online provider such as LegalZoom.  Unfortunately, these OAs merely parrot the terms in the Act.  They are not tailored to your needs.  They almost never include a right to resign.  This is penny wise and pound foolish. 

That’s what my client had done a decade earlier.  The LLC Articles of Organization nor their Operating Agreements permitted him to resign his membership.  His LLC partner refused to let him go and refused to amend the OA.  I was powerless to help unless he wanted to sue and ask a court to dissolve the LLCs.  Now he’s living in Mexico and trying desperately to keep tabs on what’s happening with houses in Virginia.  Not exactly the carefree retirement he envisioned. 

Weird, I know.  You can end a marriage but you cannot leave an LLC unless you negotiated this right ahead of time and it is in the formation documents. Not only should you make sure your LLC Articles of Organization or OA include this right but you should hire us to help you get favorable terms for your future exit.  The devil is in the details. 

Next up,  LLC Blog Series #5: Fiduciary Duties: The Responsibilities You Never Knew You Had

Contact Dunlap Law

No one should become an LLC member without legal counsel, careful thought, and skillful negotiation of the membership terms.  At Dunlap Law, we have extensive experience helping clients navigate these decisions.  Give us a call and we’ll help you too.   

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