The Great Uncertainty: Rights of Minority Limited Liability Company Owners in New York


Since the passage of Limited Liability Company statutes in the early to mid 1990's, the number of small businesses choosing to operate as LLCs has increased exponentially. Among the reasons for the explosive growth in the use of these entities is the flexibility they offer, both with regard to tax planning, and planning business management structure. However, the flip side of this flexibility is that if individuals who chose to become members of an LLC fail to pay careful attention to those provisions of the Operating Agreement dealing with disputes among the members, then they may be in for some very unpleasant surprises should such a dispute arise.

The Limited Liability Company, however, is an entity of relatively recent vintage and consequently, case law is still developing leaving many areas unclear. For example, it was only in February of 2008 that the New York Court of Appeals decided that --even in the absence of statutory authorization-- members of Limited Liability Companies have the rights to bring derivative claims in the name of the entity.

The legal rights of minority members of an LLC are less well defined than minority rights in other types of business entities. For example, among the rights that minority owners of New York privately held corporations enjoy are the right to bring derivate lawsuits in the name of the corporation against directors and/or managers; the right to seek judicial dissolution of the corporation if they are wrongfully denied meaningful participation in the entity; and the right to participate along with other shareholders in business opportunities within the company's business that may arise in the future. The conditions triggering these rights as well as their enforcement have been developed by applicable case-law over a long period of time.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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