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Dissociating from a Multi-Member Limited Liability Company under Florida’s Revised Limited Liability Act

July 5, 2017

DISCLAIMER — This is not an advertisement. THIS IS NOT LEGAL ADVICE. Nothing contained herein shall be deemed or construed to create an attorney-client relationship. You should seek independent counsel to advise you regarding your specific situation, and IN NO EVENT ARE YOU TO RELY ON ANYTHING CONTAINED HEREIN FOR ANY PURPOSE.

Dissociating from a Multi-Member Limited Liability Company under Florida’s Revised Limited Liability Act

Florida’s Revised Limited Liability Act (the “Act”), codified in Florida Statutes Chapter 605, became effective on January 1, 2014. It applies to all limited liability companies formed or registered to do business in Florida after January 1, 2014. Pre-existing LLCs in Florida continued to be subject to the prior law, which was codified in Chapter 608 of the Florida Statutes, until January 1, 2015. As of January 1, 2015, Chapter 608 has been repealed and superseded by the new Act, which now applies to all LLCs organized and existing under the laws of the State of Florida.

While there are numerous changes to the law implemented by Chapter 605 that represent a departure from the prior law governing LLCs in Florida of which practitioners and others should be aware, this article does not address all of these changes. Rather, this article focuses on the specific changes made by the new Act with respect to a member’s dissociation or withdrawal from a multi-member LLC and the attendant consequences of such dissociation or withdrawal.

Under prior law, a member was permitted to withdraw or dissociate from an LLC only upon certain specified conditions, including the LLC’s dissolution and winding up of its affairs or the occurrence of an event expressly set forth in the LLC’s operating agreement and/or articles of organization. Under the new Act, there are now various ways in which a member may dissociate, or be dissociated, depending on whether the member is an individual or an entity. The events which cause dissociation of a person as a member are enumerated by Section 605.0602 and include, but are not limited to, the following: (1) an event stated in the operating agreement as causing the person’s dissociation occurs; (2) the person’s entire interest is transferred in a foreclosure sale; (3) the company participates in a merger or in an interest exchange, and the person ceases to be a member; and (4) the company dissolves and completes winding up.

Perhaps the two most noteworthy changes in the new LLC Act with respect to a member’s dissociation are that a member is now permitted to voluntarily dissociate by express will at any time and that a member may be involuntarily dissociated by expulsion. First, under Florida Statutes Section 605.0601(1), a “person has the power to dissociate as a member at any time, rightfully or wrongfully, by withdrawing as a member by express will under s. 605.0602(1).” See also Fla. Stat. § 605.0602(1) (providing that a person is dissociated as a member if the “company has notice of the person’s express will to withdraw as a member, but if the person specified a withdrawal date later than the date the company had notice, on that later date”).

While, under the new Act, the LLC’s operating agreement cannot vary a member’s power to dissociate, Section 605.0601 provides that when a member’s dissociation from an LLC is wrongful, the wrongfully dissociated member incurs liability to the LLC and its remaining members for any damage caused by such wrongful dissociation. See Fla. Stat. § 605.0601(3) (“The liability is in addition to each debt, obligation, or other liability of the member to the company or the other members.”). Any dissociation by a member in breach of the LLC’s operating agreement is deemed to be wrongful under the new Act. The new Act expressly recognizes that an LLC’s articles of organization and/or operating agreement may prohibit a member from assigning the member’s interest in the company prior to the dissolution and winding up of the company’s affairs, such that a withdrawal or dissociation effectuated by an assignment in violation of such a restriction would be deemed wrongful. See Fla. Stat. § 605.0601(4). In addition to being wrongful if in breach of the Operating Agreement, a member’s dissociation is wrongful under the new Act where the dissociation occurs before the LLC is wound up and the dissociation is effectuated by express will, by judicial order, in bankruptcy (in the case of a member-managed LLC), or by dissolution of a member that is an entity other than an estate or non-business trust. See Fla. Stat. § 605.0601(2).

The other noteworthy provision relating to dissociation contained in the new Act relates to the involuntary dissociation of a member by expulsion. Section 605.0602 provides that a person is dissociated as a member if the person is expelled as a member. Expulsion of a member may occur pursuant to express terms of the LLC’s operating agreement, which can prescribe a method by which a member may be expelled. When a member is expelled pursuant to a provision(s) in the operating agreement, the member is dissociated upon expulsion.

In the event the operating agreement is silent as to a method for expulsion, the members may unanimously consent to expel a member. However, expulsion by unanimous consent under Section 605.0602(2)(5) is only available in certain enumerated situations, including if the LLC cannot lawfully carry on its business activities and affairs with the expelled member; the expelled member has transferred its entire transferable interest in the LLC, other than a transfer for security purposes or a charging order in effect under Section 605.0503 which has not been foreclosed; or the expelled member is a corporation or other entity that is dissolved. Notably, under prior law, a member’s transfer of the member’s entire interest in the LLC automatically resulted in the automatic termination of the transferor’s status as a member. Under the new Act, however, this automatic termination does not occur unless the transferor’s expulsion is unanimously consented to by the other members. Therefore, it may be advisable for an operating agreement to provide for the automatic dissociation of a member upon the member’s transfer of its entire interest in the LLC to avoid the need for approval by all of the other members.

A member may also be expelled by judicial order on application by the company or a member in a direct action under Section 607.0801 where a person: has engaged or is engaging in wrongful conduct that has affected adversely and materially, or will affect adversely and materially, the LLC’s activities and affairs; has committed willfully or persistently, or is committing willfully or persistently, a material breach of the company’s operating agreement or a duty or obligation under Section 605.04091; or has engaged or is engaging in conduct relating to the company’s activities and affairs which make it not reasonably practicable to carry on the activities and affairs of the company with the person as a member. See Fla. Stat. § 605.0602(4)-(6).

The new Act specifically sets forth the rights, obligations, and legal status of members who have voluntarily dissociated, or have been involuntarily dissociated, from the company. Under Florida Statutes Section 605.0603, if a person is dissociated as a member, the person’s right to participate in the management and conduct of the company’s activities and affairs terminates, but the dissociated member’s right to receive a distribution is not prohibited. A dissociated member holds its transferable interest as a “transferee” only. See Fla. Stat. § 605.0502 (providing that, subject to Section 605.0503, a transfer, in whole or in part, of a transferable interest does not entitle the transferee to participate in the management or conduct of the company’s activities and affairs but does provide the transferee the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled). In addition, a member’s dissociation does not discharge any debt that the dissociated member owes to the LLC or any of its members.

In sum, the changes implemented by Florida’s new LLC Act with respect to the dissociation, withdrawal, and expulsion of LLC members (in addition to other changes implemented by the new Act that are not discussed herein) are significant. You should consult with independent counsel of your choosing regarding your specific situation and are not to rely on anything contained herein for any purpose.