I am the sole owner of a LLC and under my operating agreement I have a preferred member. He is the investor in my business and has invested approximately $16,000.00 to date. The problem is that he owns the same kind of business I am starting and given the new regulations under the WBENC I will not qualify. I have offered him a promissory note for the investment so I can remove him from my operating agreement however he will not accept the offer. What are my options to remove him from my operating agreement?
-- Stale mate
A.
If there is a "preferred member," it sounds like you are not the sole owner of the LLC. His rights would be governed by the terms and conditions of the Operating Agreement or, if it is silent on the issues at hand, then by statutes in your state that govern LLC's. Unless the Operating Agreement provides you with the unilateral right to buy out the preferred member, you may not be able to force a buy out of his interests short of his agreeing to it or, as a more drastic remedy, taking action to liquidate and dissolve the LLC so that you could start all over. Even a voluntary dissolution may be difficult if the Operating Agreement provides that it must be approved by each class of members. This may force you to go to court on an involuntary dissolution. Short of doing this, you might set up another LLC or sell the business to yourself, but then the investor may claim that you are self-dealing and therefore liable for any loses he may incur as a result.
The moral of the story is that it can be easy to bring in investors but hard to get them out, especially when they have leverage over you as appears to be the case in this situation. It seems that it would have been better in hindsight to borrow the money you needed rather than take on the investor.
