Question

Case Problem Analysis: Limited Liability Companies

Ten individuals through an operating agreement form Cotillard, LLC, a limited liability company, in a state that has adopted the Uniform Limited Liability Company Act (ULLCA). The purpose of the LLC is to develop and sell new computer hardware systems. Each individual invested $1,000 and received 10% ownership of the LLC. Five years later, Cotillard became a successful company with a fair value of $10 million.
Ashwini Abara, a member of the limited liability company, decided to withdraw from the partnership to start up a sustainable waste disposal business. The other members of Cotillard offer to return her initial investment of $1,000. Abara disagrees and wants compensation equivalent to the fair value of her interest in the limited liability company. The other members of Cotillard also claim that Abara’s withdrawal was wrongful and that she violated her duty of loyalty to the company by starting her new business. The operating agreement is silent on how funds are distributed when a partner withdraws. The operating agreement is also silent on what a partner can or cannot do after withdrawing from the LLC.
ASSESSMENT QUESTIONS:
Abara and nine others are (PARTNERS, MEMBERS, or SHAREHOLDERS) of Cotillard, LLC. Generally, members’ liability in the company would be limited to their respective (OWNERSHIP INTERESTS IN THE COMPANY, INVESTMENTS IN THE COMPANY, or PERSONAL ASSETS).
Members of a limited liability company (DO NOT, or DO) have the right to withdraw from the entity. Withdrawal from a limited liability company is also known as (DISSOLUTION, or DISSOCIATION). When a member dissociates from an LLC, he or she (MAINTAINS, or LOSES) the right to participate in management decisions. Generally, a dissociated member (DOES NOT, or DOES) possess the right to have his or her interest in the LLC bought out by the other members.
Cotillard’s operating agreement (DOES, or DOES NOT) contain provisions establishing a buyout price. In states that (HAVE, or HAVE NOT) adopted the ULLCA, the LLC must purchase the interest at fair value within (60, 90, 30, or 120) days after the dissociation. Therefore, Abara is entitled to receive ($100,000, NOTHING, 10,000, 1,000,000, 1,000) or on dissociation from Cotillard, LLC. The amount Abara is entitled to receive represents (THE TOTAL VALUE OF THE LLC, THE FAIR VALUE OF HER INTEREST IN THE LLC, or THE VALUE OF HER INITIAL INVESTMENT).
A member’s duty of loyalty generally (CONTINUES, or TERMINATES) when a member dissociates from an LLC. The operating agreement is (NOT SILENT, or SILENT) on whether Abara can form another company after dissociation. Therefore, Abara (MAY, or MAY NOT) form her new business and has withdrawn from the LLC (WRONGFULLY, or RIGHTFULLY).
What If the Facts Were Different?
Assume that the operating agreement explicitly states that a member who withdraws from the LLC may only
receive a maximum buyout price of $50,000.
Abara (WOULD NOT, or WOULD) receive her share of the fair value of the company in this instance because when specific terms are stated in the operating agreement they (DO NOT GENERALLY, or GENERALLY) apply instead of default rules about how a dissociating members interest is purchased.

Answer 1

Abara and nine others are members of Cotillard, LLC, and their liability in the company would be limited to their respective ownership interests. Members have the right to withdraw, and when they dissociate, they lose the right to participate in management decisions. The amount Abara is entitled to receive upon dissociation represents the fair value of her interest in the LLC.

Step-by-step explanation:

Abara and nine others are members of Cotillard, LLC. Generally, members’ liability in the company would be limited to their respective ownership interests in the company. Members of a limited liability company have the right to withdraw from the entity. Withdrawal from a limited liability company is also known as dissociation. When a member dissociates from an LLC, he or she loses the right to participate in management decisions. Generally, a dissociated member does not possess the right to have his or her interest in the LLC bought out by the other members.

Cotillard’s operating agreement does not contain provisions establishing a buyout price. In states that have adopted the ULLCA, the LLC must purchase the interest at fair value within 120 days after the dissociation. Therefore, Abara is entitled to receive $1,000,000 on dissociation from Cotillard, LLC. The amount Abara is entitled to receive represents the fair value of her interest in the LLC.

A member’s duty of loyalty generally continues when a member dissociates from an LLC. The operating agreement is silent on whether Abara can form another company after dissociation. Therefore, Abara may form her new business and has withdrawn from the LLC rightfully.