LLC Dissociation

Dissociation for most LLC’s is defined as the termination of an LLC member’s membership rights except for the member’s rights to allocations and distributions (also known as a member’s economic rights).  Most limited liability companies will have an executed operating agreement that sets forth certain situations, procedures and methods for dissociating a member from an LLC.  The Illinois LLC Act sets a procedure for a member’s automatic dissociation when a mutually agreed upon event occurs pursuant to an operating agreement. For example, a LLC’s operating agreement may provision certain events that will trigger a member’s dissociation, such as: resignation as a member, death, disability, dissolution of an entity member, assignment of a member’s entire LLC interest, a member’s bankruptcy, breach of the agreement, breach of trust, misconduct affecting the LLC’s reputation, serious illegal or immoral conduct, etc.

Member Dissociation Under The Illinois Limited Liability Company Act

However, there are circumstances where the LLC does not have an executed operating agreement or where the members have elected to rely on the LLC Act to address member dissociations. The Illinois Limited Liability Company Act allows for the dissociation of members from the LLC. Under the LLC Act (805 ILCS 180/35-45, 180/35-55(a)), dissociation is the termination of: (1) a member’s right to participate in the management and conduct of the company’s business; (2) certain fiduciary duties; and (3) certain duties of loyalty and duties of care. Under the LLC Act (805 ILCS 180/35-45), events causing member’s dissociations include: (1) resignation; (2) assignment of a member’s entire LLC interest; (3) member’s expulsion by unanimous vote of the other members; (4) judicial determination; (5) a member’s bankruptcy; (6) death; (7) disability; (8) dissolution of entity member, and a few others.

As noted above, the Illinois LLC Act allows the LLC or another member to oust a member by way of court order. This is referred to in the LLC Act as judicial dissociation (805 ILCS 180/35-45). There are three specific circumstances defined in the Act which give rise to an action for judicial dissociation: (1) if a member engages in wrongful conduct that adversely and materially affects the company’s business; (2) if a member willfully or persistently committed a material breach of the operating agreement or of a duty owed to the company or other members; or (3) if a member is engaged in conduct relating to the company’s business that makes it not reasonably practicable to carry on the business with the member.

It is important to note, when a member is dissociated from an LLC, the dissociated member is divested of all membership rights as a member to participate in the management or operation of the company (and certain fiduciary duties, duties of loyalty, and duties of care are also terminated as outlined above). Unless the member has dissociated by transferring all his or her distributional interest in the LLC or some other means as outlined in the company’s operating agreement, the dissociated member does not necessarily forfeit the value of his or her ownership interest in the company.  As such, a member’s LLC interest or distributional interest (aka economic rights – a member’s right to receive distributions of the limited liability company’s assets, but no other rights or interests of a member) must be redeemed by the LLC or purchased by another member promptly after the member’s dissociation.  That said, if the members of the LLC mutually agree to provide that all of a member’s rights, including economic rights, are terminated upon dissociation, such provision will likely be enforced.  This may be the case, for example, in a service LLC that has not accumulated and that is unlikely ever to accumulate significant goodwill value and thus has and is unlikely ever to have valuable assets other than the ability of its members to provide services to customers or clients.