Forced liquidation of an LLC ?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Nebraska_Drought
Posts: 375
Joined: Fri Nov 13, 2020 10:19 am
Location: Lincoln, NE

Forced liquidation of an LLC ?

Post by Nebraska_Drought »

About a decade ago, I started an LLC that I am the registered president of. The LLC was started to have ownership over some recreational property and there are 3 members: I have a 50% share, member #2 has a 25% share and member #3 has a 25% share. In the beginning, the 3 members agreed that I'd be president and handle all paperwork/insurance/taxes etc on the property. We also all agreed that the property would remain under the ownership of the LLC and if someone sold their shares or transferred them to another family member that it would have to be agreed upon and approved by the LLC. The other stipulation we agreed upon, in principal, is that no member could force the others to liquidate the LLC (property) unless it was a unanimous decision by the LLC. My paperwork associated with the LLC is in my safe and I have not looked through it all (yet) to find the paperwork that was associated with the LLC where all of these stipulations were spelled out.

Here is my question. Member #3 (25% share holder) is getting up in age and wants to pass their share down to a family member. That is "legal" as far as the LLC was set up and Members #1 and #2 are fine with it. Since the new "Member #3" did not agree to the stipulations under the formation of the LLC, could they try to force a sale of the property for their 25% share? Members #1 and #2 are worried about this as the new Member #3 does not seem to have the same long-term interest as the current Member #3. As the majority shareholder and president, I do not want to "buy out" Member #3, nor have they suggested it. Member #2 is in the same boat. The idea was that the LLC would be formed to own the recreational property and it would be passed down, but never to be sold. In theory, the LLC would own the property forever with the shareholders maintaining whatever share they hold and that being passed down from person to person.

Details of the property is that it was purchased for $85,000 and it is now worth approximately $265,000. It is a prime recreational property for our area and I get multiple land agents contacting me each year wondering if I was interested in selling it. The value will only continue to go up and as you can see, in the last 10 years, it has gained a tremendous amount of equity and will continue to do so. Property was purchased as a cash sale and there is no lien on it. Total cash assets of the LLC are less than $10,000.

Any idea on how to move forward or to address potential requests to sell the property down the line by the 25% shareholder (new Member #3) ?
User avatar
Lee_WSP
Posts: 10346
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Forced liquidation of an LLC ?

Post by Lee_WSP »

You can always buy member #3 out
Topic Author
Nebraska_Drought
Posts: 375
Joined: Fri Nov 13, 2020 10:19 am
Location: Lincoln, NE

Re: Forced liquidation of an LLC ?

Post by Nebraska_Drought »

Lee_WSP wrote: Thu Apr 22, 2021 1:23 pm You can always buy member #3 out
Yes, that is an option but even that goes against the agreed upon situation when the LLC was formed. In all honesty, I want to know if my hand or the other LLC owners hand can be forced to do anything (legally) by the other owner (minority owner to me).
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Forced liquidation of an LLC ?

Post by Grt2bOutdoors »

Consult an attorney. Sometimes if an agreement can not be reached then a party may resort to the courts to resolve the matter.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
SuzBanyan
Posts: 2008
Joined: Thu Jun 02, 2016 11:20 am

Re: Forced liquidation of an LLC ?

Post by SuzBanyan »

Generally, it is a condition to passing the interest on to the family member of Member #3 that such family member agree to, at a minimum, all the terms of the existing written agreement. Review your agreement and consult with an attorney.
User avatar
Lee_WSP
Posts: 10346
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Forced liquidation of an LLC ?

Post by Lee_WSP »

Nebraska_Drought wrote: Thu Apr 22, 2021 1:45 pm
Lee_WSP wrote: Thu Apr 22, 2021 1:23 pm You can always buy member #3 out
Yes, that is an option but even that goes against the agreed upon situation when the LLC was formed. In all honesty, I want to know if my hand or the other LLC owners hand can be forced to do anything (legally) by the other owner (minority owner to me).
That would require knowledge of the LLC laws of your state and a thorough review of the LLC operating agreement. As such, I must refer you to an attorney in your area for a good answer to that question.

But there must be some mechanism for dissolution written in either the agreement or in state law. While I have heard of cases where a minority was essentially stuck because of the restrictive dissolution mechanisms put into place, I don't believe any state allows a member to remain a member against their will. How much they get is a different question.
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: Forced liquidation of an LLC ?

Post by HomeStretch »

At formation, did the three members execute an operating agreement that specified, among other things, how to handle a situation like this?
Topic Author
Nebraska_Drought
Posts: 375
Joined: Fri Nov 13, 2020 10:19 am
Location: Lincoln, NE

Re: Forced liquidation of an LLC ?

Post by Nebraska_Drought »

Thank you for the follow-up information.

I dug into my original LLC documents and found that we did create an operating agreement when the LLC was formed based upon our state laws. The language is pretty genetic and we did not add much for specifics when it was drawn up, but the answers to my questions are within the LLC Operating Agreement and should suffice if we have to go there.

Thank you !
sport
Posts: 12084
Joined: Tue Feb 27, 2007 2:26 pm
Location: Cleveland, OH

Re: Forced liquidation of an LLC ?

Post by sport »

Nebraska_Drought wrote: Thu Apr 22, 2021 12:11 pm We also all agreed that the property would remain under the ownership of the LLC and if someone sold their shares or transferred them to another family member that it would have to be agreed upon and approved by the LLC.
Is this not your answer? Have the new Member #3 agree to the terms signed by old Member #3 or the transfer is not approved.
Post Reply