We have suddenly found ourselves in troubled economic times in New Jersey due to the COVID-19 crisis. For the past two weeks, I have received many calls about partnerships and limited liability companies (“LLC”). People want to know if they can make capital calls, dilute or disassociate members, or take other measures to deal with our changing economic environment. The COVID-19 crisis impacts LLCs and partnerships on many levels.
Limited Liability Companies
In New Jersey, without a written operating agreement, the Revised Uniform Limited Liability Company Act (“LLC Act”) supplies the terms for the relations between members. The LLC Act also sets obligations to fund the LLC. It is typical for an operating agreement to describe in detail the obligations of members to contribute capital when needed. It also describes the consequences for failing to do so.
The LLC Act envisions cash contribution to an LLC as an obligation from a member. It also allows the LLC to provide for specific consequences. Consequences may include forfeiture of a member interest, in the event of missed contributions.
Likewise, for partnerships, the partnership agreement should cover the obligation of a partner to fund the partnership with needed capital. Again, it also describes the consequences for failing to do so. In the absence of a written partnership agreement, New Jersey statutes will guide these issues to a large degree. Those rules are too complex for a discussion on this blog.
As concerns the right of a partner or member to receive employment and “guaranteed salary,” under New Jersey’s partnership law, “[a] partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership.” N.J.S.A. § 42:1A-21. Similarly, for an LLC member, there is no guarantee of employment with the LLC without a written contract or other agreement. Nor is there a guarantee of a salary.
Breach of Obligations
Moreover, as a general proposition, a partner’s or LLC member’s failure to contribute necessary capital can be regarded as a breach of obligations. There can be significant consequences for committing such a breach. For instance, in the case of an LLC, a repeated failure to comply with financial obligations to the company can be as grounds for disassociation. Although it is important to note that disassociation (or, for that matter, regarding a partner as having been diluted or removed) should never be declared through self-help and without strictly complying with the operating agreement as well as the LLC Act, and other applicable law such as the common law of the State.
These are the general rules of the road. There is no way to outline the various scenarios and permutations that could exist in your situation without more information. Such as, the history between the parties, the nature of the business and contributions made by each party. In other words, it is essential to know the facts as throughout the development of the business.
Apply careful consideration to these factors (and many others) with regard to financial issues. The COVID-19 crisis impacts LLCs and partnerships on many levels. Therefore, please contact me if you have any questions about this blog or other inter-member, shareholder or partnership dispute issues.