Can majority owners of an LLC take a manager’s units back as remuneration for embezzlement?

UPDATED: Sep 30, 2022

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Can majority owners of an LLC take a manager’s units back as remuneration for embezzlement?

I’m a co-owner of an LLC along with 2 other shareholders. It’s been discovered that the manager of the LLC embezzled over several years, taking more than $250,000 in extra pay not, including using the company credit card for personal expenses. He has most likely spent

every penny, so there is nothing to be gained by suing him, as he won’t pay a dollar back. We shareholders would like to not only remove him as manager, however also take back all of his membership units as remuneration for the theft. The plan would be to have a valuation done on the entity which he’s damaged by racking up massive credit debt, and then essentially buy him out by taking his units in exchange for the stolen amount of money. Is this legal as long as the operating agreement permits such action by a majority vote of members?

Asked on July 30, 2016 under Business Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

No, it is not legal, even if the operating agreement allows a forced buyout of minority ownership by the majority, unless the operating agreement specifically states that if the member being bought out owes money, he can be "bought out" by applying or netting out his debt vs. what he would otherwise be paid in the buy out. You need that sort of specific authorization; a general authorization for a forced buyout would not be enough, since you have to follow the terms of the operating agreement in conducting the buyout, so if the operating agreement states that you have to pay the bought-out member the then-current value of his ownership, you'd have to do that--that is, actually pay him, as per the operating agreement. Certainly, he could voluntarily agree to what you propose, but you can't force him to accept debt write-off/reduction for his ownership unless the agreement says he must.

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