Black-letter propositions
- 01
The management of an LLC and its business is vested in the managers, each manager has equal rights to participate, and management decisions approved by a majority of the managers are controlling.
- 02
Managers may make management decisions without a meeting and without notice.
- 03
Subject to the direction and control of a majority of the managers, each manager may act on behalf of the LLC in the ordinary course of its business.
- 04
All members are managers by virtue of their status as members, together with any persons designated as managers in the operating agreement, unless the operating agreement provides or contemplates that members are not necessarily managers, in which case those designated are the managers.
- 05
The operating agreement may provide that the LLC is managed by company officials who are not designated as managers, and all members are managers for any period during which the LLC would otherwise have no managers or company officials.
- 06
Each manager must manage in accordance with the operating agreement and discharge duties in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances, and, subject to the operating agreement, in a manner the manager believes to be in the best interests of the LLC.
- 07
A manager may rely on information, opinions, reports, or statements from persons the manager believes to be reliable and competent, unless the manager has actual knowledge that makes reliance unwarranted, and a manager who acts in compliance with the standard is not liable to the LLC.
- 08
A person who is an interest owner, manager, or other company official is not liable for the obligations of the LLC solely by reason of that status.
- 09
No distribution may be made if, after giving it effect, the LLC would not be able to pay its debts as they become due in the ordinary course of business or its total liabilities would exceed the value of its assets, measured as of the authorization date if paid within 120 days.
- 10
A manager or company official who had authority and approved a wrongful distribution is personally liable to the LLC, but not to any other person, for the excess only if the official did not act in compliance with the statutory standard, without regard to any modification of the standard by the operating agreement, and a proceeding is barred unless commenced within two years after the distribution.
- 11
An official held liable for a wrongful distribution is entitled to contribution from each other official who could be held liable and to reimbursement from each interest owner who received it knowing it was wrongful.
- 12
A member may bring a derivative action if the member was a member when the act occurred, or the interest devolved from one who was, and made written demand on the LLC to take suitable action and either the demand was rejected, 90 days passed, or irreparable injury would result from waiting.
- 13
The superior court may dissolve an LLC on the application of a member if it is not practicable to conduct the business in conformance with the operating agreement and the Act, or liquidation is necessary to protect the member's rights and interests, and on the application of the Attorney General for fraud in obtaining the articles or continued abuse of authority.
- 14
After dissolution the LLC must wind up, the managers collect assets, discharge or provide for liabilities, and distribute what remains, and dissolution does not change the standards of conduct of the managers or prevent proceedings by or against the LLC.
Use this attack sequence under time
Frame the issue
Read the operating agreement first, because the statute supplies default rules that the agreement may change.
Resolve the next checkpoint
Decide who the managers are: all members by default, or those designated in the agreement.
Resolve the next checkpoint
Apply the majority-of-managers rule and the rule that each manager may act in the ordinary course.
Resolve the next checkpoint
State the manager's standard of conduct and check reliance, and separately check any modification in the operating agreement.
Resolve the next checkpoint
Ask whether any member or manager is personally liable to third parties, which is not so by status alone.
Resolve the next checkpoint
For a distribution, apply both the inability-to-pay test and the liabilities-exceed-assets test.
Resolve the next checkpoint
For a derivative claim check membership at the time of the act, written demand, and the 90 days.
Finish the conclusion
For dissolution, ask whether it is not practicable to conduct the business under the agreement or whether liquidation protects the member.
Common wrong turns
- Members are managers by default even if the operating agreement is silent, so every member can act in the ordinary course unless the agreement designates managers.
- A person is not liable for the LLC's debts merely by being a member or manager, though the person may be liable for the person's own acts or a guarantee.
- A wrongful-distribution claim belongs to the LLC and only a breach of the statutory standard, unmodified by the agreement, creates liability.
- The two-year period for wrongful distributions is shorter than the three-year period for a corporation.
- A member derivative plaintiff need not prove the demand was futile if 90 days have passed.
Worked example
Three friends form a North Carolina LLC with no provision about managers. Two of them vote to sign a lease over the third's objection, and later two of them approve a distribution that leaves the LLC unable to pay its debts. A creditor also sues all three members personally for the LLC's rent.
Because the operating agreement does not designate managers, all members are managers, and a majority of the managers controls, so the two members' vote on the lease controls and the third may not stop it. The creditor's claim against the members personally fails because a member is not liable for the LLC's obligations solely by reason of being a member. The two who approved a distribution leaving the LLC unable to pay its debts are liable to the LLC, but not to the creditor directly, if they did not comply with the statutory standard of conduct, and they have contribution rights against other liable officials.
Practice this topic
Management and standards of conduct
North Carolina General Statutes section 57D-3-20 vests management in the managers, gives each equal rights to participate, makes decisions approved by a majority controlling, lets managers act without a meeting or notice, lets each manager act in the ordinary course subject to majority direction, makes all members managers by status unless the operating agreement provides otherwise, and makes all members managers for any period when the LLC would otherwise have none.
North Carolina General Statutes section 57D-3-21 requires each manager to manage in accordance with the operating agreement and to act in good faith, with ordinary prudent care, and, subject to the operating agreement, in the manner the manager believes to be in the LLC's best interests, permits reliance on reliable and competent persons absent actual knowledge that makes it unwarranted, and relieves a manager who complies from liability to the LLC.
Liability, distributions, and information
North Carolina General Statutes section 57D-3-30 provides that an interest owner, manager, or other company official is not liable for the LLC's obligations solely by reason of that status.
North Carolina General Statutes section 57D-4-05 bars a distribution if the LLC afterward could not pay its debts as they become due in the ordinary course or its total liabilities would exceed the value of its assets, and section 57D-4-06 makes a manager or official who approved a wrongful distribution liable to the LLC only if the official did not comply with the statutory standard of conduct, without regard to any modification by the operating agreement, within a two-year limit, with contribution and reimbursement rights.
North Carolina General Statutes section 57D-3-04 gives each member the right to inspect and copy the articles and operating agreement, tax returns or financial statements for the preceding four fiscal years, and a list of interest owners, subject to the section's other provisions.
Derivative actions, dissolution, and winding up
North Carolina General Statutes section 57D-8-01 allows a member to bring a derivative action in superior court if the member was a member at the time of the act or its interest devolved from one who was, and made written demand and either the demand was rejected, 90 days passed, or irreparable injury would result from waiting.
North Carolina General Statutes section 57D-6-02 lets the superior court dissolve an LLC on a member's application if it is not practicable to conduct its business in conformance with the operating agreement and the Act or liquidation is necessary to protect the member's rights and interests, and on the Attorney General's application for fraud in obtaining articles or continued abuse of authority after 20 days' notice.
North Carolina General Statutes section 57D-6-07 requires a dissolved LLC to wind up, with the managers collecting assets, paying or providing for liabilities, and distributing the remainder, and it preserves the managers' standards of conduct and the LLC's right to sue and be sued.
Frequently asked questions
What is the controlling rule for north carolina limited liability company management, standards of conduct, distributions, derivative actions, and dissolution?+
Identify who manages the LLC and which decisions the majority controls, state the standard of conduct and its limits, decide whether members are liable to third parties, apply the distribution limits and the liability of the approving managers, and address derivative suits and dissolution as raised.
Who manages a North Carolina LLC by default?+
All members are managers unless the operating agreement designates others, under North Carolina General Statutes section 57D-3-20.
How are management decisions made?+
Decisions approved by a majority of the managers control, and each manager may act in the ordinary course, under section 57D-3-20.
Are LLC members personally liable for company debts?+
Not solely because they are members or managers, under North Carolina General Statutes section 57D-3-30.
How long to sue over a wrongful LLC distribution?+
Two years after the distribution, under North Carolina General Statutes section 57D-4-06.
When may a court dissolve a North Carolina LLC at a member's request?+
When conducting the business as the agreement and Act require is not practicable, or liquidation is needed to protect the member, under section 57D-6-02.