Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

When Can a New Jersey LLC Expel One of Its Members?

Author: Scarinci Hollenbeck, LLC

Date: April 30, 2024

Key Contacts

Back
When Can a New Jersey LLC Expel One of Its Members?

Disputes among members of a limited liability company (LLC) are not uncommon and can often be resolved outside of court. However, LLC disputes can sometimes escalate to the point that an LLC seeks to expel a member from the business. When seeking to remove a member, LLCs may rely on the provisions of their operating agreement regarding expulsion. In the absence of such an agreement, the New Jersey’s Revised Uniform Limited Liability Company Act will govern.

Grounds for LLC Expulsion

There are various reasons why a New Jersey LLC may want to remove a member, including retirement, internal disputes, wrongful conduct, or death. In some cases, the members of an LLC can hold a meeting and adopt a resolution to remove the member (if approved by the majority of votes). However, if the member contests the removal, court intervention may be necessary.

Operating Agreements

Many operating agreements contain provisions establishing when a member may be removed from the LLC. This is the simplest way to expel a member as the grounds for expulsion and required procedures are outlined in terms of the agreement. A well-drafted operating agreement will address both voluntary resignations and involuntary removals. Expulsion provisions should specify when a member can be expelled, the required votes for expelling an LLC member, and the procedure for buying out the departing member’s interest.

New Jersey LLC Act

In the absence of an operating agreement or provision in an operating agreement regarding expulsion, New Jersey’sRevised Uniform Limited Liability Company Act (LLC Act) controls. The statute provides for the disassociation of another member under several circumstances including where a member gave notice of withdrawal; where the person is expelled as a member under the operating agreement; or where the member is a corporate entity or partnership that has dissolved or had its charter revoked.

Judicial LLC Expulsion

When the parties can’t reach an agreement out of court, an LLC may expel a member by judicial order. Specifically, a New Jersey court may order a member expelled under the following circumstances: (a) the member engaged in wrongful conduct that adversely and materially affected the LLC’s business; (b) the member willfully or persistently committed a material breach of the operating agreement; or (c) the member engaged in conduct relating to the LLC’s business which makes it not reasonably practicable to carry on the business with the member as a member of the LLC.

In IE Test, LLC v. Carroll, the New Jersey Supreme Court addressed the “not reasonably practicable” standard, confirming that LCCs must meet a high bar to be granted judicial expulsion. According to the justices, the New Jersey Legislature did not intend for expulsion to be available whenever “it would be more challenging or complicated for other members to run the business with the LLC member than without him.” Instead, the LLC Act mandates that it must be “unfeasible, despite reasonable efforts, to keep the LLC operating while the disputed member remains affiliated with it.”

As the New Jersey Supreme Court noted, the LLC Act does not define the term “not reasonably practicable,” or specifically describe the conduct that implicates subsection 3(c) of the LLC Act. Accordingly, the Court established a multi-factor test, under which no factor is determinative:

  • The nature of the member’s conduct in relation to the company’s business;
  • Whether the entity can be managed to promote the purposes for which it was formed with the member remaining;
  • Whether the dispute precludes the members from working with one another to pursue the company’s goals;
  • Whether there is a deadlock among the members;
  • Whether, despite deadlock, members can make decisions on the management of the company under the operating agreement;
  • Whether there is still a business to operate, in light of the company’s financial position; and
  • Whether continuing the company with the member is financially feasible.

Key Takeaway

Expelling an LLC member is often fraught with business and legal challenges. Scarinci Hollenbeck’s business litigation attorneys have significant experience resolving LLC disputes, including LLC expulsions. Our experienced attorneys also routinely work with LLCs to draft operating agreements that protect the interests of the LCC members and help prevent protracted legal battles. 

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business post image

The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business

Since his inauguration two months ago, Donald Trump’s administration and the Congress it controls have indicated important upcoming policy changes. These changes will impact financial services policies and priorities. The changes will particularly affect cryptocurrency, as well as banking rules and regulations. Key Regulatory Changes in Cryptocurrency For example, in the burgeoning cryptocurrency business environment, […]

Author: Dan Brecher

Link to post with title - "The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business"
Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1 post image

Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1

The retail sector has experienced a wave of bankruptcy filings over the last year. Brick-and-mortar businesses in financial distress include big-name brands like Big Lots, Party City, The Container Store, and Vitamin Shoppe. When large retailers seek bankruptcy protection, they are not the only businesses impacted. Landlords can be particularly hard hit. While commercial landlords […]

Author: Brian D. Spector

Link to post with title - "Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1"
How Understanding Bankruptcy Trends Can Benefit Your Business post image

How Understanding Bankruptcy Trends Can Benefit Your Business

The bankruptcy legal landscape presents both challenges and opportunities for businesses navigating financial distress. Understanding current bankruptcy trends can help businesses make more informed and strategic decisions. Corporate Bankruptcy Filings Trending Upwards Bankruptcy filings continued to trend upwards in 2024. According to statistics released by the Administrative Office of the U.S. Courts, personal and business […]

Author: Brian D. Spector

Link to post with title - "How Understanding Bankruptcy Trends Can Benefit Your Business"
SEC Takes Actions Against Issuers for Failure to File Form D post image

SEC Takes Actions Against Issuers for Failure to File Form D

In December, the U.S. Securities and Exchange Commission (SEC) announced charges against two privately held companies for failing to file a Form D notice, which is generally utilized for exempt securities offerings. Here, the SEC’s enforcement sends a strong message: compliance with regulatory requirements is not optional and failure to comply can have significant consequences. […]

Author: Kenneth C. Oh

Link to post with title - "SEC Takes Actions Against Issuers for Failure to File Form D"
Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda post image

Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda

On February 14, 2025, the Office of General Counsel (OGC) of the National Labor Relations Board (NLRB) under Acting General Counsel William B. Cowen issued Memorandum 25-05, “New Process for More Efficient, Effective, Accessible and Transparent Case handling.” The Memorandum rescinds nearly all of the Memoranda issued by his direct predecessor, Jennifer Abruzzo, setting the […]

Author: Matthew F. Mimnaugh

Link to post with title - "Redefining Labor Relations: NLRB's Pivot from Abruzzo’s Memoranda"
What Are FIRPTA Withholding Requirements? post image

What Are FIRPTA Withholding Requirements?

If you purchase real property from a foreign person or entity, you may be required to withhold taxes from your payment to the seller under the Foreign Investment in Real Property Tax Act (FIRPTA). The federal tax law is designed to ensure that foreign sellers pay any applicable capital gains tax on profits realized from […]

Author: Jesse M. Dimitro

Link to post with title - "What Are FIRPTA Withholding Requirements?"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!

Please select a category(s) below: