There are presently about 15,000 New Hampshire two-member LLCs in good standing under the New Hampshire LLC Act. Because they face a lesser risk of veil piercing than single-member LLCs, two-member LLCs can provide both of their members with significantly stronger statutory asset protections than single-member LLCs. For this reason, even LLCs in which only one member will actually be conducting the LLC’s business should often be structured as two- member LLCs.
However, as discussed in this column last week, two-member LLCs face an inherent and substantial risk of irreconcilable disputes between the members and thus of LLC divorce. Obviously, single-member LLCs don’t face this risk. How should the members of two-member LLCs address this risk? The New Hampshire LLC Act does not answer this question, and in the case of every two-member LLC, the answer will often depend on unique facts. However, here are some general answers likely to be useful to the members of many New Hampshire two-member LLCs:
— Every two-member LLC should have a written operating agreement that expressly addresses and resolves, among many other issues, the above possibility of irreconcilable inter-member disputes. The most common operating agreement provision addressing this possibility provides for the resolution of these disputes by arbitration or litigation. However, if only one of the members of a two-member LLC actually operates its business, the operating agreement should often provide that if such a dispute arises, the passive member must resign but will be entitled to a fair market value buyout of his or her membership.
— The operating agreement of a two-member LLC should also provide (i) that if, for any reason, the membership of one of the members is terminated and the LLC thus becomes a single-member LLC, no provision of the LLC’s operating agreement as a two-member LLC will continue in effect; (ii) that in this situation, the remaining member of the LLC must adopt a written operating agreement suitable for a single-member LLC; and (iii) that until the remaining member does so, the LLC will be governed by the default provisions of the New Hampshire LLC Act that govern single-member LLCs. These provisions are set forth in New Hampshire LLC Act sections 151 through 154. However, for many two-member LLCs that become single-member LLCs, one or more of the above statutory provisions may be inappropriate. Thus, the remaining members of two-member LLCs, by themselves or with the help of their lawyers, should review these provisions and, in a written single-member LLC operating agreement, should expressly override these provisions to the extent necessary.
— In particular, the operating agreements of two-member LLCs should expressly provide that if these LLCs become single-member LLCs for any reason, none of the management provisions of the operating agreement of the LLC as a two-member LLC will apply. This is to prevent any argument by former members of two-member LLCs that although they are no longer members of these LLC, they are still managers of it. The necessity of such a provision in the operating agreements of two-member LLCs is demonstrated by a recent New York case entitled Stewart Family LLC v Barbara Stewart.
Because the operating agreement of the Stewart Family LLC lacked such a provision, the divorced Stewart family spouses, each of whom had been both a member and a manager of their LLC, engaged in litigation about the management of the LLC for more than a decade. This litigation undoubtedly cost the Stewart spouses many tens of thousands of dollars in legal fees and untold personal anguish. The message for members of New Hampshire two-member LLCs is clear: Beware of the Stewart case.
John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.