As a limited liability company (LLC) member, you have an ownership interest in the business. LLC members contribute financially to the entity and have certain rights and decision-making responsibilities concerning its operations. If you believe something has gone wrong between you and another member or with the company, there may be grounds for legal action. Depending on the infraction, you could be making either a direct or derivative claim. As an LLC member or manager, you need to know: What is the difference between a direct and derivative LLC claim?
The Difference Between a Direct and a Derivative Claim
Direct claims refer to those that one member can make against another member. Generally, this type of claim arises when an LLC member believes that another member has deliberately done something to interfere with their rights. By contrast, a member can bring a derivative claim on behalf of the company to protect its interests.
Members Can Only Bring Direct Claims Under Certain Circumstances
Generally, an LLC member (shareholder) can file suit on behalf of an inured LLC. However, the member may only file a direct action under limited circumstances. These actions can be filed when a member is injured, and that injury isn’t a direct consequence of the harm suffered by the LLC.
A member may be entitled to bring a direct claim if, for example, another member deliberately interfered with the complaining party’s right to be provided with LLC-related information or to vote on a particular matter.
Derivative Action Requirements
Under Florida law, a member may maintain a derivative action to enforce a right of a limited liability company if:
- “The member first makes a demand on the other members in a member-managed limited liability company or the managers of a manager-managed limited liability company requesting that the managers or other members cause the company to take suitable action to enforce the right, and the managers or other members do not take action within a reasonable time, not to exceed 90 days; or
- A demand under subsection (1) would be futile, or irreparable injury would result to the company by waiting for the other members or the managers to take action to enforce the right in accordance with subsection (1).”
A member can bring a derivative claim on behalf of the LLC when they believe a right needs to be enforced or that the company is in danger.
Members file derivative claims when an LLC is not taking action to protect itself. A derivative action to enforce a right of a limited liability company may only be brought “by a person who is a member at the time the action is commenced and:
- Was a member when the conduct giving rise to the action occurred; or
- Whose status as a member devolved on the person by operation of law or pursuant to the terms of the operating agreement from a person who was a member when the conduct giving rise to the action occurred.”
One of the most common examples of someone needing to bring this type of action is when there has been fraud or another misappropriation of company funds or resources.
LLC direct and derivative actions are complex, and it’s best to work with an experienced Florida business attorney when pursuing these cases. Your business lawyer can help you evaluate the LLC infraction and determine your next steps.
Contact an Experienced Florida Business Lawyer
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with commercial leasing, business, and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.