Per RCW 25.15.246(1), “a member has no interest in specific limited liability company property.” There are a number of consequences that flow from such a brief statement in the LLC Act. This article will discuss a few of such consequences.
First, the members have no right to prosecute a cause of action owned by the LLC. Rather, they must proceed derivatively. I have discussed the “direct v. derivative” distinction in the past, including here. The LLC Act has its own section on derivative actions (see RCW 25.15.386 – 401) and the Court Rules has its own rule (see CR 23.1).
Second, the members have no right occupy real property leased by the LLC. A common structure is for an operating entity to lease property from a separate, real estate holding, entity. Both the operating entity and the holding company may be owned by the same people, and when conflict arises one member invariably excludes the other from access. The question of who has the right to possess the property when an LLC is the tenant is typically answered by resort to an LLC agreement or the LLC Act. However, suffice it to say that one’s status as a member does not give a right to possession.
Finally, attorney-client privilege issues abound. The LLC holds the privilege, rather than any member. The determination of who can waive it and who has access to counsel for the LLC is a subject of its own. However, any time a member becomes adverse to the LLC, that member rarely has a right to the LLC’s counsel. When you represent an LLC, you must be careful to preserve the privilege, particularly once the members have a conflict.
There are additional issues that arise from the fact that members have no interest in the LLC’s property. More often than not, an LLC needs its own counsel, separate from the counsel for any member to protect itself. As the old saying goes “Where you sit, depends on where you stand”. When it comes to representing an LLC and/or its members, be careful!