One of the first actions LLC members take when a membership dispute arises is to make a demand for LLC documents. Members often believe they are “entitled” to documents, including customer lists, trade secrets, and documents relating to the Company’s intellectual property. Members making these requests are often surprised that they have no rights to that information.
What Does the Act Say?
Prior to discussing Washington’s LLC Act’s (the “Act”) records statute, members need to know that they have no interest in the LLC’s property at all. RCW 25.15.246. Rather, the LLC is a distinct legal entity, with its own right to hold its property and protect its information. Members and those with interests in an LLC must understand that concept because it has significant consequences.
The Act is quite explicit about a member’s right to books and records, per RCW 25.15.136 (2):
On ten days’ demand … a member may inspect and copy … the records required by subsection (1) of this section to be kept by a limited liability company. The member need not have any particular purpose for seeking the records.
Disgruntled members seeking access to an LLC’s books and records site this subsection of the Act as if this requires the LLC to throw up its hands and allow the member to do as they please. However, 25.15.136 contains much more than just the above cited section (in fact, it contains 12 additional subsections, which can be viewed here).
The rest of RCW 25.15.136 shows that members are not automatically entitled to LLC books and records upon the mere fact of their membership. RCW 25.15.136(3) limits the scope of what members are entitled to inspect and copy by stating that members seeking a) list of current and past LLC members and/or managers, b) excerpts from meeting or records of LLC action, and c) LLC “accounting records” are entitled to such information only if the member states a purpose reasonably related to the member’s LLC interest, the requesting member describes the records with reasonable particularity, and the records sought are directly connected to the member’s purpose. RCW 25.15.136(5)(c) further permits LLCs to decline to provide any demanded records.
The LLC Can Decline a Request
The above analysis reinforces the concept that members are not entitled to inspect and copy an LLC’s books and records merely because they are members. Members requesting records—specifically accounting records—must comply with those limits outlined in RCW 25.15.136(4). On the other hand, LLCs are not entitled to adhere to every member’s records request. An LLC may decline to fulfill a member’s records request so long as the LLC complies with .136(5)(c).
An LLC Agreement may alter the rights allowed by .136 but may not vary the required records or “unreasonably restrict” a member’s right to records. RCW 25.15.018(3)(g). Lawyers representing members in disputes regularly demand the LLC deliver a host of records. However, the LLC has no obligation to deliver any records at all. Moreover, although the Act requires the company to keep records, it is unclear who holds that duty to keep records. It is reasonable to conclude that a manager has the obligation to maintain the records in a manager-managed LLC, but the Act is silent on that point. Who has the obligation in a member-managed LLC? In addition, keep in mind that non-member transferees have no right to records at all, although there is an exception for the estate of a deceased member.
Practitioners need to prepare for records requests and understand that an LLC’s failure to fulfill a records request may not be wrongful. Even before a records request is made, LLCs should establish their own protocol for who keeps the records, where they are kept, and who can access the records. Prior planning can reduce costs and future disputes.
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