Litigating in LLCs
Larry E. Ribstein (Deceased)
University of Illinois College of Law; PERC - Property and Environment Research Center
July 9, 2009
Business Lawyer, Vol. 64, pp. 739-755, May 2009
U Illinois Law & Economics Research Paper No. LE09-018
One of the most important issues involving limited liability companies is the appropriate way to characterize and handle disputes among members. Courts and legislatures borrowed the derivative suit remedy from corporations and limited partnerships and applied it to LLCs without adequately considering whether this application was appropriate. In fact, this remedy is not suited to the typical business associations for which LLC statutes are designed — that is, closely held fi rms in which members generally participate directly in management. In this setting, the derivative remedy creates costs and complications that are unnecessary because more appropriate remedies are available, including member- authorized suits on behalf of the entity, direct suits by the injured parties, and contractual arbitration. Accordingly, the derivative suit should not be a default remedy for LLCs. More generally, this analysis provides an example of the potential risks of borrowing LLC rules from other types of business associations.
Number of Pages in PDF File: 19Accepted Paper Series
Date posted: June 16, 2008 ; Last revised: August 20, 2010
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