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Litigating in LLCs

19 Pages Posted: 16 Jun 2008 Last revised: 20 Aug 2010

Larry E. Ribstein

University of Illinois College of Law (deceased); PERC - Property and Environment Research Center

Date Written: July 9, 2009

Abstract

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.

Suggested Citation

Ribstein, Larry E., Litigating in LLCs (July 9, 2009). Business Lawyer, Vol. 64, pp. 739-755, May 2009; U Illinois Law & Economics Research Paper No. LE09-018. Available at SSRN: https://ssrn.com/abstract=1146662

Larry Edward Ribstein (Contact Author)

University of Illinois College of Law (deceased)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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