Your trusted source for Iowa business and franchise law insights.
Your trusted source for Iowa business and franchise law insights.
I was researching some issues for an LLC operating agreement and ran across an excellent post from the Wisconsin Business Law Blog on the fact that capital calls are often overlooked by LLC investors. Attorney Todd Goodwin provided the following example,
[i]f a "capital call" provision exists and is exercised by the majority members or by the managing member and one of the members cannot afford to put in the required capital, such member could face expulsion from the LLC, dilution of their ownership percentage in the LLC, super-dilution of their ownership percentage to the point where their percentage is effectively worthless, or other negative consequences. (There can be other consequences, but these are some of the typical ones seen in these types of agreements).
I have seen this happen several times with limited liability companies. It happened frequently for investors during the latest economic downturn, especially with real estate investors who could not meet their capital calls. Many of those real estate investors faced expulsion as a result. As Todd points out, the capital calls are neither bad or disadvantageous, but are often important for the operation of the LLC. As an investor it is important to review and understand fully the terms of the capital call provisions BEFORE you sign the operating agreement.
Rush Nigut is a shareholder with the Brick Gentry Law Firm in West Des Moines, Iowa. His practice includes both transactional and litigation matters including franchising and business law. Rush started his legal blog, Rush on Business, in 2006. He has been quoted…
Rush Nigut is a shareholder with the Brick Gentry Law Firm in West Des Moines, Iowa. His practice includes both transactional and litigation matters including franchising and business law. Rush started his legal blog, Rush on Business, in 2006. He has been quoted or referenced by hundreds of other blogs, websites, and publications. He also is the editor of the Brick Gentry Trial Team blog and can help you identify the most qualified lawyer at Brick Gentry to handle your case. Our lawyers have a breadth of trial experience in personal injury, employment discrimination, business litigation, IP law, and class action cases.