PARTNERSHIP AND LLC CAPITAL CALLS DURING COVID-19 PANDEMIC
COVID-19 is having a once in a generation impact on businesses and their operations. During this dynamic and uncertain time, partnerships and limited liability companies (LLCs) may be forced to turn to mandatory capital contributions from their members, or “capital calls,” in order to meet financial needs of the business. When can a capital call be imposed? What will happen to a member who cannot pay the capital call? If you need assistance in planning for, implementing or responding to a capital call, Brown & Charbonneau, LLP can help.
What is a Capital Call?
When forming a partnership or LLC, the partners or members will generally be required to make a contribution of capital (usually cash) into the partnership or LLC to fund the commencement of business operations.
A “capital call” describes a situation where the partnership or LLC requires its partners or members to make one more or more additional, mandatory contributions of capital, after their initial capital contribution.
When Can Capital Calls Be Imposed?
Whether or not a capital call may be imposed, by whom and under what circumstances, are questions that will generally be governed by a partnership agreement or LLC operating agreement.
The partnership or LLC operating agreement may prohibit capital calls entirely, or it may allow capital calls when approved by a certain percentage of the partners or members. The partnership or LLC operating agreement may also allow officers or managers discretion over imposing capital calls, or provide particular circumstances in which a capital call may be imposed.
As business owners continue to respond to the COVID-19 pandemic, capital calls may be considered as an important tool to address financial needs of the company caused by interruptions in sales, contract disputes, employment claims and other unanticipated impacts of the COVID-19 pandemic on businesses.
However, even when allowed by the parties’ agreement, disputes may arise regarding whether a capital call is appropriate. For example, a partner or LLC member may want to inspect the company’s books and records to evaluate or confirm a claimed financial need for a capital call. Capital calls may also give rise to claims for breach of fiduciary duty against partners, members or company management for imposing a capital call without just cause or for an improper purpose.
What if a Partner or Member is Unable to Pay a Capital Call?
A partnership or LLC operating agreement that permits capital calls will also generally set forth the parties’ agreement for resolving a partner or member’s failure to comply with a capital call. Some examples include provisions for reductions of ownership interests, restrictions or forfeitures of profit distributions, and even forced sales of the non-complying partner or member’s ownership interest.
Getting Legal Help
If you think a capital call might be needed for your business, or if you believe a capital call being imposed on you may be improper, our Irvine based team of experienced business litigation attorneys and trial specialists are here to help. Contact Brown & Charbonneau, LLP today by calling 714-505-3000 to schedule your appointment or email us at firstname.lastname@example.org.
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