Understanding Your Rights as a Small Business Owner

Often times, a once strong and peaceful business relationship can become tenuous and even irreparable. These problems may lead to disputes among the owners within closely-held corporations and limited liability companies (“LLCs”). Unlike publicly-traded companies, there are rarely markets for closely-held corporate stock or membership interests that would allow an individual to easily sell their equity in the company to a third party. Therefore, it is very beneficial for all business owners to know of their rights if a dispute ever arises between themselves and a fellow owner or officer of a company.

This article will describe the rights and protections that are afforded to business owners under both the Illinois Business Corporation Act (the “BCA”) and the Illinois Limited Liability Company Act (the “LLC Act”).

Fiduciary Duties

Corporate Boards of Directors and LLC Managers each owe shareholders and members certain Fiduciary Duties, meaning that any action that management takes must be taken with the best of interests of the business owners in mind. Management of corporations and LLCs owe Fiduciary Duties of Loyalty and Care to both the owners and the corporation itself. The Fiduciary Duty of Loyalty is breached when an individual directly competes against a company or uses any kind of company-knowledge or resources to solely benefit themselves and not the company. On the other hand, the Fiduciary Duty of Care is breached when an individual does not act reasonably and with due diligence. It would be more difficult to raise a breach of the Fiduciary Duty of Care issue because business management is afforded great leeway in their decisions based on the Business Judgment Rule. Under the Business Judgement Rule, in the absence of bad faith, fraud, illegality or gross overreaching, courts will not interfere with the exercise of business judgment by corporate directors.

The Right to Inspect Business Records

Both the BCA and the LLC Act provide for the rights of shareholders and members to demand and inspect corporate records.

Corporations (805 ILCS 5/7.75)

The BCA requires corporations to maintain more extensive and detailed records than the LLC Act requires of LLCs. Therefore, each meeting of the shareholders and board of directors in a corporation must be documented with meeting minutes and each share of stock must be accounted for and reflected in stock certificates and in the corporation’s stock ledger.

If a shareholder has a good faith belief that its financial interests are being adversely affected by acts of the corporation’s management, then that shareholder has the right to examine the corporation’s books and records of account, minutes, and voting trust agreements, among other things. If a corporation refuses to allow shareholder examination, then a shareholder has the right to file suit and obtain a court order, forcing the corporation to turn over the records. If a corporation still refuses to allow a shareholder to examine the company’s records, then the corporation shall be liable to the shareholder, in a penalty of up to ten percent of the value of the shares owned by the shareholder, in addition to other damages or remedies at law.

LLCs (805 ILCS 180/10-15)

Under the LLC Act, a member may demand that a company furnish to him or her, records concerning the company’s activities, financial condition, and other circumstances of the company’s business, all in order to properly exercise the member’s rights and duties under the company’s operating agreement or the LLC Act. Essentially, an LLC member has the right under the LLC Act to force the managers of the LLC to turn over and allow the member to inspect certain records that the member may not otherwise have access to.

Conclusion

In conclusion, once a shareholder or member discovers any kind of misappropriation of corporate funds or bad faith actions by a company’s management, that business owner is entitled to bring suit enforcing his or her rights as an owner against either the corporation itself or against particular officers, directors, or managers of the company. Having knowledge of these rights allows business owners to be fully aware of the power they have to protect their own investments in their businesses and it may even allow them to have leverage against other adverse owners and management.

If you would like to discuss this topic further, you may contact attorney Frank Portera at (847) 705-7555 or fportera@lavellelaw.com.