When a limited liability company (“LLC”) is first formed, its owners are often eager to start doing business. In the pandemonium that comes along with getting a business up and running, the owners often overlook what business records and information the owners of the LLC may rightfully access going forward (often referred to as “information rights”). Oftentimes, this topic only emerges down the road, once a dispute arises and it’s too late for the owners (often referred to as the “members”) of the LLC to come to a meeting of the minds.
Generally, LLC members (whether they are actively involved with LLC operations or passive investors) are entitled to the information rights they are provided in the Operating Agreement of the LLC. Thus, a well-drafted Operating Agreement can preclude a dispute over a member’s information rights. For this reason and a multitude of others, it is essential that experienced counsel be consulted to assist an LLC with drafting an Operating Agreement at the outset of the formation of the LLC.
With that being said, in Iowa and many other states (though this blog is limited to an analysis of Iowa law), the Revised Uniform Limited Liability Company Act prescribes minimum information rights for LLC members. These minimum rights are meant to protect members of LLCs that (a) do not have a formal Operating Agreement or (b) have an Operating Agreement that unfairly suppresses the information rights of the LLC’s members.
In Iowa, for a member-managed LLC, a member is generally entitled to inspect and copy during regular business hours any record maintained by the LLC regarding the LLC’s activities, financial condition, and other circumstances, to the extent the information is material to the member’s rights and duties under the LLC’s Operating Agreement. See Iowa Code § 489.410(1)(a).
For a manager-managed LLC organized in Iowa, which is an LLC directed by one or more managers elected by the members, managers have the same rights as a member in a member-managed LLC (see the paragraph above). The members in a manager-managed LLC, however, have fewer rights in comparison. Members may only inspect and copy during regular business hours information regarding the activities, financial condition, and other circumstances of the LLC as reasonable provided that (a) the member seeks the information for a purpose material to the member’s interest as a member and (b) the information sought is directly connected to the member’s purpose. See Iowa Code § 489.410(2)(b)(1)-(3).
Note, however, that all the rights noted above are subject to modification by the LLC’s Operating Agreement, provided that the modifications are not unreasonable or unfairly suppressive. Thus, the Operating Agreement might grant members more expansive rights to information or, contrarily, it could place reasonable restrictions and conditions on members’ access to and use of LLC information.
In my experience, it is most often the case that LLC members’ information rights are delineated in an Operating Agreement to be similar to the minimum rights granted to shareholders of a corporation (albeit different terminology is used). This means LLC members are often granted a right to inspect and copy (a) the LLC’s Operating Agreement, (b) the minutes of meetings of the LLC’s members and managers (if applicable), (c) financial statements of the LLC for the prior three years, (d) a list of the LLC’s current members and managers (if applicable), and (e) a copy of the LLC’s most recent biennial report filed with the State of Iowa.
Determining an LLC member’s information rights requires an analysis of an LLC’s Operating Agreement in conjunction with applicable state law. If you would like to discuss your rights as an LLC member or how those rights may be exercised, please do not hesitate to reach out to Brennan Block by email at email@example.com by or phone at (515) 242-2441.