Forming an LLC or a Corporation for your business is a good idea. It shields you personally from liability and creates potential tax advantages, especially as to entitlement taxes for those opting for S-Corporation status. However, incorporation carries with it an often misunderstand effect, the company as an LLC or Corporation is an entity in and of itself. This means that if someone has impugned the company’s rights, it is the company that has a claim, not the shareholders or members. This manifests itself as especially confusing when, in a closely held company, one member steals money from the company. As a fellow owner, it seems and feels like that person has stolen from me; if both members were entitled to $50,000 in profit, and one member took $75,000 instead, I just had $25,000 stole from me, right? Not under the laws of Wisconsin. Instead, the company has a claim against the shareholder or member that took the money. This is enforced through what is called a derivative action, where a shareholder brings a claim on behalf of the corporation or LLC.
The Wisconsin Court of Appeals in Essential Homecare, Inc. et al v. Mai See Vang Yang et al. recently addressed a shareholder derivative action stating:
Derivative claims “belong to the corporation, not to the complaining [shareholder].” See Park Bank v. Westburg, 2013 WI 57, ¶41, 348 Wis. 2d 409, 832 N.W.2d 539. Generally, a derivative claim is one that “a corporation could bring because the corporation’s assets are affected.” Id. (quoted source omitted). In a derivative action, a shareholder assumes the mantle of a corporation itself to right wrongs committed by those temporarily in control of the corporation. The purpose of a shareholder derivative action is to prevent injustices to the corporation by allowing shareholders to enforce corporate interests when the directors refuse to take corrective action. See id.
Interestingly much of the analysis in that case turned on whether the plaintiff had complied with the statutory requirement that a written demand to the corporation be made before a derivative action may be brought by sending a text message to the other shareholder. The Court held in this case it did not, but did not address whether a text message could ever satisfy the “written notice” requirement, only that sufficient evidence in that case was not presented to satisfy the standard.
If you are a member of a corporation or LLC and you believe one of the other members has stolen money or paid themselves improper distributions, the remedy belongs to the corporation or LLC, and you need experienced counsel to help you navigate the requirements of a sometimes complicated procedure for a shareholder or member to bring those claims on behalf of their company.