Bar Exam (Next Generation) Quiz: Powers And Rights Of Members And Managers Of Limited Liability Companies
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Powers And Rights Of Members And Managers Of Limited Liability CompaniesQuestion 1 of 12

Priya is a non-manager member of Apex Logistics, LLC, a manager-managed company. The operating agreement states that a member may inspect the company's books and records only with the manager's prior written approval. Priya asks the manager for the company's bank statements and customer lists, saying she wants to check whether the manager has been taking unauthorized payments. The manager denies the request, citing Priya's ownership interest in a competing company. Priya sues to obtain the records.

Which issue is most likely to determine whether Priya is entitled to inspect the records?

Whether the manager's denial was made in good faith and in the best interests of Apex.
Whether Priya's stated concern about unauthorized payments is supported by specific facts.
Whether the operating agreement's prior-approval requirement is an unreasonable restriction on Priya's right to information.
Whether Priya's interest in a competing company disqualifies her from accessing Apex's records.
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Bar Exam (Next Generation) Quiz

Bar Exam (Next Generation) Quiz: Powers And Rights Of Members And Managers Of Limited Liability Companies

Practice Powers And Rights Of Members And Managers Of Limited Liability Companies in Bar Exam (Next Generation) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Powers And Rights Of Members And Managers Of Limited Liability Companies, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Next Generation).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

Priya is a non-manager member of Apex Logistics, LLC, a manager-managed company. The operating agreement states that a member may inspect the company's books and records only with the manager's prior written approval. Priya asks the manager for the company's bank statements and customer lists, saying she wants to check whether the manager has been taking unauthorized payments. The manager denies the request, citing Priya's ownership interest in a competing company. Priya sues to obtain the records.

Which issue is most likely to determine whether Priya is entitled to inspect the records?

  1. Whether the manager's denial was made in good faith and in the best interests of Apex.
  2. Whether Priya's stated concern about unauthorized payments is supported by specific facts.
  3. Whether the operating agreement's prior-approval requirement is an unreasonable restriction on Priya's right to information. (correct answer)
  4. Whether Priya's interest in a competing company disqualifies her from accessing Apex's records.
Explanation: Whenever you see an LLC member seeking records, focus on the scope of the statutory inspection right and whether the operating agreement can limit it. Under manager-managed LLC law, members have a right to inspect books and records for a proper purpose, but an operating agreement may impose reasonable restrictions. The central issue here is whether the clause requiring the manager's prior written approval is an unreasonable restriction on Priya's statutory right to information. That threshold determines everything: if the clause is enforceable, her claim fails; if it is unreasonable, she can inspect despite the manager's refusal. The manager's denial in good faith and in Apex's best interests is not the standard for a member's inspection demand—the statutory right is independent of the manager's view of her motives. Nor must Priya support her concern about unauthorized payments with specific facts before gaining access; a credible desire to investigate self-dealing is a proper purpose. Finally, Priya's interest in a competing company does not automatically disqualify her; it may be relevant to balancing, but it cannot override an unreasonable restriction. On exam day, when an operating agreement seems to eliminate a member's right to records, ask whether the restriction is reasonable—not whether the member has proven her case.

Question 2

Kessler Group LLC has one manager, Maria, and two nonmanager members, Amy and Ben. Maria declares a $300,000 distribution to the members in proportion to their interests, knowing that Kessler's total liabilities already exceeded its total assets immediately before the distribution. Amy receives $150,000, unaware of the prohibition and with no reason to know it; Ben receives $150,000 after reviewing a balance sheet showing that Kessler's liabilities exceeded its assets both before and after the distribution.

The Mercer Limited Liability Company Act provides in relevant part: Section 404: A limited liability company may not make a distribution if after giving it effect the company's total liabilities would exceed its total assets. Section 405(a): A manager who votes for or assents to a distribution in violation of Section 404 is personally liable to the LLC for the amount by which the distribution exceeds the amount that could lawfully have been made. Section 405(b): A member who receives a distribution in violation of Section 404 and who knew at the time of receipt that the distribution was prohibited is liable to the LLC for the amount received. Section 405(c): A member who receives a distribution in violation of Section 404 without knowledge of the prohibition has no liability to the LLC.

Which statement is correct?

  1. Maria is liable to Kessler for $300,000, Ben is liable to Kessler for $150,000, and Amy is also liable to Kessler for $150,000.
  2. Maria is liable to Kessler for $300,000, and Ben is liable to Kessler for $150,000; Amy has no liability to Kessler. (correct answer)
  3. Maria is liable to Kessler for only $150,000, and Ben is liable to Kessler for $150,000; Amy has no liability.
  4. Maria is not liable because the operating agreement gave her discretion to declare distributions; Ben is liable to Kessler for $150,000, and Amy has no liability.
Explanation: Whenever you see a distribution question under an LLC statute, separate the actors: the manager's liability turns on assenting to an unlawful distribution, while a member's liability turns on knowledge at receipt. Maria declared a $300,000 distribution when Kessler’s total liabilities already exceeded its assets. Section 404 forbids any distribution if, after giving it effect, liabilities would exceed assets; because the company was already insolvent, no amount could lawfully have been distributed. Under Section 405(a), Maria as manager is personally liable for the amount by which the distribution exceeded the lawful amount—the entire $300,000. Therefore, an answer limiting Maria to $150,000 misapplies the statute by effectively splitting the unlawful distribution. For recipients, Section 405(b) reaches only a member who knew the distribution was prohibited. Ben is liable for his $150,000 because he reviewed a balance sheet showing liabilities exceeding assets both before and after the distribution, so he had actual knowledge. Amy, however, received her $150,000 without knowledge and with no reason to know; Section 405(c) expressly excuses her, so any answer saying Amy is liable is incorrect. The answer claiming Maria is not liable because the operating agreement gave her discretion is also wrong: statutory prohibitions bind managers regardless of internal discretion. Thus the correct result is: Maria liable for $300,000, Ben liable for $150,000, Amy no liability.

Question 3

Ridgeline LLC is manager-managed. Its members hold voting interests as follows: A 40%, B 35%, C 25%. D is the manager and holds no membership interest. The operating agreement provides: 'The Manager has exclusive authority to manage the business and affairs of the LLC. Members shall have no authority to bind the LLC. Any sale of all or substantially all of the LLC's assets outside the ordinary course of business must be approved by Members holding at least 70% of the Voting Interests.' At a properly called meeting, A and B vote in favor of a proposed sale of all of Ridgeline's assets to a third party, and C votes against. D then signs the sale contract on behalf of Ridgeline.

The Mercer Limited Liability Company Act provides in relevant part: Section 701(a): A manager of a manager-managed LLC has full power to manage the LLC, except that a sale, lease, exchange, or other disposition of all or substantially all of the LLC's property outside the ordinary course of business must be approved by members. Section 701(b): If the operating agreement specifies the percentage of voting interests required for approval of a disposition, that percentage controls; if it does not, approval of all members is required. Section 701(c): Approval of a disposition under this section is a matter on which members may vote, and a manager who also holds a membership interest may vote that interest as a member unless the operating agreement provides otherwise.

Was the sale properly authorized?

  1. No, because a sale of all assets outside the ordinary course of business requires the unanimous approval of all members, and C voted against.
  2. No, because the sale was a disposition of all or substantially all of the LLC's assets and the operating agreement gave the manager exclusive authority, not the members, to approve such a sale.
  3. Yes, because A and B together hold 75% of the voting interests, satisfying the 70% requirement, and D properly signed after member approval. (correct answer)
  4. Yes, because D had full managerial power and the sale was in the ordinary course of the LLC's business.
Explanation: This question tests the interplay between statutory default rules and an LLC's operating agreement for dispositions of all or substantially all assets. Start by checking the operating agreement first: it may change the default approval requirement. Here, the operating agreement explicitly requires member approval of any sale of all or substantially all assets outside the ordinary course, and sets that approval at "at least 70% of the Voting Interests." A and B together hold 75%, so the member-approval condition is satisfied. The statute also respects that percentage: Section 701(b) says the operating agreement's specified percentage controls, and only if it is silent does unanimous approval apply. D then signed the contract after that approval, which was proper because the manager executes the sale once members have authorized it. The "unanimous approval of all members" answer is wrong because it ignores the operating agreement's 70% provision. The "manager had exclusive authority" answer misreads the agreement: the manager's exclusive authority is subject to the express carve-out requiring member approval for this kind of sale. The "sale was in the ordinary course" answer is wrong because selling all assets to a third party is outside the ordinary course, which is exactly why the member-approval requirement exists. On exam day, when you see an LLC asset disposition, ask: what does the operating agreement require, and did the required percentage approve? Then check whether the proper party signed.

Question 4

Amal, Ben, and Chen are the only members of Pinnacle Packaging, LLC, a member-managed company. The operating agreement provides that amendments to the agreement may be adopted by members holding at least 65% of the total voting interests. The agreement is silent on capital contributions beyond the members' initial contributions. At a meeting, Amal and Ben, who together hold 65% of the voting interests, vote to amend the agreement to require each member to contribute an additional $100,000 to fund a new production line. Chen votes no and refuses to contribute. Amal and Ben claim the amendment is binding on Chen.

Which issue is most likely to determine whether Chen must contribute?

  1. Whether the 65% vote satisfied the operating agreement's amendment requirement.
  2. Whether an operating agreement amendment can impose a new capital contribution obligation on a non-consenting member. (correct answer)
  3. Whether the amendment was adopted at a properly noticed meeting of the members.
  4. Whether Chen's refusal to contribute after the amendment amounts to wrongful dissociation.
Explanation: This question tests the limits of majority power under an LLC operating agreement. Whenever you see an LLC amendment, separate the procedural validity of the vote from the substantive power to bind a non-consenting member. Here, Amal and Ben held 65%, so the operating agreement's amendment requirement was likely met. But meeting that threshold only answers how the agreement can be changed; it does not answer whether the change can impose a fresh $100,000 capital call on Chen. Under LLC law, a member's obligation to contribute capital is generally limited to what was agreed in the operating agreement or by separate consent. An amendment that creates a new affirmative obligation to fund the company changes the economic deal of membership, so a non-consenting member is not automatically bound, even if the amendment was validly adopted by the required vote. The key dispute is therefore whether such a capital obligation can be imposed on Chen without his consent. The 65% vote issue is a trap because it conflates the power to amend procedure with the power to alter substantive rights. The notice-meeting issue is irrelevant because nothing suggests defective notice. Chen's refusal is not wrongful dissociation; it is a refusal to pay an obligation whose validity is exactly the contested question. When you see a capital-contribution question, remember: consent matters unless the operating agreement clearly says otherwise.

Question 5

Rosa is a member of Harbor View Cafe, LLC, a manager-managed company. The operating agreement provides that any decision to bring a lawsuit against a manager must be approved by a majority of the members. Rosa learns that the managing member paid herself a $250,000 bonus from company funds without approval. Rosa demands that the LLC sue the manager. The two other members, who were not involved in the bonus decision, investigate and vote unanimously that the lawsuit is not in the LLC's best interests because of cost and reputational harm. Rosa sues on behalf of the LLC to recover the bonus.

Which issue is most likely to determine whether Rosa's suit can proceed?

  1. Whether Rosa can show that she was personally harmed by the bonus decision and therefore has standing to sue in her own name.
  2. Whether the manager's bonus was so excessive that no reasonable manager would have approved it.
  3. Whether the disinterested members' refusal to sue was made in good faith after a reasonable investigation. (correct answer)
  4. Whether Rosa made her demand before the bonus payment was disclosed to the other members.
Explanation: Whenever you see a member suing on behalf of an LLC, you are in derivative-action territory. The claim belongs to the LLC, not the member personally, and courts generally require the member to make a demand on the company before suing. If the company refuses, the key question becomes whether that refusal deserves deference. Here, Rosa demanded that the LLC sue the manager. The two disinterested members investigated and unanimously refused, citing cost and reputational harm. That refusal is exactly the issue that will determine whether Rosa's suit proceeds: courts will defer to a refusal made in good faith and after a reasonable investigation. If the refusal meets that standard, Rosa cannot override it; if the investigation was a sham or the refusal was self-dealing, her derivative suit may continue. "Whether Rosa can show that she was personally harmed" misunderstands standing — a derivative plaintiff needs harm to the LLC, not personal injury. "Whether the manager's bonus was so excessive" goes to the merits of the claim, but it does not decide the procedural question of whether Rosa can step into the LLC's shoes after a refusal. "Whether Rosa made her demand before the bonus payment was disclosed" misstates the timing rule: she demanded after discovering the bonus, which is sufficient; disclosure to other members is not the controlling test. Study tip: for derivative suits, separate the demand/refusal issue from the merits. Focus on whether the decision-makers were disinterested, investigated, and acted in good faith.

Question 6

Walsh is a member of Summit LLC. Carter has a final judgment against Walsh. Carter asks the court to issue a charging order against Walsh's membership interest, to require Walsh to vote his interest as Carter directs until the judgment is paid, and to require Summit to distribute all of its currently available cash to Carter in partial satisfaction of the judgment. Summit's operating agreement provides that a member may not transfer an interest without the unanimous consent of the other members; the other members do not consent.

The applicable law, as stated in In re Willow Creek LLC, provides: 'A charging order is the exclusive remedy by which a judgment creditor of a member may reach the member's interest in an LLC. The charging order entitles the creditor to receive only those distributions that the LLC would otherwise pay to the debtor-member. It does not make the creditor a member, does not give the creditor voting rights, and does not entitle the creditor to compel the LLC to make a distribution. If the interest is foreclosed, the purchaser at the foreclosure sale acquires the transferable interest but becomes a member only if the members consent.'

Which of the following best describes the court's proper ruling?

  1. The court may issue the charging order and direct Walsh to vote as Carter directs, because the charging order gives the creditor all of the debtor-member's rights in the LLC.
  2. The court may issue the charging order, but Carter has no right to receive distributions from Summit unless Summit would have made a distribution to Walsh, and Carter cannot control Walsh's vote. (correct answer)
  3. The court may not issue a charging order unless the other members first consent, because the operating agreement prohibits transfer of a membership interest without unanimous consent.
  4. The court may issue the charging order and order Summit to distribute all of its currently available cash to Carter, because a charging order places the creditor in the member's shoes with respect to distributions.
Explanation: When you see a question about a judgment creditor trying to reach an LLC member's interest, the key is the charging order: it is the exclusive remedy, but it is deliberately narrow. The creditor steps into the debtor-member's economic rights only—not into the member's management rights. Here, the court should issue the charging order, but Carter's rights are limited by the rule from In re Willow Creek. Carter may receive only distributions that Summit would otherwise pay to Walsh. If Summit makes no distribution to Walsh, Carter gets nothing, and Carter cannot force Summit to distribute cash. Likewise, the charging order gives Carter no voting rights, so the court cannot require Walsh to vote as Carter directs. The wrong answers each stretch the charging order too far. The choice saying the court may issue the charging order and direct Walsh's vote is wrong because a charging order does not convey voting power. The choice saying the court may order Summit to distribute all available cash is wrong because the creditor cannot compel distributions—it only receives distributions the LLC already chooses to make to the debtor. The choice saying the charging order places Carter "in the member's shoes" for distributions is the same flaw: it overstates the creditor's rights. Finally, the choice claiming the court cannot issue a charging order without the other members' consent is wrong because a charging order does not transfer membership; it merely reaches distributions, so the operating agreement's transfer restriction does not block it. Study tip: always separate economic rights (distributions) from governance rights (voting, management). A charging order gives only the former.

Question 7

Maya and Elena are the only members of Solstice Yoga, LLC, a manager-managed company. The operating agreement names Maya as the sole manager and provides that only Maya may enter contracts for the company. While Maya is out of the country, Elena signs a one-year lease for new studio space with a landlord who has never dealt with Solstice before. Elena tells the landlord only that she is 'a member of Solstice.' Maya refuses to honor the lease.

In a dispute between the landlord and Solstice, which additional fact would be most important in determining whether Solstice is bound by the lease?

  1. Whether Maya had previously allowed Elena to negotiate and sign contracts for Solstice and the landlord knew of that practice. (correct answer)
  2. Whether the one-year lease was required by law to be in writing to be enforceable against Solstice.
  3. Whether Elena reasonably believed, when she signed the lease, that Maya would approve the transaction.
  4. Whether the rent Elena agreed to pay was below the market rate for comparable studio space.
Explanation: This question tests authority to bind a manager-managed LLC. Because Solstice is manager-managed and the operating agreement names only Maya as manager, Elena, as a mere member, has no actual authority simply by being a member. But an LLC can still be bound under apparent authority if the principal, through Maya, cloaks Elena with apparent authority and the third party reasonably relies on it. That is why the most important fact is whether Maya had previously allowed Elena to negotiate and sign contracts for Solstice and the landlord knew of that practice: prior similar dealings by Maya, known to the landlord, are the kind of manifestation that creates apparent authority. The writing requirement is irrelevant: even if the lease must be in writing, that goes to enforceability, not whether Elena had authority. Elena's reasonable belief that Maya would approve is also beside the point — apparent authority depends on the third party's reasonable reliance on the principal's actions, not the agent's subjective hopes. And whether the rent was below market may suggest the deal is favorable, but it does not establish authority or ratification. Study tip: in entity-authority questions, always ask what the principal did to cause the third party to believe. Actual authority looks inward; apparent authority looks outward.

Question 8

Heron LLC is manager-managed. Dana is its sole manager and owns 30% of the membership interests; Priya owns 40%; Roman owns 30%. Dana proposes that Heron lease a warehouse from Warehousing Solutions, Inc., a corporation wholly owned by Dana. She discloses in writing to Priya and Roman the material terms and her conflict. Priya approves the transaction; Roman does not. The operating agreement provides: 'Any transaction between the LLC and a manager or affiliate of a manager that is approved by a majority of the voting power held by disinterested members after full disclosure is conclusively presumed to be fair.'

The Mercer Limited Liability Company Act Section 409 provides: 'A manager has fiduciary duties of loyalty and care to the LLC and its members. A transaction in which a manager has a conflict of interest is not void or voidable if the manager proves that the transaction was fair to the LLC or if the material facts and the manager's conflict were disclosed to the disinterested members and a majority of the voting power held by disinterested members approved the transaction. The operating agreement may not eliminate the duty of loyalty, but it may provide that a transaction approved in that manner is conclusively presumed fair.'

If Roman later challenges the lease as unfair, which statement is correct?

  1. The lease is void because Dana, as sole manager, has no power to enter into a transaction with an affiliate of the manager even if members approve.
  2. The lease is valid only if Dana proves the rent is no more than fair-market rent, because Roman did not approve and the conclusive-presumption provision is unenforceable.
  3. The lease is valid because Dana made full disclosure, the required vote of disinterested members was obtained, and the operating agreement's conclusive-presumption provision is permitted by the Act. (correct answer)
  4. The lease is valid as to Priya's 40% interest but voidable as to Roman's 30% interest because Roman withheld consent.
Explanation: Whenever you see a manager-conflict transaction under an LLC Act, focus on full disclosure and approval by a majority of the disinterested voting power. Here Dana disclosed the material terms and her conflict in writing. The disinterested members were Priya (40%) and Roman (30%), so Priya's approval alone represented more than half of that 70% disinterested voting power, even though Roman voted no. The operating agreement then makes such an approved transaction conclusively presumed fair, and the Act expressly permits that conclusive-presumption provision while still preserving the duty of loyalty. Thus the lease is valid, and Dana need not separately prove fair-market rent. The argument that the lease is void because Dana is sole manager misreads the statute: a conflicted manager may deal with an affiliate if the statutory approval process is followed. The argument that Dana must prove fair-market rent because Roman did not approve ignores both the enforceable conclusive-presumption clause and the fact that Roman's no vote did not defeat the majority. Finally, the idea that the lease is valid as to Priya's 40% but voidable as to Roman's 30% misunderstands LLCs: the transaction is unitary, and proper approval binds all members, not just those who consented. Remember: in conflict-of-interest questions, calculate disinterested voting power, require full disclosure and majority approval, and respect an operating-agreement conclusive-presumption clause if the Act allows it.

Question 9

Nadia and Omar are the only members of Harbor Freight Logistics, LLC, which is manager-managed. The operating agreement designates Omar as the manager and states that Nadia is a non-managing member. The agreement is silent on outside business activities. Without telling Omar or the LLC, Nadia buys a small delivery business and begins serving two customers who had previously used Harbor Freight. Omar claims Nadia breached a duty to Harbor Freight by competing with it.

Which issue is most likely to determine whether Nadia breached a duty to the LLC?

  1. Whether Nadia's delivery business directly competes with Harbor Freight's existing delivery business and serves the same customers.
  2. Whether Harbor Freight lost profits as a result of Nadia's outside business and, if so, how much.
  3. Whether Nadia used confidential information belonging to Harbor Freight to obtain the two customers she now serves.
  4. Whether Nadia, as a non-manager member of a manager-managed LLC, owed a duty to refrain from competing with the LLC. (correct answer)
Explanation: Whenever you see an LLC question involving fiduciary duties, check the management structure first. In a manager-managed LLC, the operating agreement typically places management authority—and fiduciary duties—in the managers, not in the members who are not managers. Here, Omar is the manager and Nadia is a non-managing member; the agreement is silent about outside business activities. The decisive threshold issue is therefore whether Nadia, as a non-manager in a manager-managed LLC, owed a duty not to compete with the LLC. If she did not, then no amount of competition or lost profit creates liability. If she did, the other facts become relevant. Directly competing and serving the same customers: relevant to whether competition occurred or harmed the LLC, but it does not establish a duty. Lost profits: damages are not liability; a court must first find a duty and a breach. Confidential information: using LLC secrets could implicate a separate duty or trade-secret law even for a non-manager, but Omar's claim is about competition—and without a no-compete or loyalty duty, competition alone is not a breach. The real trap is assuming all members owe the same duties as managers; in manager-managed LLCs, they generally do not unless the operating agreement imposes them. When a question asks what determines liability, look for the gatekeeper issue—here, the existence of a duty—before analyzing facts.

Question 10

Dario, Elena, and Faiza are the only members of Blue River Brewing, LLC, a member-managed company. The operating agreement is silent on how distributions are to be shared. Dario contributed $100,000, Elena contributed $50,000, and Faiza contributed no cash but provides brewing services. After a profitable year, Dario and Elena vote to distribute $30,000 to themselves in proportion to their cash contributions and nothing to Faiza. The distribution would leave Blue River with sufficient assets to pay its debts as they become due. Faiza objects.

Which issue is most likely to determine whether the distribution is valid?

  1. Whether Faiza's brewing services were a valid form of contribution to Blue River.
  2. Whether the distribution left Blue River with sufficient assets to pay its debts as they became due.
  3. Whether Dario and Elena's vote was a proper exercise of majority management authority.
  4. Whether distributions under a silent operating agreement must be made in equal shares among all members. (correct answer)
Explanation: When you see an LLC distribution dispute, first ask: "What do the operating agreement or default rules say about sharing?" An LLC's operating agreement is its contract, but when it is silent, state LLC statutes supply default terms. Here, the agreement says nothing about how distributions are shared, so the determinative question is what default rule applies. In most LLC default rules, distributions are shared in equal shares among all members, not in proportion to capital contributions, unless the operating agreement says otherwise. That makes the correct issue whether a silent operating agreement mandates equal shares. Dario and Elena's vote cannot override Faiza's statutory default right, so their attempt to give themselves $30,000 and Faiza nothing is likely invalid. The other choices miss the point. Whether Faiza's brewing services were a valid form of contribution is irrelevant because her membership is not disputed, and services can be valid contributions; this choice distracts you from the distribution-sharing question. Whether the distribution left sufficient assets to pay debts is also not the issue—the facts expressly say it did, and solvency tests address creditor protection, not internal fairness among members. Finally, whether the vote was a proper exercise of majority management authority conflates management decisions with member economic rights; a majority can run day-to-day affairs, but the default distribution rule protects every member's share unless agreed otherwise. On exam day, whenever an operating agreement is silent, default statutory rules fill the gap—and for LLC distributions, equal shares often control. Watch for facts that tempt you into contribution-based reasoning.

Question 11

Beacon LLC has three members: Rosie (20%), Sam (40%), and Tessa (40%). The LLC is manager-managed; Tessa is the manager. Rosie also owns an outside company that sells products directly competitive with Beacon's. Rosie submits a written demand to inspect Beacon's customer list and pricing records, stating that she wants to verify that Tessa is not giving improper discounts to Sam. Rosie's actual purpose, however, is to obtain the customer list for her outside company. Tessa refuses. Rosie sues to compel inspection.

The Mercer Limited Liability Company Act Section 410 provides in relevant part:

(a) A member may inspect and copy records of the LLC upon reasonable notice during ordinary business hours if the demand is made in good faith and for a purpose reasonably related to the member's interest as a member.

(b) A purpose is not reasonably related to the member's interest if the member is in competition with the LLC and the records sought are not needed to protect the member's interest in the LLC.

(c) The operating agreement may not eliminate the right of inspection but may require a confidentiality agreement and reimbursement of copying costs.

(d) If the LLC refuses a proper demand, the member may obtain a court order and, if the refusal was arbitrary, costs and attorney's fees.

May Rosie compel inspection?

  1. Yes, because Section 410(c) says the right to inspect may not be eliminated, and Tessa's refusal was arbitrary once Rosie stated a proper purpose in writing.
  2. Yes, because Rosie's written demand states a purpose reasonably related to her membership, and a manager has no authority to decide whether that purpose is sufficient.
  3. No, because Rosie is in competition with Beacon and her actual purpose is to obtain the customer list for her outside company, which is not reasonably related to her interest as a member. (correct answer)
  4. No, because members of a manager-managed LLC have no right to inspect customer lists or pricing records; their inspection right is limited to financial statements and tax returns.
Explanation: Whenever you see an LLC inspection question, focus on the statutory standard: the member must make the demand in good faith and for a purpose reasonably related to her interest as a member. Here, Section 410(b) adds a crucial limit—if the member is in competition with the LLC, the purpose is not reasonably related unless the records are needed to protect her LLC interest. Rosie cannot compel inspection. Her written demand claims she wants to verify Tessa's discounts to Sam, but her actual purpose is to obtain Beacon's customer list for her competing outside company. Because she is in competition with Beacon and the customer list is not needed to protect her membership interest, the demand fails the good-faith and reasonable-purpose test. The statute allows the LLC to refuse an improper demand, and the court will not order inspection. The first wrong answer ("Section 410(c) says the right may not be eliminated") confuses non-waivability with an absolute right; the right still depends on a proper demand, and Tessa's refusal was not arbitrary because Rosie's actual purpose was improper. The second wrong answer ("written demand states a proper purpose, and a manager has no authority") ignores that actual purpose controls and that the LLC may judge whether the demand satisfies the statute. The fourth wrong answer ("members of a manager-managed LLC have no right to inspect customer lists") misstates the law; Section 410(a) broadly covers records, not just financial statements and tax returns. Study tip: whenever a member's stated purpose differs from her actual purpose, the actual purpose decides the inspection right—especially if she competes with the LLC.

Question 12

Northgate LLC is manager-managed. Its operating agreement designates Priya as the sole manager and states that only Priya may sign contracts on Northgate's behalf. Priya has repeatedly told OfficeSource, a supplier, that Dan handles Northgate's supply purchases, and she has directed OfficeSource to send invoices to Dan's attention. Dan, a nonmanager member, signed a standard purchase order for $35,000 of office supplies for Northgate as 'Dan, Member, Northgate LLC.' OfficeSource knew Dan was a member and not the manager; it had no notice of the operating agreement. When Northgate refused to pay, OfficeSource sued Northgate.

The Mercer Limited Liability Company Act provides in relevant part: Section 301(a): A member of a manager-managed LLC is not an agent of the LLC solely because the member is a member. Section 301(b): An LLC is bound by a person's act if the person has actual authority or if the act is apparently in the ordinary course of the LLC's activities and the other party reasonably believes, based on the LLC's conduct, that the person is authorized, unless the other party has notice that the person lacks authority. Section 301(c): A third party's knowledge that a person is only a member of a manager-managed LLC does not by itself establish that the third party had notice of a lack of authority.

Will Northgate be bound by the purchase order?

  1. No, because Dan lacked actual authority and OfficeSource knew he was not the manager, so OfficeSource cannot claim apparent authority.
  2. No, because under Section 301(a) a nonmanager member can never have apparent authority to bind a manager-managed LLC.
  3. Yes, because Dan's act was in the ordinary course, Priya's statements held Dan out to OfficeSource, and OfficeSource did not have notice that Dan lacked authority. (correct answer)
  4. Yes, because under Section 301 every member of a manager-managed LLC has actual authority to bind the LLC in the ordinary course unless the operating agreement is filed with the state.
Explanation: When a question asks whether an LLC is bound by an unauthorized member's act, focus on actual authority, apparent authority, and notice. Section 301(b) gives the statutory test: the LLC is bound if the act is apparently in the ordinary course of its activities and the other party reasonably believes, based on the LLC's conduct, that the person is authorized — unless the other party has notice of the lack of authority. Buying $35,000 of office supplies is ordinary course, and Priya, the manager, repeatedly told OfficeSource that Dan handled supply purchases and directed invoices to him. That managerial conduct held Dan out as authorized, so OfficeSource reasonably believed he could sign. OfficeSource knew Dan was only a member, but Section 301(c) says that alone does not establish notice of lack of authority; and OfficeSource had no notice of the operating agreement's limit. Thus Northgate is bound. The "No, because Dan lacked actual authority" answer misses that apparent authority can bind the LLC without actual authority, and knowing Dan was not manager is not enough under 301(c). The "nonmanager member can never have apparent authority" answer misreads Section 301(a): it negates agency solely from membership, but 301(b) allows apparent authority based on LLC conduct. The "every member has actual authority" answer misstates the statute: 301(a) says membership alone is not agency, and the operating agreement did not grant Dan actual authority. The purchase order binds through apparent authority. On exam, separate actual from apparent authority: look for the LLC's conduct clothing the person with authority, and check whether the third party had notice of limits.