Posted in Business Partnership
By Tony Liu, Founder and Principal Business Trial Attorney
In Summary
Many investors believe that staying passive protects their ownership and income. In California, that assumption can be dangerous. If a non-managing LLC member becomes disruptive—or even unintentionally destabilizing—the company may have the right to remove them. This guide explains when expulsion is legally possible, what rights passive owners actually have, and how to protect your investment before control slips away.
If you’re already sensing tension or instability inside a company, this is the type of internal dispute that experienced Newport, CA business litigation lawyer and throughout Southern California is designed to address early—before positions harden.
Why Passive Ownership Is Not a Shield
There’s a quiet myth in business ownership: Once you invest, you’re entitled to profits forever—even if you step back.
For many silent investors, that belief feels reasonable. You put in capital. You trusted the operators. You expected transparency, professionalism, and fair dealing. But California law doesn’t treat ownership as untouchable simply because someone is no longer involved day-to-day.
Courts focus on one central question: Does this owner’s conduct—active or passive—harm the enterprise?
If the answer is yes, ownership alone may not be enough to protect them.
This is where many passive owners feel blindsided. The risk isn’t just being ignored or sidelined. In some situations, the risk is expulsion.
What Rights Does a Passive LLC Owner Have in California?
A non-managing LLC member does have real rights, but those rights are often narrower than expected.
Core rights typically include:
- The right to receive distributions when properly declared
- The right to access certain financial information
- The right to vote on major issues if the operating agreement allows it
What passive owners usually don’t control:
- Daily operations
- Management decisions
- How other members communicate with investors or vendors
- Whether the company tolerates destabilizing conduct
Definition: A non-managing LLC member is an owner who does not participate in daily operations and whose power is defined primarily by the operating agreement and California’s LLC statutes, not by informal expectations.
This distinction matters more than most investors realize.
Can a Passive Owner Be Removed From an LLC in California?
Short answer: yes—under the right conditions.
California law allows LLC members to be expelled if:
- The operating agreement authorizes removal, or
- A court determines that the member’s conduct makes it impractical to continue the business with them involved
This authority comes from California Corporations Code §17706.02, which permits the expulsion of a member who engages in wrongful conduct that materially harms the company or persistently breaches the operating agreement.
Intent is not the deciding factor. Impact is. An owner can be removed even if they believe they’re acting in self-defense.
When Does a Passive Owner Cross the Line Into “Disruptive”?
This is where the analysis becomes uncomfortable for silent investors. You don’t need to be operational to be considered disruptive.
Common behaviors that put passive owners at risk:
- Threatening litigation as leverage rather than resolution
- Accusing leadership of misconduct to other investors or lenders
- Sending inflammatory emails that undermine confidence
- Blocking governance votes while remaining disengaged
- Creating uncertainty during fundraising or refinancing
- Repeating unverified allegations that destabilize the business
From the court’s perspective, these actions don’t look like “protecting an investment.” They look like introducing risk.
A Real-World Example: When Silence Turns Into Disruption
California courts have already addressed this scenario.
In Tuli v. Specialty Surgical Center, a founder who helped build the company eventually stepped back into a passive role. Over time, he stopped contributing operationally—but continued taking profits. Eventually, he began sending accusatory communications to investors, alleging misconduct.
The board relied on the operating agreement’s termination clause and voted to remove him. He sued, claiming wrongful expulsion.
The court ruled in favor of the company, emphasizing that even a founder can be removed if their conduct becomes disruptive and the agreement authorizes action.
Key takeaway: Being passive doesn’t mean being invisible—and it doesn’t mean being immune.
How Operating Agreements Decide Who Stays and Who Goes
For passive investors, this is the most overlooked document in the entire relationship.
Why expulsion clauses exist
Operating agreements often include termination or expulsion provisions to:
- Protect the business from internal sabotage
- Preserve lender and investor confidence
- Maintain operational stability
These clauses usually define:
- What qualifies as “cause”
- Who can vote on removal
- Whether a buyout is required
Why silent investors miss the risk
Early optimism, trust in partners, and a desire to stay hands-off often lead investors to skim—or ignore—these sections entirely.
By the time the clause matters, leverage may already be gone.
This is where early legal guidance focused on internal disputes can dramatically change outcomes.
What If the Operating Agreement Is Vague—or Silent?
When an agreement doesn’t clearly address expulsion, California’s default LLC rules apply.
That usually means:
- More court involvement
- Less predictability
- Higher cost and longer timelines
Courts—particularly in venues like Orange County Superior Court—tend to prioritize business continuity over individual entitlement. If keeping a disruptive member threatens the enterprise, courts are often willing to authorize removal or other remedies.
This is rarely the outcome silent investors expect.
How Passive Owners Can Protect Their Investment Before Control Is Lost
Most damage happens after emotions take over.
Smart silent investors act earlier.
Practical steps that reduce expulsion risk:
- Request financial information calmly and consistently
- Keep concerns factual, documented, and private
- Avoid accusatory language or public escalation
- Review expulsion and buyout language now—not during conflict
- Get strategic guidance before sending “one last email”
Many investors later admit the same regret: “I wish I’d slowed down before reacting.”
If You’re Dealing With a Disruptive Passive Investor
For managing members and majority owners, the challenge is acting decisively without triggering unnecessary legal chaos.
Key principles:
- Follow the operating agreement precisely
- Document business harm—not personal frustration
- Use formal processes, not emotional responses
- Understand when negotiation is smarter than expulsion
Handled correctly, internal disputes don’t have to destroy the company—or the relationship.
Alternatives to Expulsion Worth Considering
Removal isn’t always the best first move. In many situations, better outcomes come from:
- Negotiated buyouts
- Structured mediation
- Clarifying rights and boundaries going forward
The State Bar of California and organizations like the American Bar Association consistently emphasize dispute resolution as a way to preserve value and reduce risk in closely held businesses.
Frequently Asked Questions
Can you lose ownership if you stop participating in a business in California?
Yes. While passivity alone isn’t grounds for removal, conduct that harms the business—or violates the operating agreement—can justify expulsion.
What happens if an LLC member becomes disruptive but owns equity?
Ownership does not prevent removal if the agreement allows it or a court finds the conduct materially harmful.
Can majority members remove a minority owner without consent?
In some cases, yes—if the operating agreement authorizes expulsion or a court orders it under California law.
Do passive owners have the right to see financial records?
Generally, yes. But how and when access is granted often depends on the operating agreement and the manner of the request.
Can an expelled member sue the company?
Yes, but courts often defer to properly followed agreements and documented governance decisions.
When to Get Help Before Things Fall Apart
If you’re a silent investor who feels locked out, uneasy, or tempted to escalate—or if you’re managing a passive owner whose actions are creating instability—the timing of your next move often matters more than the move itself.
The goal isn’t to “win a fight.” It’s to protect value, preserve leverage, and avoid decisions that can’t be undone.
A focused conversation now can help you understand your rights, assess your leverage, and choose a path that protects both your investment and your reputation.
Schedule a meeting with Focus Law to discuss your situation and your next move.
