Is it legal to require a minimum number of hours worked per year to keep an ownership percentage in a company?

Question

I'm a part owner of a LLC and I own a percentage of the company. When we started this company, we had a meeting where we signed an agreement. In this agreement, it was stated ("expectation and obligations") that 40 hours of work is expected per percentage point of ownerships. So the company is now saying that I must continue to contribute the minimum hours of work per year to maintain my ownership stake.  
 
Is this legally allowed and what may happen if I'm unable to contribute this minimum amount of hours of work? Also, I've offered to continue work part time but it's being declined, so would this absolve me from this minimum work requirement?

Shawn R. Jackson · Answer

As you might imagine, it depends upon both what is written in the LLC Operating Agreement and how it is written. Various provisions such as the one you are sharing ... are enforceable in certain circumstances ... so, what I would suggest is that you share the signed agreement with an attorney and engage a free 30-minute video call consultation with the attorney of your choice. Does this make sense to you?

Neil Pedersen · Answer

The governance of an LLC is largely a creature of contract.  Therefore the answer to your question must come from the terms of the operating agreement.  If the members so wish to have a provision as you have reported, they are allowed to collectively agree to such a term. 
 
Good luck to you.

T. Augustus Claus · Answer

In California, it's generally legal to establish a minimum annual work requirement to maintain ownership percentage in a company, provided it's outlined in the company's operating or partnership agreement. Transparency and obtaining written consent from owners are important. The requirement should also be reasonable and not overly burdensome.

James L. Arrasmith · Answer

I understand your concerns regarding the ownership requirement in your LLC operating agreement. In California, LLCs have flexibility in structuring their agreements, and ownership retention based on a minimum number of hours worked may be permissible if explicitly stated and agreed upon by all parties. However, the enforceability of such a provision and potential consequences of not meeting the requirement can vary based on specific contract language and circumstances. To determine the best course of action, I recommend a thorough review of the operating agreement and consultation with a legal expert. 
 
James L. Arrasmith 
Founding Attorney and Chief Lawyer of The Law Offices of James L. Arrasmith.

Q: Is it legal to require a minimum number of hours worked per year to keep an ownership percentage in a company?