by Richard Keyt, Arizona limited liability company & business attorney

You probably would not be surprised to learn that members of an Arizona limited liability company are not created by spontaneous combustion nor do members magically appear out of thin air.  Arizona law is very explicit as to how a person or entity becomes a member of an Arizona LLC.

Arizona Statutory Law

Arizona Revised Statutes Section 29-3401 states:

A. At the time of formation, a limited liability company must have at least one member. If a company is to have only one member on formation, the person becomes a member by agreeing to be a member and by being identified as the member in the Articles of Organization.  The member and the organizer may be, but are not required to be, different persons. If the member and organizer are different persons, the organizer acts on behalf of the initial member.

B. If a limited liability company is to have more than one member on formation, those persons become members as agreed by the persons before the formation of the company. the organizer acts on behalf of the persons in forming the company and may be, but is not required to be, one of the persons.

C. After formation of a limited liability company, a person becomes a member by any of the following:

1. as provided in the operating agreement.

2. as the result of a transaction effective under Article 10 of this Chapter.

3. by agreeing to become a member, with the affirmative vote or consent of all the members.

4. as provided in Section 29-3701.A.3.

If your Arizona limited liability company has a member that was not named in the initial Articles of Organization filed with the Arizona Corporation Commission or if it has a member who became a member after the company was formed, did the LLC comply with ARS Section 29-3401.C  If not, that member has a problem and is technically not a member of the LLC.

Note the different procedures for admitting a member depending on whether the member becomes a member AS OF THE DATE OF FORMATION OF THE LLC or later.  The method is different depending on the point in time when a person or entity is to become a member.

Potential Problem With Manager Managed LLCs

Arizona law says that a manager managed LLC must name in the initial Articles of Organization members who own 20% or more of the capital or profits of the LLC.  If your manager managed Arizona LLC’s Articles of Organization does not list all of the initial members in the initial Articles of Organization filed with the Arizona Corporation Commission, did the LLC comply with ARS Section 29-3401 with respect to the less than 20% members?  If not, it should do so immediately.

Potential Problem with New Members

If your LLC added a member after the initial Articles of Organization were filed with the Arizona Corporation Commission, did your LLC comply with ARS Section 29-3401 with respect to the member(s) added later?  If not, it should do so immediately.

How to Document the Addition of a New Member

Has your Arizona LLC properly documented all changes involving members and their percentage of ownership of the company?  If not, the company and its members risk having a dispute one day over who the owners are, how much does each member own and when did the member acquire the interest.  These types of disputes frequently result in litigation and can be very expensive to resolve.  Do not delay properly documents changes involving members.  The best time to document a change is when it occurs.

Whenever there is a change with respect to any member of an Arizona LLC, the change should be evidenced, at a minimum, by all of the following documents:

1. Assignment of Membership Interest Agreement:  A buyer and seller (in a transaction that involves a purchase and sale) or an assignor and assignee (in a transaction that does not involve a sale) should sign an Assignment of Membership Interest Agreement that states the seller/assignor is assigning the interest to the buyer/assignee as of the effective date of the transfer.  This document is equivalent to a Deed or Bill of Sale.  It is the document that actually evidences the change of ownership from the seller/assignor to the buyer/assignee.  You would not buy a home without getting a Deed and you should not acquire or transfer an interest in an Arizona LLC without an Assignment of Membership Interest Agreement.

2. Amendment to the Articles of Organization.  If the change involves the addition or deletion of one or more members of a member managed LLC or the addition or deletion of one or more members who owns 20% or more of the LLC or a manager of a manager managed LLC the company’s Articles of Organization on file with the Arizona Corporation must be amended to reflect the change(s).

3. Amendment to the Operating Agreement.  Because the Operating Agreement is the primary document that evidences the ownership of the company and rights and obligations of the members, all members, including the all new members, should sign an Amendment to the Operating Agreement.  The Amendment to the Operating Agreement should contain any changes resulting from the sale/assignment such as removing the names of terminated members, adding the names of new members, adding the addresses for notices of any new members, stating the revised percentage ownership of all members, changes in managers, if any, and any other changes resulting from the sale/assignment.

4. Resolution of Members:  All the members should sign a Resolution that evidences their approval to the change in membership interest and addition of a new member, if applicable.  If all the members will not approve a transfer of a membership interest, and the LLC has an Operating Agreement that allows less than all of the members to approve a transfer, the members should have a formally noticed and called meeting to vote on the proposed transfer.

How to Hire KEYTLaw to Document Member Changes

The quickest way to hire Richard Keyt do prepare all the documents needed to add or remove one or more members and/or managers submit our Member Change Questionnaire.