Question: The members of my multi-member Arizona limited liability company never signed an Operating Agreement. The members now disagree on how to run the company. What are the members’ voting rights?
Answer: One of the primary reasons the members of a multi-member LLC should sign an Operating Agreement is to set rules on members’ voting rights and to set what major actions require the prior approval of a majority or super majority of the members or the unanimous approval of all members. If the members fail to adopt a good Operating Agreement then the default voting rules of Arizona’s LLC law apply and its a matter of time before the members disagree on action and big problems arise.
When the members of an Arizona LLC fail to adopt an Operating Agreement that provides for members’ voting rights or if the members adopt an Operating Agreement that is voting rights deficient, Arizona Revised Statutes Section 29-681 applies and provides the default members’ voting rules and rights.
The voting rules that apply to an Arizona LLC that does not have an Operating Agreement with voting rules signed by all of the members are listed below. There are only nine actions that require the approval of members – four of which of which require the approval of all members and five of which require the approval of a majority of the members.
- All Members Get One Vote: Every member has one vote regardless of how much money the member invested or how much of the LLC the member owns. For example, if Homer and Marge Simpson invested $1,000 in World Wide Widgets, LLC and acquired a 1% membership interest as community property and Ned Flanders invested $99,000 for 99% of the company then each of the three members has one vote with respect to the nine major actions listed in Section 29-751. Warning: If you are the major investor and/or the owner of a majority of the percentage interests in an Arizona LLC Section 29-751 is the reason you must have a good Operating Agreement that sets forth voting rules and rights.
- When Unanimous Approval is Required: Only four actions require that all members approve the action. “The affirmative vote, approval or consent of all members is required to:
1. Adopt, amend, amend and restate or revoke an operating agreement or authorize a transaction, agreement or action on behalf of the limited liability company that is unrelated to its purpose or business as stated in an operating agreement or that otherwise violates an operating agreement.
2. Issue an interest in the limited liability company to any person.
3. Approve a plan of merger or consolidation of the limited liability company with or into one or more business entities as defined in Section 29-751.
4. Authorize an amendment to the articles of organization that changes the status of the limited liability company from or to one in which management is vested in a manager or managers to or from one in which management is reserved to the members.”
- When Approval of a Majority of the Members is Required: Only five actions require the approval of a majority of the members. “The affirmative vote, approval or consent of a majority of the members, or if management of the limited liability company is vested in one or more managers, the affirmative vote, approval or consent of the sole manager or a majority of the managers, is required to:
1. Resolve any difference concerning matters connected with the business of the limited liability company.
2. Authorize the distribution of limited liability company cash or property to the members.
3. Authorize the limited liability company to repurchase all or part of any member’s interest in the limited liability company from that member.
4. Authorize the filing of articles of termination concerning the limited liability company.
5. Subject to subsection C, paragraph 4 of this section, authorize an amendment to the articles of organization, except that an amendment that merely corrects a false or inaccurate statement in the articles of organization may be filed at any time by a manager if management of the limited liability company is vested in one or more managers or by a member if management of the limited liability company is reserved to the members.
When there is no Operating Agreement Section 29-751.E.1 & 2 give the majority of members a lot of power to out vote the minority members and run the company.
The members failure to to adopt an Operating Agreement more often than not will eventually lead to a dispute among members as to how to run the company. One of the most common reasons people call me is to learn their options when their Arizona LLC does not have an Operating Agreement and the members need a company divorce.