Members

Caution: LLC Membership Interests Held as Community Property

Question:  My husband and I acquired a 50% membership interest in an Arizona LLC as community property with right of survivorship.  Homer & Marge Simpson own the other 50% of the LLC.  My husband died and my husband’s interest in the LLC passed to me automatically per Arizona Revised Statutes Section 29-732.01.

Homer Simpson says that he and Marge now have control of the LLC because the 25% interest I acquired from my husband is a mere assignment of his interest and is not a membership interest with voting rights.  The Simpsons say that I own a 25% membership interest in the LLC and the 25 votes associated with that membership interest and an economic right to 25% of the profits of the LLC without any voting rights.  Homer says that since my husband’s death members have 75 total votes instead of 100, the Simpsons have 50 votes and I have 25 votes  How many votes do I have?

Answer:  The interest in the LLC that you inherited from your husband is a membership interest with voting rights rather than an assignment of an economic interest without voting rights if the members of your LLC signed an Operating Agreement that provides that when a married couple own their interest in the LLC as community property with right of survivorship and one of them dies, the interest of the deceased inherited by the survivor is a membership interest.  Section 29-731.B.2.  If the members of your LLC did not sign such an Operating Agreement then what you inherited from your husband was a 25% economic interest in the LLC without any voting rights.

Lesson to Be Learned:  If your Arizona LLC has members who own their membership interests as community property with right of survivorship, joint tenancy with right of survivorship or tenants in common and the members want the heirs who inherit an interest to inherit membership interests with voting rights vs. economic interests without voting rights then the members of the LLC must sign an Operating Agreement that provides that inherited interests are membership interests with voting rights.

Note:  My standard Operating Agreement contains this automatic membership interest with respect to inherited interests clause.  Hire Arizona LLC attorney Richard Keyt to amend your existing Operating Agreement or prepare a new Operating Agreement by completing our online Questionnaire.

2017-05-29T10:46:48-07:00November 22nd, 2016|FAQs, Members, Operating Agreements|0 Comments

KEYTLaw Formed LLC’s Documents Stored in the Cloud

We are proud to announce that when Richard Keyt forms a Silver or Gold LLC KEYTLaw will upload and save all of the LLC’s documents to a secure folder in the cloud hosted by the Citrix ShareFile service.  We are very excited to offer this new service that has the following features:

  • We send an email message to all LLC members notifying them that their LLC’s documents have been saved in the LLC’s ShareFile folder.
  • When the member clicks on the link in the Welcome email the member is taken to a ShareFile page that tells the member ShareFile sent the member an email message that contains an access code.  The member is asked to check his or her inbox, copy the access code in the follow up email and paste the access code on the ShareFile web page.
  • When the member inserts the access code and clicks on the login button the member is taken to a secure web page on which the member enters a password, a confirmation of the password, first name and last name.
  • When the member saves the information the member is taken to a ShareFile folder in which all of the LLC’s documents are saved in Adobe .pdf format.
  • When logged in to the LLC’s ShareFile folder the member can: (1) download a document, (2) copy a document, (3) upload documents, and (4) share a file with another person.

ShareFile Security

ShareFile is a state of the art secure online document storage service.  ShareFile’s security features include the following:

Data Protection During File Transfer

  • File transfer: ShareFile employs SSL/TLS protocols to protect client authentication, authorization and file transfers.
  • High-grade encryption: ShareFile secures files in transit with no less than 128-bit encryption using industry-standard encryption protocols.
  • File integrity: ShareFile employs a keyed hashed message authentication code (HMAC) to authenticate and ensure the integrity of intra-system communications. ShareFile verifies file size and file hash to ensure integrity.
  • Link generation: ShareFile download links are uniquely and randomly generated using strong hash-based message authentication codes. ShareFile provides technical countermeasures to protect links from guessing attacks.

Data Protection During Storage

  • Datacenters: ShareFile uses SSAE 16 Type II accredited or ISO 27001 certified datacenters to host the SaaS application and metadata. All files are stored in SSAE 16 Type II (SOC1), SOC2 and ISO 27001 accredited datacenters with high availability and durability ratings.
  • Encryption: ShareFile stores client files at rest using AES 256-bit encryption, a Federal Information Processing Standards (FIPS) encryption algorithm.
  • Firewalls: Files are processed using systems protected by securely configured firewalls that effectively limit and control access to network segments.
  • Redundant storage: Files are stored in replicate with leading Infrastructure-as-a-Service (IaaS) providers that ensure high file durability and availability.
  • Backup: Files are backed up according to configurable file-retention and versioning settings

We look forward to providing members of LLCs we form and clients with state of the art online document storage.

2017-08-25T14:54:40-07:00October 18th, 2015|Forming LLCs, Members, Miscellaneous|0 Comments

What are Arizona LLC Members Voting Rights?

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 29-751Warning:  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.

2016-11-16T08:23:42-07:00February 1st, 2015|FAQs, Member Disputes, Members, Operating LLCs|0 Comments

Why Does My Spouse’s Name Appear in My Arizona LLC’s Articles of Organization?

Question:  You formed my Arizona limited liability company and the Articles of Organization list me and my spouse as members.  Why is my spouse named as a member in the AOO?

Answer:  You told us that you and your spouse are Arizona residents and you want to own your membership interest in the LLC as community property.  That means each spouse owns an undivided ½ of the 100% of membership interests in your LLC.  Arizona law requires that the names and addresses of all members who own 20% or more of an Arizona LLC be disclosed in the Articles of Organization.

A married person can also own his or her interest in the LLC as separate property, which means the owner spouse owns 100% of the membership interests in the LLC and the other spouse owns none of the LLC.  When a married Arizona resident owns his or her interest in the Arizona LLC as separate property then only the owner spouse is listed in the Articles of Organization.

For more on this topic see “How Do I Acquire an Ownership Interest in an Arizona LLC as Separate Property?

2016-11-16T08:23:44-07:00September 9th, 2013|FAQs, Members|0 Comments

Don’t File a False Document with the Arizona Corporation Commission

A client called and said his banker refused to open a bank account because the Articles of Organization filed with the Arizona Corporation Commission does not list the name of a person who owns 10% of the LLC.  The banker insisted that my client file an amendment to the Articles of Organization that names the 10% owner as a member.  Here is the text of an email message I sent to my client about the bank’s unreasonable and ignorant request:

I understand that your bank wants you to commit a felony and file a false document with the Arizona Corporation Commission that misrepresents the ownership of your LLC. Specifically your bank wants the Articles of Organization of <name omitted>, LLC, to show that Homer and Marge Simpson are members of the LLC despite the fact they together own only 10% of the company.

Arizona Revised Statutes Section 29-632.A states: “The articles of organization shall state: If management of the limited liability company is vested in a manager or managers, each person who is a manager of the limited liability company and each member who owns a twenty per cent or greater interest in the capital or profits of the limited liability company.”

Your LLC is manager managed therefore Arizona LLC law prohibits naming anybody as a member of the LLC unless the member owns 20% or more of the LLC. I understand that your banker wants you to file a false document with the Arizona Corporation Commission that names Homer and Marge Simpson as members of the LLC. You should not do that because it is a felony to file a document with the Arizona Corporation Commission that you know contains a misrepresentation of the facts.

Arizona Revised Statutes Section 29-613.A states: “A person who . . . signs any articles, statement, report, application or other document filed with the commission that is known to the person as false in any material respect is guilty of a class 4 felony.”

Because of this law knowledgeable bankers and others always ask to see the Operating Agreement of a manager managed Arizona LLC because an Operating Agreement signed by all of the members is the only way to verify all of the owners of a manager managed Arizona LLC and their percentage ownership of the LLC.

Bottom Line:  Do not file documents with the Arizona Corporation Commission that contain false statements.

No Written Contracts + Death of Single Member LLC Owner = Nightmare

Recently I met with two very troubled men who are at the beginning stages of a nightmare caused by the death of a member of an Arizona limited liability company and the LLC members’ failure to document their LLC and enter into a Buy Sell Agreement.  As I listened to their tale of woe, I was reminded of the time I heard Mike Gallagher, the founder of Gallagher & Kennedy, P.A. my former law firm, say to a young G & K lawyer in jest, “Jim, you aren’t completely worthless.  You can always be used as a bad example.”  What we have here is the perfect bad example caused by the failure to plan.

The two men (who I will call Bob and Jim) were involved with a single member LLC I will call World Wide Widgets, LLC (WWW) owned by Jack, a single man with no children.  Over a period of years Bob loaned several hundred thousand dollars to the LLC without any documentation.  Bob and Jim agreed orally that as part of the loan the WWW would pay Bob interest plus a share of the substantial profits of WWW.  Jim was the primary person who ran the company on a day to day basis.

The company was very successful and making big bucks because it had a very valuable contract with a nationally known company that had a fabulous online business.  Everybody was very happy with the company and the money and profits they received from the highly successful WWW.  Jack told Bob and Jim that he was going to give them part ownership of WWW.

Unfortunately Jack died without warning and all hell broke loose because the parties made the following fundamental mistakes:

  • No Loan Documents.  Bob did not document his loan to WWW with a promissory note.  Nor did he secure payment of the note with a lien on WWW’s assets.  Bob cannot enforce his loan without going to court or making a deal with Jack’s heir, both of which are expensive courses of action best to be avoided.
  • No Option to Acquire Membership Interests.  Bob and Jim did not get Jack to sign a contract that provided they had a right to become members of WWW.  Nor did they push Jack to actually transfer partial ownership of WWW to them.  If Bob and Jim had entered into an option to acquire membership interests in WWW they would have been able to become members without the need to sue (a difficult case to prove) or making a deal with Jack’s heir.  If Bob and Jim had been members of WWW they would have been wise to have entered into a Buy Sell Agreement with Jack that would have given WWW and themselves an option to buy Jack’s membership interest in WWW from Jack’s heir after death.  The purpose of a Buy Sell Agreement is to allow ownership of an LLC to be retained in the hands of the LLC members in the event a member dies.  To learn more about Buy Sell Agreements see my website on this important topic.
  • No Employment Agreement.  Jim did not have an employment agreement signed by WWW.  Without an employment agreement Jim’s job and compensation was at the mercy of Jack’s heir.
  • No Estate Plan.  Jack did not have a Will or a Trust that provided who inherited WWW after his death.  Jack’s only living relative was an estranged sister with whom he had not had any contact for years.  Bob and Jim believe that Jack would have wanted them to inherit WWW, not his estranged sister.  Because Jack died without an estate plan, the State of Arizona’s estate plan determined who inherited Jack’s assets.  Because Jack was single, had no children and his parents were deceased, his entire estate was inherited by the estranged sister who didn’t give a hoot about Bob and Jim and their failure to get signed documents.  To learn more about Arizona Wills, Trusts, estate planning and how to give your family asset protection see my website called Arizona Wills & Trusts.

The end result was not pretty, but it was a very expensive lesson from which I hope others can learn.

Lessons to Be Learned

1.  People die.

2.  People die.  I repeated this lesson because the reality of life is that few people believe this is a true statement.  This is the conclusion I have reached after 25 years as a business lawyer who has formed 6,700+ companies, the vast majority of which none of the members took action to make life easier on their loved ones and co-members while alive.

3.  Document with signed agreements all transactions involving your LLC.  These transactions include promissory notes (with a resolution of members authorizing the loan), employment agreements, independent contractor agreements, options to purchase membership interests in the LLC and a Buy Sell Agreement signed by all of the members.

4.  If you have an ownership interest in an LLC or a corporation, sign a Will or a Trust that provides who will inherit your interest in the companies when you die.

Hire Us

If you need to document a transaction or provide for the orderly transfer of your companies and other assets on your death, call me, Richard Keyt (480-664-7478) or my son Arizona LLC and estate planning attorney Richard C. Keyt (480-664-7472).  Do it now.  Don’t procrastinate until it’s too late and you become a bad example like Bob, Jim and Jack.  To learn more go to Arizona Wills & Trusts.

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2019-06-15T07:29:32-07:00August 11th, 2013|Buy Sell Agreements, FAQs, Members|1 Comment

Court Rules LLC Member not Obligated to Contribute Money to LLC

The New York case of Duff v.Curto, 2012 NY Slip Op 30264(U) (Sup Ct Suffolk County Jan. 25, 2012), by  Suffolk County New York Justice Emily Pines involved a claim by one LLC member that the other member failed to contribute money to the company.  Duff claimed he contributed $523,000 to the capital of Fairlea Court Holding, LLC, of which Gary Duff and Peter Curto, Jr., were the only two members. Duff claimed that Curto breached the Operating Agreement because he did not contribute any money to the company and that Curto was unjustly enriched.

They signed an Operating Agreement that said:

“[u]pon the execution of this Agreement, each Member shall contribute cash and/or property to the Company as set forth opposite their names in Exhibit A”

Exhibit A stated that each member had a 50% interest in the company, but it did not show that either member was to contribute any capital to the company.  The Court said:

“The Court finds that the documentary evidence provided raises an issue of the parties intent in placing the 50% figure in the Agreement and does not definitively dispose of the plaintiff’s claim”

The Court found that Duff reported on his tax returns that he loaned $309,000 to the LLC and that Curto never agreed to contribute any money to the company.

Lesson for Arizona LLCs

Arizona LLC law provides that no member of an Arizona limited liability company is liable to contribute money or property or services to the LLC unless the member agrees to do so in writing.  Arizona Revised Statutes Section 29-702.A states:

“A promise by a member to make a capital contribution to the limited liability company is not enforceable unless set out in writing and signed by the member.”

If you have an Arizona LLC and want to create a legal obligation on the part of one or more members then the LLC must obtain a written document signed by the member(s) that states the amount of money or the description of the property or the nature and extent of the services and when the money or property or services must be contributed.  The best place for these provisions is the Operating Agreement.

Arizona Attorney General Sues Spouse Because She Owned a Community Property Interest in Husband’s LLC

Arizona Attorney General Tom Horne sued a Phoenix-area firearms dealer for consumer fraud in a lawsuit filed in Maricopa County Superior Court.  The defendants in the lawsuit are Lancaster Arms, LLC, owned by co-defendants Chester Durda and his wife Marsha.  The AG alleges that the LLC and its member Chester Durda defrauded consumers by failing to provide promised merchandise and services to dozens of customers between February of 2009 and September of 2011.

The Attorney General’s press release states:

“Protecting consumers is one of the most important jobs of this office,” Horne said. “Businesses such as the one named in this lawsuit cannot be allowed to make promises to customers and not deliver on those promises. The problem is made even worse when, as in this case, some customers made advance payments with the expectation that they would get either merchandise or services in return, and instead they got nothing. The legal action requests that the court order the business to make restitution, pay penalties, and prevent it from defrauding additional consumers.”

According to the complaint, Lancaster Arms claimed to consumers, some of whom worked in law enforcement and the military, and to some weapons dealers, on the internet and through personal contact by Chester Durda, that the company sold weapons, parts and accessories and that it provided weapon kit assembly services to consumers who sent their kits to the company. Additionally, Lancaster Arms represented that some of its weapons were subject to its “Limited Life Time Warranty”. The lawsuit alleges that Lancaster Arms failed to ship merchandise that consumers had paid for, failed to repair weapons under warranty, and failed to provide refunds. The lawsuit also alleges that Lancaster Arms failed to assemble weapons kits sent to it by consumers and failed to return the un-assembled kits to the consumers or to provide them with refunds. The complaint asks the court to enter an injunction prohibiting the defendants from engaging in any further unlawful acts, require the defendants to restore money and property to consumers, order the payment of civil penalties of up to $10,000 per violation, and to reimburse the State’s court costs and other related expenses.

The lesson to be learned from this lawsuit is that assuming that Mrs. Durda did not have any involvement with the LLC or the alleged unlawful activities she was named as a defendant because the plaintiff wants to be able to collect damages from her community property.  When spouses own an interest in an LLC as community property there always the risk that the non-active spouse could be named as a defendant in a lawsuit for this reason.  If this is a concern and the non-involved spouse wants to protect his or her assets from liabilities arising from the active spouse’s involvement with the LLC, then the active spouse should own all of the LLC as separate property and the non-active spouse would not own any of the LLC.

See my article called “How Do I Acquire an Ownership Interest in an Arizona LLC as Separate Property?

Read the Complaint.

2016-11-16T08:23:51-07:00December 15th, 2011|Asset Protection, Lawsuits, Members|0 Comments

Who Can Own an Arizona Limited Liability Company?

Question:  Are there limitations on who can own a membership interest in an Arizona limited liability company?

Answer:  No.  Arizona limited liability company law does not restrict either the type of person or entity that can own an interest in an Arizona LLC or the citizenship or residence of an LLC owner.  Arizona LLCs can be owned by one person, multiple people, one entity, multiple entities or any combination thereof.  All of the following types of entities can own an interest in an Arizona limited liability company:

  • trust
  • corporation (for profit)
  • nonprofit corporation
  • limited liability company (LLC)
  • limited partnership (LP)
  • limited liability partnership (LLP)
  • limited liability limited partnership (LLLP)
  • general partnership (GP)
  • joint venture (JV)

Any or all of the owners of an Arizona LLC can be non-U.S. citizens and non-U.S. residents.

2016-11-16T08:23:51-07:00December 14th, 2011|FAQs, Forming LLCs, Members|2 Comments

Virginia Supreme Court Rules Death of LLC Member Transferred only Rights to Profits, Not Management or Voting Rights

Every person who is a member of an LLC will die, but few people take action while alive that will insure that the right person or people or entity inherits their membership interest in their LLC or that their heir(s) will become full members of the LLC after the LLC member dies.  A November 5, 2011, Virginia Supreme Court case illustrates the problem that arises when the deceased member failed to take action to insure that his daughter would become a member of the LLC of which he owned 80%.

The case of Ott v. Monroe involves a dispute between a 20% member and the daughter a deceased member who inherited the deceased member’s 80% interest in the LLC.  This case is an excellent teaching tool for everybody who is a member of an LLC.  The court ruled that the daughter who inherited the 80% LLC interest inherited only the right to receive 80% of the profits and distributions from the LLC and that she did not become a member of the LLC with any voting rights.  The bottom line is that after the death of the 80% member the 20% member became the sole  member of the company and the only person able to vote and control the LLC.

A member’s interest in an LLC consists of two types of interests.  The first interest is a control interest, which is the member’s right to participate with other members in the management of the LLC’s affairs. The second interest is a financial interest, which is the member’s right to a share of the LLC’s profits and losses and right to receive distributions from the LLC.  The general rule of Virginia and Arizona law is that a member may transfer only the member’s financial interest. The control interest in an LLC is personal to the member and cannot be transferred to another person or entity by the unilateral act of the member.  Arizona Revised Statutes Section 29-732.A provides:

The assignment of an interest in a limited liability company does not dissolve the limited liability company or entitle the assignee to participate in the management of the business and affairs of the limited liability company or to become or to exercise the rights of a member, unless the assignee is admitted as a member as provided in section 29-731. An assignee that has not become a member is only entitled to receive, to the extent assigned, the share of distributions, including distributions representing the return of contributions, and the allocation of profits and losses, to which the assignor would otherwise be entitled with respect to the assigned interest.”  Emphasis added.

The failure to plan caused the minority member to obtain control of the LLC when the majority member died.  This is a wake call for all people who are majority owners of an LLC.  The failure of the majority member to plan could cause the loved one(s) who inherit the majority owners interest in the LLC to lose control of the company when the majority owner dies.  Does your LLC’s Operating Agreement provide that the control interest of a deceased member transfers automatically to the member’s heirs(s)?  Should it?  The members of every multi-member LLC must decide if the control interest will or will not transfer automatically to an heir when a member dies.  If the control interest is to transfer automatically after a death, the only way to cause it to happen is by having all of the members sign a document (preferably an Operating Agreement) that provides for the automatic transfer of the control interest when a member dies.

Do you know who will inherit your membership interest in your LLCs if you were to die?  Will your heirs have to waste time and money in probate court?  For more on this topic read my article called “Who Will Inherit Your Membership Interest in Your Arizona LLC When You Die?

P.S.  The Operating Agreement I prepare for every Arizona LLC I form contains a section entitled “Transfer of a Membership Interest on Death of a Member by a Transfer of Membership Interest Testament,” which provides in part:

“Notwithstanding anything herein to the contrary, if a Member dies after making a valid Transfer of Membership Interest Testament that names one or more people or entities (“Heirs”) to inherit all or a portion of the deceased Member’s Membership Interest, the following shall occur after the death of the Member:

a. Each Heir shall inherit the portion of the deceased Member’s Membership Interest stated in the Transfer of Membership Interest Testament.

b. An Heir inherits the right to receive profits, losses and distributions attributable to the inherited Membership Interest, but shall not become a Member and have any other rights of a Member unless and until all of the requirements of Section 7.1 other than subsection (i) are satisfied.”

Do you know what your LLC’s Operating Agreement says about transfers of the financial interest and the control interest after the death of a member?  If not, do your loved ones a favor and read your Operating Agreement or if your LLC does not have an Operating Agreement, take action to have all of the members adopt an Operating Agreement that deals with what happens to a member’s interest after death.

The text of Ott v. Monroe follows.

OTT v. MONROE
Janet M. OTT v. Lou Ann MONROE, et al.
Record No. 101278.No. 101278.
November 04, 2011

PRESENT: All the Justices.

I. BACKGROUND AND MATERIAL PROCEEDINGS BELOW

Admiral Dewey Monroe, Jr. (“Dewey”) and his wife Lou Ann Monroe (“Lou Ann”) formed a Virginia limited liability company, L & J Holdings, LLC (“the Company”), which was governed by an operating agreement they executed in April 2003 (“the Agreement”). The Agreement provided that Dewey and Lou Ann were the sole members and that they held an 80% membership interest and a 20% membership interest, respectively. It also provided that Lou Ann would be the managing member and Joseph G. Monroe (“Joseph”) would serve as the successor managing member in the event of her death, disability, removal, or resignation.

Paragraph 2 of the Agreement provided that “

[e]xcept as provided herein, no Member shall transfer his membership or ownership, or any portion or interest thereof, to any non-Member person, without the written consent of all other Members, except by death, intestacy, devise, or otherwise by operation of law.” Paragraph 10(B) provided in relevant part that “[n]o Member shall, directly or indirectly, transfer, sell, give, encumber, assign, pledge, or otherwise deal with or dispose of all or any part of his Membership Interest now owned or subsequently acquired by him, other than as provided for in this Agreement.” Paragraph 10(C) provided in relevant part that, Paragraph 10(B) notwithstanding, “any Member ․ may transfer all or any portion of the Member’s Interest at any time to ․ [o]ther Members [or][t]he spouse, children or other descendants of any Member.”

Dewey died in 2004. Through a will executed prior to the formation of the Company, he bequeathed his entire estate to his daughter, Janet. After the will was admitted to probate, Janet asserted that Dewey’s bequest transferred his membership in the Company to her. She called a meeting of the Company, sending notice to Lou Ann, with the intent to remove Lou Ann and Joseph from their positions as managing member and successor managing member, respectively. Lou Ann responded that Janet had inherited only Dewey’s right to share in profits and losses of the Company and to receive distributions to which he would be entitled.

Janet proceeded with the meeting and putatively removed Lou Ann and Joseph, electing herself as the Company’s new managing member and electing Susan Shackelford as successor managing member in the event of her death, disability, removal, or resignation. Thereafter, Janet filed a complaint in the circuit court seeking declaratory judgment that she had inherited her father’s full membership in the Company and Lou Ann and Joseph had been validly removed from their positions. Lou Ann and Joseph filed a demurrer, again asserting that Janet had inherited only Dewey’s right to share in profits and losses and to receive distributions.

The court denied the demurrer and the case proceeded to a bench trial. At its conclusion, the court held that Dewey was dissociated from the Company upon his death by operation of Code § 13.1–1040.1(7)(a). Consequently, the court concluded that all his rights as a member to participate in the control of the Company’s affairs terminated and only the right to share profits and losses and to receive distributions survived to be inherited by Janet through his will. Accordingly, the court ruled that Janet was not a member of the Company and thus lacked the authority to remove Lou Ann and Joseph from their positions. We awarded Janet this appeal.

II. ANALYSIS

This appeal assigns error to the circuit court’s interpretation of the Agreement and the relevant statutes. Accordingly, we review the judgment de novo. Uniwest Constr., Inc. v. Amtech Elevator Servs., 280 Va. 428, 440, 699 S.E.2d 223, 229 (2010).

When interpreting a contract, we construe it as a whole. When its terms are clear and unambiguous, we give them their plain meaning. We harmonize its provisions and give effect to each of them when it reasonably can be done. Id. Similarly, we construe statutes as a consistent and harmonious whole to give effect to the overall statutory scheme. Virginia Electric & Power Co. v. Board of County Supervisors, 226 Va. 382, 388, 309 S.E.2d 308, 311 (1983). We apply the plain meaning of a statute unless its terms are ambiguous or doing so would lead to an absurd result. Covel v. Town of Vienna, 280 Va. 151, 158, 694 S.E.2d 609, 614 (2010).

Janet argues that the circuit court erred in ruling that Dewey was dissociated upon his death by operation of Code § 13.1–1040.1(7)(a) because that provision is preceded by the proviso, “[e]xcept as otherwise provided in the articles of organization or an operating agreement.” She asserts that Paragraph 2 of the Agreement constitutes such an exception and supersedes dissociation under the statute.  FN 1.  We disagree.

A. THE VIRGINIA LIMITED LIABILITY COMPANY ACT

We begin our analysis by examining the statutory framework governing Virginia limited liability companies, the Virginia Limited Liability Company Act, Code § 13.1–1000 et seq. (“the Act”). “The [limited liability company] is a hybrid entity, borrowing from both the corporate and partnership models” to combine a corporation’s limited liability for its owners with a partnership’s pass-through treatment for income tax purposes. S. Brian Farmer & Louis A. Mezzullo, The Virginia Limited Liability Company Act, 25 U. Rich. L.Rev. 789, 790 (1991). When the Act was enacted in 1991, federal tax regulations denied the pass-through treatment afforded partnerships if a business entity possessed three of the four principal characteristics of corporations: (1) perpetual existence, (2) central management, (3) limited liability of owners, and (4) free transferability of ownership interests. Id. at 813–15, 694 S.E.2d 609. Because limited liability was an indispensable characteristic of limited liability companies, the provisions of the Act were drafted to avoid the three remaining corporate characteristics. Id. at 815–21, 694 S.E.2d 609. Thus, the transferability of a member’s interest in a limited liability company is analogous to the transferability of a partner’s interest in a partnership.

When the Act was enacted in 1991, the Uniform Partnership Act expressly provided that

[a] conveyance by a partner of his interest in the partnership does not ․ entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled.

Former Code § 50–27(1) (Repl.Vol.1989). FN 2.

Implicit within this language was the recognition that a partner’s interest in a partnership comprises two distinct and divisible components. The first component, the control interest, encompasses the partner’s entitlement to participate with the other partners in the administration of the partnership’s affairs. The second component, the financial interest, encompasses only the sharing of profits and losses of the partnership and receipt of distributions from its accumulated income and assets. Under the statute, only the financial interest is alienable. Thus, the control interest in a partnership is personal to the partner and cannot be bestowed on another by the unilateral act of a partner even if the words of his conveyance do not expressly limit its scope.

The division of a partner’s interest into a control interest, which may not be transferred unilaterally, and a financial interest is mirrored in the Act. Both when the Company was formed and when Janet inherited through Dewey’s will, Code § 13.1–1039 provided that

[u]nless otherwise provided in the articles of organization or an operating agreement, a membership interest in a limited liability company is assignable in whole or in part․ An assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member. Such an assignment entitles the assignee to receive, to the extent assigned, only any share of profits and losses and distributions to which the assignor would be entitled. FN 3.

Thus, an assignee of a financial interest has no control interest in a limited liability company without becoming a member. Code § 13 .1–1040(A) provides the means by which the assignee of a financial interest may become a member: “Except as otherwise provided in writing in the articles of organization or an operating agreement, an assignee of an interest in a limited liability company may become a member only by the consent of” a majority of those members exercising the direct management of the company.

In light of this statutory background, we turn to Janet’s argument.

B. DIRECT INHERITANCE OF MEMBERSHIP IN A LIMITED LIABILITY COMPANY BY DESCENT OR DEVISE

Janet argues that she inherited Dewey’s membership directly by operation of his will. She asserts the Agreement permitted her to inherit directly because Paragraph 2 superseded Code § 13.1–1040.1(7)(a). However, Paragraph 2 merely prohibits any member from transferring any part of his membership except (a) where specifically allowed under the terms of the Agreement, (b) with the consent of all the other members, or (c) upon death, intestacy, devise, or otherwise by operation of law. It does not address statutory dissociation and does not state an intent to supersede Code § 13.1–1040.1(7)(a). Consequently, it lacks specific language that would constitute an exception to the rule of dissociation set forth in Code § 13.1–1040.1. Dewey thus was dissociated from the Company upon his death and Janet became a mere assignee by operation of Code § 13.1–1040.2, entitled under Code § 13.1–1039 only to his financial interest.

Even if Paragraph 2 had superseded dissociation under Code § 13.1–1040.1, it is not possible for a member unilaterally to alienate his personal control interest in a limited liability company. Code § 13.1–1039(A). The words “[u]nless otherwise provided in the articles of organization or an operating agreement” in Code § 13.1–1039 make it possible for a limited liability company to restrict the assignment of members’ financial interests because they modify the remainder of the sentence, which continues “a membership in a limited liability company is assignable in whole or in part.” The words “[u]nless otherwise provided in the articles of organization or an operating agreement” do not make it possible for a limited liability company to allow a member to assign his control interest because they do not modify the separate sentence, which states that “[a]n assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member.” Additionally, Code § 13.1–1023(A) provides that an operating agreement may not contain provisions inconsistent with the laws of the Commonwealth. Thus it was not within Dewey’s power under the Agreement unilaterally to convey to Janet his control interest and make her a member of the Company upon his death because the Agreement could not confer that power on him.

III. CONCLUSION

For the foregoing reasons, the circuit court did not err in holding that Janet inherited only Dewey’s financial interest in the Company—the right to share in profits and losses and to receive distributions. Because she was not a member, the circuit court did not err in holding that she lacked authority to remove its managing member and successor managing member. Accordingly, we will affirm the judgment of the circuit court.

Affirmed.

FOOTNOTES

1.  Janet also asserts that statutory dissociation is preempted by Paragraph 10(A), which states that “no Member shall have any right to voluntarily resign or otherwise withdraw from the Company ․ without the prior written consent of all remaining Members of the Company. Any attempted resignation or withdrawal without the requisite consent shall be null and void and have no legal effect.” Nothing in the record of this case establishes that Dewey’s death was a voluntary attempt to resign or otherwise withdraw from the Company. Paragraph 10(A) therefore is not implicated.

2.  This limitation was preserved in Code § 50–73.106 when Chapter 1 of Title 50 was repealed and replaced upon the enactment of the Virginia Uniform Partnership Act in 1996. 1996 Acts ch. 292.

3.  Code § 13.1–1039 was subsequently amended and reenacted to add a new subdivision not relevant to this appeal. 2006 Acts ch. 912.

OPINION BY Justice WILLIAM C. MIMS.

2016-11-16T08:23:51-07:00November 22nd, 2011|Lawsuits, Members|0 Comments

Who Will Inherit Your LLC if You Die?

If you are a member of one or more LLCs, do you know who will inherit your membership interest if you die?  If you do not prepare for your death and designate your heir(s) properly then the state where you live will determine who inherits your LLCs after you die after the LLC membership goes through a costly probate.

Every state has a law called the “law of intestate succession.” This law is the state’s statutory scheme for determining who inherits property when a person dies owning property and the person does not have a valid Will.  Arizona’s intestate succession laws are found in Title 14, Chapter 2, Article 1 of the Arizona Revised Statutes.  Arizona’s law of intestate succession provides for the following inheritance rules for an Arizona resident who dies without a Will:

  • If you die single with no descendants, your estate goes to your parents equally if both survive or to the surviving parent.
  • If you die single with no descendants and both of your parents are deceased, your estate goes to the descendants of your parents or either of them by representation.
  • If you die while married, your entire estate goes to your spouse if you do not have any descendants or if ALL of your descendants are descendants of you and your spouse.
  • If you die while married and have any descendants that are not descendants of you and your spouse, your spouse will inherit one-half of the intestate separate property and none of your community property.

If you are married and have any children with a person who is not your spouse, pay close attention to the last rule listed above because it could create a nightmare for your spouse.

Example: Homer has a son named Bob who is not his wife Marge’s son. Homer and Marge are estranged from Bob. Homer & Marge own 100% of World Wide Widgets Arizona, LLC, as community property. The LLC is worth $500,000. Homer is an Arizona resident and dies without a Will. Homer does not own any separate property. Arizona law provides that Marge inherits nothing, zip, zero, nada other than a spousal homestead allowance of $18,000. Homer’s membership interest in the LLC goes to Bob who now becomes half owner of the LLC with Marge. Not only has Homer’s failure to plan cost Marge $250,000, but Homer left Marge the giant headache of operating a business with Bob who knows nothing about the business and only wants his $250,000.

Arizona law does provide that “The decedent’s surviving spouse and minor children whom the decedent was obligated to support and children who were in fact being supported by the decedent are entitled to a reasonable allowance in money out of the estate for their maintenance during the period of administration. This allowance shall not continue for longer than one year if the estate is inadequate to discharge allowed claims.” This allowance however, does not amount to a lot of money.

If you do not know for a fact that the person or people you want to inherit your ownership interest will actually inherit your LLCs when you die then you need to take action now to protect your loved ones and insure that the LLCs go to your desired heirs. However, if you are happy to do nothing and let the law of intestate succession determine who will inherit your LLCs, your heirs will still be required to open an expensive and public probate proceeding with an Arizona superior court.

Best, but More Expensive Solution

The best solution to make sure that your ownership interest in LLCs goes to your desired heirs is to create a trust and have the trust own the LLC.  When the trust owns the LLC there is no need for a probate because the trust owns the LLC interest before and after your death.  See “How to Transfer an LLC to a Trust” for more on this topic.

Cheapest and Simplest Solution

The simplest way to make sure your Arizona LLCs go to the right person or people after you die is to sign a Transfer of Membership Interest Testament. This simple document not only specifies who inherits your Arizona LLCs, but it also avoids an expensive probate of your LLC interest. To learn more about this important family protection document read my article called “Who will Inherit Your Membership Interest in Your Arizona LLC When You Die?

2017-05-01T07:19:55-07:00August 15th, 2011|Asset Protection, Members, Operating LLCs|0 Comments

Can an Arizona LLC be Owned Entirely by Non-U.S. Citizens Who Do Not Reside in the U.S.?

Question:  Can an Arizona limited liability company be formed and owned by non-United States citizens who do not reside in Arizona or the United States?

Answer:  Yes.  Arizona limited liability company law does not require that any owner of an Arizona LLC be a U.S. citizen or a resident of the United States.  I have formed many Arizona LLCs for people who live outside the U.S. and who are not U.S. citizens.

LLC’s Need a Federal Employer Tax ID Number:  It is also possible for an LLC owned only by non-U.S. citizens to get a federal employer identification number from the Internal Revenue Service.  An LLC needs  an EIN to open a bank account in the United States and to put on federal income tax returns and forms.

U.S. Bank Account:  As for opening a bank account in the U.S., it is best if at least one owner or the manager is in the U.S. to open the account in person in the United States.  U.S. bank laws require that the bank know and verify who is it dong banking business with.    If that is not possible, I recommend that LLCs owned solely by non-U.S. citizens coordinate opening an account in the U.S. with the branch office of a bank in their county of residence that has one or more bank branches in the U.S.