What to Do When Your LLC Adds or Deletes a Member or if a Member’s Interest in the Company Changes
By Richard Keyt, Arizona limited liability company & business attorney
If your Arizona limited liability company has added or removed a member or changed the percentage ownership of existing members, the transaction(s) should be documented in writing. Your Arizona LLC is a legally existing entity and its members have legal rights that can be enforced by Arizona courts. Any time your LLC adds a new member or a member ceases to be a member, the company must document the change to protect the interested parties. When your company has a change with respect to any member, do not rely on mere oral statements.
Without a written document that shows a change in ownership of your LLC, how will the members prove who the owners are, their percentage of ownership and the dates of acquiring membership interests? If the company adds a new member, a member ceases to be a member, any members change their percentage ownership of the company or there is a change with respect to any other rights or obligations of a member, the change should be documented by having the parties sign appropriate documents.
A member who says “I quit and don’t want to be a member anymore” when your company is going through hard times may come back to reclaim ownership months or years later when the company’s fortunes have improved. You may have a hard time convincing a court that your “former” member terminated his membership when the only written evidence of membership is the company’s Articles of Organization on file with the Arizona Corporation Commission that names the “former” member as a member of the company.
Arizona Revised Statutes Section 29-633.B requires that the company file an amendment to its Articles of Organization with the Arizona Corporation Commission if:
(i) in the case of a manager managed company: (A) a person who was not named as a member in the Articles of Organization acquires 20% or more of the percentage interests, (B) a person who was named as a member in the Articles of Organization ceases to own 20% or more of the percentage interests, or (C) the company adds or deletes a manager; or
(ii) in the case of a member managed company: (A) a person who was not named as a member in the Articles of Organization acquires a membership interest in the company, (B) a person who was named as a member in the Articles of Organization ceases to own a membership interest.
Arizona law requires that the LLC file the amendment to its Articles of Organization within thirty days of the occurrence of the change.
The Arizona Limited Liability Company Act provides that after a limited liability company files its initial Articles of Organization, a person or entity may be admitted as an additional member only: (i) with the consent of all members, or (ii) after being identified as a member in a written statement certified by each of the managers identified in the initial Articles of Organization. A.R.S. § 29-731. Section 29-681 states the affirmative vote, approval or consent of all members is required to issue an interest in the limited liability company to any person unless otherwise provided in an Operating Agreement.
If your Operating Agreement does not provide that a new member can be approved by less than unanimous consent, a new member cannot be admitted as a member of the company without the consent of all members. An Arizona LLC should always document in writing those members who approve or disapprove of admitting a new member.
Has your Arizona LLC properly documented all changes involving members and their percentage of ownership of the company? If you are considering becoming the member of an Arizona LLC or if you are creating a new Arizona LLC you must read and understand “Requirements of Arizona Law to Become a Member/Owner of an AZ LLC.” If your LLC does not properly document the addition or removal of members, it is a recipe for future disagreements and litigation.
If a change in membership is not properly documented or if it does not comply with Arizona’s statutory LLC law, 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 documenting changes involving members. The best time to document a change is when it occurs. To hire us to document the addition or removal of a member of an Arizona LLC pay online in our secure store and then complete our online Member Change Questionnaire. Order your change of member documents now before it is too late.
Documents Needed to Evidence a Change with Respect to a Member
Normally, 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:
- 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 without an Assignment of Membership Interest Agreement.
- Amendment to the Articles of Organization. Arizona Revised Statutes Section 29-633 requires Arizona LLCs to amend their Articles of Organization if: (i) a member managed limited liability company adds or removes a member, (ii) a manager managed AZ LLC adds a member who owns 20% or more of the company or a member named in the Articles of Organization terminates membership or if that member’s membership interest goes below 20% ownership, or (iii) a manager managed company adds or removes a manager. For more on this topic, read “When an LLC Must Amend its Articles of Organization.”
- 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.
- 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.
Fixed Fees for Change of Member Documents
Arizona limited liability lawyer Richard Keyt charges $345 to prepare the documents listed above other than prepare an Operating Agreement which is an additional $497. If a change of members involves more than one recipient member and one transferring member (married couples owning their interests as community property are considered one member), we charge $100 for each additional Assignment of Membership Interest Agreement after the first one.
The above documents and prices are based on one member (or a husband and wife who are members) transferring all or a portion of the member’s interest for no consideration or for nominal consideration to: (i) one other member, (ii) one new member, or (iii) to the company. If your transaction involves more than nominal consideration, then in addition to the above documents, you should consider evidencing the transaction with a Membership Interest Purchase Agreement* (the agreement that contains the terms and conditions of the sale such as the purchase price), a Promissory Note (if the entire purchase price will not be paid at closing), a Security Agreement (and UCC-1 Financing Statement) and/or Deed of Trust (if the Promissory Note will be secured by a lien on the purchaser’s personal property and/or real property, respectively), and Noncompetition Agreement signed by the seller that prevents the seller from competing with the company’s business. If your transaction involves more than nominal consideration, contact Richard Keyt at 602-906-4953, ext. 1 for the cost to prepare these additional documents.
*Membership Interest Purchase 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 a Membership Interest Purchase Agreement that states the percentage interest being sold or transferred, how much money, if any, will be paid for the interest, the effective date, and any other terms and conditions applicable to the purchase. This document creates a legally binding contract between the parties to sell or transfer the membership interest. It is especially important when the transfer involves a substantial amount of money.
Call If You Have Questions
If you have questions about documenting member changes of an Arizona LLC, contact Arizona LLC lawyers Richard Keyt (480-664-7478) or his son Richard C. Keyt (480-664-7472). We do not charge for change of LLC member questions.
How to Hire Arizona LLC Attorney Richard Keyt to Document Your LLC’s Member Changes
Let us prepare all of the documents to evidence adding or deleting an LLC member or increasing or decreasing members’ percentage interests.
To hire Richard Keyt to prepare change of member documents for an Arizona LLC complete and submit our Member Change Questionnaire.