Arizona LLC Blog

How to Open a Bank Account for an Arizona LLC Before the ACC Approves Its Articles of Organization

Because the Arizona Corporation Commission’s new database is broken and apparently can’t be fixed the time the ACC takes to review and approve the Articles of Organization filed to create a new Arizona LLC or PLLC has sky-rocketed through the roof. To see how long it will take for the Arizona Corporation Commission to review and approve your company’s Articles of Organization go to the ACC’s processing times web page. See also my article called “Arizona Corporation Commission’s New Database System Sucks.”

This delay is preventing people from opening a bank account in the name of the newly formed company. Most of the large national banks and some smaller banks in Arizona will not open a bank account for a newly formed LLC or PLLC until after the Arizona Corporation Commission approves the company’s Articles of Organization. If you cannot wait until the ACC approves the Articles of Organization of your newly formed Arizona LLC or PLLC you can open a bank account before the Articles are approved if you go to one of the banks listed below.

1. First Western Trust. Call Anna Popova, Assistant Vice President, at 602-224-7616 or email her at Anna.Popova@myfw.com. Her office is at 2425 E Camelback Road, Suite 100, Phoenix, AZ 85016. To open an account this bank needs the company’s EIN, Articles of Organization with the ACC stamp on it and the company’s Operating agreement. LLC owners can open a new business account as early as the day they file the Articles of Organization with Arizona Corporation Commission. They bank also has an office at 7025 North Scottsdale Road, Suite 100, Scottsdale, AZ 8525.

2. Trust Bank. Call Angela M. Chavira, Arizona Banking Manager, at 480-883-6819 or email her at Angela.Chavira@tbaz.com. Her office is at 2375 E. Camelback Road, Suite 155, Phoenix, AZ 85016. Trust Bank has four offices in Arizona. See its list of locations.

Richard Keyt2018-10-03T14:59:03+00:00October 3rd, 2018|AZ Corporation Commission, Forming LLCs|0 Comments

Arizona Corporation Terminates Its Email Address for Problems

We got the following message in an email we received from the Arizona Corporation Commission today, October 1, 2018:

“THE DOCUMENT INTAKE MAILBOX IS BEING DISCONTINUED, EFFECTIVE AT 5:00 P.M. MST, OCTOBER 5, 2018. We will continue to accept documents emailed to DOCUMENTINTAKE@AZCC.GOV through October 5, 2018 at 5 pm MST. After that point, the mailbox will be closed and will not accept any additional emails. We strongly encourage you to use online filing available at http://ecorp.azcc.gov. We will continue to accept paper documents mailed or walked in to 1300 W. Washington St, Phoenix, AZ 85007. If you have any questions, please call Customer Service at 602-542-3026.”

This is very troubling. We have sent problems that needed fixing for LLCs and corporations to this email address for a very long time. Now instead of continuing a reliable method of communication the Arizona Corporation Commission wants people to use its broken online ecorp system.

Richard Keyt2018-10-01T16:37:06+00:00October 1st, 2018|AZ Corporation Commission|0 Comments

How to Get a Certificate of Good Standing for an Arizona LLC

Question: How can I get a Certificate of Good standing for my Arizona LLC from the Arizona Corporation Commission?

Answer: The first thing you need to know is you should not follow the instructions on the Arizona Corporation Commission’s website because those instructions are wrong. Second, the process is complicated, which is why I created an instructional video that shows you what you must do to purchase the COGS for $45 and immediately download a Certificate of Good Standing.

Richard Keyt2018-09-27T16:51:39+00:00September 27th, 2018|ACC How to Videos, AZ Corporation Commission, FAQs|0 Comments

Arizona Corporation Commission Responds to My ACC Sucks Article

Last month I wrote a blog post called “Arizona Corporation Commission’s New Database System Sucks.” The article alerts the public to some of the many problems created by the ACC switching to a new software system on May 20, 2018. Here is the Arizona Corporation Commission’s response to my blog post:

“Commissioner Olson forwarded your e-mail to me and asked me to investigate the progress that the Corporations Division has made so far on their new database system. Here are some of the updates:

1. They are familiar with Rick Keyt’s complaints which have mostly been resolved, but they will be following up. Some of the customers who made filings during the first 3 months of rolling out the new program still have some minor issues which are being resolved.

2. They do have a system in place to accommodate urgent requests from customers who reach out to the Commission Offices, so as soon as Commissioner Olson’s office hears about a specific issue, we inform the Corporations Division and they are able to resolve the issues pretty quickly on an individual basis.

3. Overall, the early issues they experienced with the new system during the first two months are much, much better. The little things, like the search date/time that Mr. Keyt pointed out, are resolved. The bigger things, like dates, have seen substantial improvements, but they are still working out a few bugs. They just entered the warranty phase of the contract with the vendor, and the remaining bugs should be fixed over the next 90 days, per the contract.

4. Unfortunately, they are still struggling with processing times right now. Some of that was due to a back-log that built up during the initial phase of the transition, but they have now gotten through all the documents that migrated from the old system, and are now examining documents filed during the first 2 months in the new system. These documents require a lot of corrections, and that takes time. The Corporations Division is working with the Executive Director, Matt Neubert, on potential solutions to improve the processing times, since it usually boils down to additional resources.

That is the update so far, we are hopeful that more information and progress will be forthcoming and we will continue to update the interested parties as we are given new information.

Thank-you for reaching out to Commissioner Olson, we are keeping a close eye on this issue. Also thank-you for the article you shared, if you know of anyone else having similar issues, please send them our way!

Thank-you,

Jacqueline Parker, Esq.
Deputy Policy Advisor to Commissioner Olson
Arizona Corporation Commission
1200 W. Washington Street
Phoenix, Arizona 85007
(602) 542-0745 (office)
(602) 542-4144 (direct line)
JParker@azcc.gov
www.azcc.gov

We have noticed that the ACC is making fewer errors. Hopefully it will be able to work out all of the kinks and get the new software system working smoothly.

Richard Keyt2018-09-07T08:48:03+00:00September 7th, 2018|AZ Corporation Commission|0 Comments

We Updated Our Buy Sell Agreement Triggering Events that Can Cause a Buy Out

Most multi-member LLCs other than a two member LLC owned by a married couple should have an exit strategy because like marriages, more than fifty percent of multi-member LLCs have one or more members who want a company divorce. If members of a multi-member company do not sign a contract that provides for the buy out of one or more members on the happening of an event described in the contract they are stuck together forever unless a member convinces a court in an expensive lawsuit to judicially dissolve the company. See my article on this important topic called “A Multi-Member LLC’s Most Important Document” aka a “Buy Sell Agreement.”

My Buy Sell Agreement is very comprehensive because it is the product of my 38 years of being a business lawyer who has seen far too many LLC divorces. I updated my Buy Sell Agreement to add more “triggering events.” A triggering event is an event that gives the company an option to buy the entire membership interest of the member who is involved in the event. Members can also provide in their Buy Sell Agreement that certain triggering events such as the death of a member require the company to buy the entire membership interest from the estate of a deceased member.

To hire me to prepare a Buy Sell Agreement one of the members must complete and submit my online Buy Sell Agreement questionnaire. The questionnaire asks the LLC member who completes the questionnaire to pick and chose the provisions and triggering events that will be included in their company’s Buy Sell Agreement. Look at the Buy Sell Agreement questionnaire to see the many triggering events that you can select or deselect for your company’s custom drafted Buy Sell Agreement. FYI: We can also arrange for all members to digitally sign their Buy Sell Agreement using DocuSign.

Here is a list of the triggering events from which my clients can select for their Buy Sell Agreement.

Triggering Event	Purpose
1. Any event the members desire	A Buy Sell Agreement can include any triggering events that are important to the members. For example, the members could agree that if the New York Yankees win the World Series, member 1 must sell to member 2 for $100.
2. Operating Agreement default	If a member defaults under the Operating Agreement signed by all of the members the LLC has an option to buy out the defaulting member.
3. Member fails to contribute money or property	This provision encourages a member to satisfy the member's obligation in a written document to pay money or assign property to the company because if the member fails to satisfy that obligation the LLC will have an option to buy out the defaulting member.
4. Death of a member	The LLC or surviving members have an option to purchase the interest of a deceased member. The Buy Sell Agreement can also require the LLC to buy-out a deceased member. These types of buy outs can be funded with life insure on the lives of members.
5. Member is convicted of a felony	Many LLC members do not want to have another member who has been convicted of a felony.
6. Divorce of a member	Prevents the wrong spouse from acquiring an interest in the LLC if two members own their interest as community property and they get divorced and the wrong spouse becomes the sole owner of all or a portion of the membership interest.
7. Member files for bankruptcy	If a member loses the member's interest in the LLC because of filing for bankruptcy, the company and other members should be able to buy the interest from the creditor who acquires it out of the bankruptcy.
8. Member transfers all or part of the member's membership interest without the approval of the other members	The Buy Sell Agreement provides that a member may not transfer or encumber all or any interest in the member's interest in the company without the approval of the members and compliance with the terms and conditions of the Operating Agreement and/or the Buy Sell Agreement. If a member violates the no transfer/encumbrance provisions, the LLC should have an option to acquire the interest of the defaulting member, perhaps at an amount less than the fair market value of the interest.
9. Termination of employment of a member	Applies only to a member who is employed full time by the LLC. Especially important when the employee is a minority member and should only own an interest while employed.
10. Member loses his or her professional license	Commonly used for LLC's that are owned by members who must be licensed in a particular area. For example, the Buy Sell Agreement of an LLC owned by physicians might give the LLC and other members an option to acquire the interest of a physician/member who loses his or her license to practice medicine.
11. Majority member sells membership interest	"Drag Along" provision: Majority member has the option to require minority members to sell their interests in the LLC if the majority member sells. The sale of the minority members' interests are on the same terms and conditions as the sale of the majority member's interest.
12. Majority member sells membership interest	"Tag Along" provision: Minority members have the option to require the majority member to include the sale of the minority members' interests in the LLC if the majority member intends to sell. The sale of the minority members' interests must be on the same terms and conditions as the sale of the majority member's interest.
13. Member is disabled	Used to acquire the interest of a member who become permanently disabled and unable to provide needed services for the LLC.
14. Member retires	Members sometimes want to retire, but without a Buy Sell Agreement that provides for a retirement purchase, it probably will not happen.
15. Member is incompetent	Applies if a member loses his or her mental capacity and a court appoints a conservator to manage the members financial affair.
16. Member files a false document with the ACC	If a member causes a false document to be filed with the Arizona Corporation Commission it is a triggering event that can cause a buy out,
17. Member causes somebody to be added or removed from the LLC's bank account	If a member causes a signer to be added or removed on the company's bank account without the approval of the members per the operating agreement it is a triggering event that can cause a buy out.

Other Important Provisions in My Buy Sell Agreement

My Buy Sell Agreement also contains the following provisions:

Restrictions on Transferring Membership Interests: Members may not transfer all or any part of their membership interest without the consent of the members. Transfers to family members or trusts are allowed unless your Buy Sell Agreement also prohibits these transfers.

Right of First Refusal: If a member desires to sell or transfer the member’s membership interest the company first and then the other members have the option to match to proposed sale and acquire the membership interest.

Life Insurance: Members may purchase life insurance on the life of other members and use the life insurance proceeds to pay the purchase price to buy the membership interest of a deceased member.

Non-Compete: This provision prohibits a member and/or ex-member from competing with the company’s business and hiring the company’s employees.

Dispute Resolution: This provision obligates the members to settle disputes without resorting to litigation.

Questions?

If you have any questions about Buy Sell Agreements, call me, Richard Keyt, at 480-884-7478 or send an email message to me at rk@keytlaw.com. I don’t charge to answer questions about Buy Sell Agreements.

How to Purchase an LLC Buy Sell Agreement

To hire me to prepare your Buy Sell Agreement complete and submit my Buy Sell Agreement questionnaire.

Richard Keyt2018-09-02T11:54:53+00:00September 2nd, 2018|Buy Sell Agreements, Operating LLCs|0 Comments

How Do I Protect My Company’s Name in All 50 States?

Question: I want to form a new limited liability company and protect its name in all fifty states. How do I do that?

Answer: Each of the fifty states regulates and authorizes the names of companies formed in the state. Company names are protected only in the state in which the company is formed. There is no way to protect a company name in all fifty states other than forming a company with the same name in every state in every state, but that would not be practical or prudent. Bottom line: There is no practical way to protect a company name in all fifty states unless you can register the name as a trademark or service mark with the U.S. Patent & Trademark office.

Federally Registered Trademarks & Service Marks

The U.S. allows people and companies to register a trademark or service mark with the U.S. Patent & Trademark office. A federally registered trademark or service mark is protected in all fifty states. A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A service mark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of a service rather than goods.

Examples of trademarks and service marks include: brand names, slogans, and logos. The term “trademark” is often used in a general sense to refer to both trademarks and service marks. Use of a business name does not necessarily qualify as trademark use, though other use of a business name as the source of goods or services may qualify it as both a business name and a trademark or service mark.

Trademarks are territorial and must be filed in each country where protection is sought. A U.S. trademark does not afford protection in another country. For more information on how to apply for trademarks in a foreign country, contact the intellectual property office in that country directly.

Richard Keyt2018-09-01T17:12:36+00:00September 1st, 2018|FAQs, How Do I|0 Comments

Title Insurance for an LLC that Acquires Real Estate from a Member

Question: I own Arizona rental real estate. I want to form a limited liability company to own the real estate for asset protection. If I transfer title to the real estate to my one hundred percent owned Arizona LLC will the LLC be covered by the title insurance policy issued to me when I bought the land?

Answer: No unless you take action that causes the title insurance company to add the LLC to your title insurance policy. As a real estate attorney I recommend that the owner(s) of the LLC always do what is necessary to cause the LLC to be covered by the title insurance when the LLC acquires real estate from the owner(s) of the LLC.

A nationally recognized title insurance expert named John C. Murray wrote an excellent article called “Title Insurance For Limited Liability Company Transactions” in which he says:

“The best solution may be for the grantee LLC to request an ‘additional insured’ endorsement from the title insurer (in those jurisdictions where it is available), which would be effective as of the date of the conveyance. This endorsement specifically amends the existing owner’s policy to add the LLC as a named insured. The cost of the endorsement is usually nominal ($100 to $300) and many title insurers will routinely issue the endorsement for successor LLCs”

See also the Adobe pdf file that contains an article called “Do I still have Coverage if I transfer my property to.” The author states the following with respect to a property owner who transfers land to the owner’s LLC:

“To ensure that title insurance coverage continues on the property, [the owner] should contact [the title insurance company] to discuss obtaining an additional insured endorsement to the current policy and/or discuss obtaining a new policy depending on the facts and circumstances supporting the transfer. Without doing that, they risk terminating title insurance coverage on the property.”

Richard Keyt2018-08-04T09:03:03+00:00August 4th, 2018|FAQs, Real Estate Issues|0 Comments

Arizona Corporation Commission’s New Database System Sucks

This article explains a very serious problem that affects most Arizona LLCs and PLLCs that have filed paper (not online filed) Articles of Organization or amendments to Articles of Organization after May 19, 2018. If you have a company that filed paper articles or amended articles with the Arizona Corporation Commission after that date you need to read this article so you will understand the problems the ACC probably created for you and your company.

ACC Adopts New Software System that Is Crap

On May 20, 2018, the Arizona Corporation Commission stopped using the database and related software that served the public well for many years and switched to a new database system that is broken and may not be fixable. Before the new software went live the ACC was reviewing expedited filings in 3 – 5 business days and non-expedited filings in 20 – 25 business days. According to the ACC’s processing time report dated July 30, 2018, the new and improved software system enables the ACC to review expedited filings in 15 -20 business days and non-expedited filings in 54 – 59 business days.

Here’s an example of the broken software system. I did a search for an Arizona LLC. Note the date and time of the search, which was 1/1/0001. My search did not occur in the year after Jesus was born. How is it possible the software programmers were unable to program the software to display the date and time of a search? Very troubling.

The Biggest Problem is the ACC Cannot Put Correct Information on Approved Filings

The new software system prevents the Arizona Corporation Commission from compiling and disseminating accurate and correct information. Between May 24, 2018, and July 13, 2018, we filed Articles of Organization for SIXTY-FIVE LLCs that the ACC has approved, but whose approval documents contain ACC created errors that the ACC is unable to fix. Despite our many requests to fix incorrect dates and text the ACC put on approved documents the ACC has been unable to correct a single item of bad information it stamped on the companies’ approval documents. Update 8/14/18: On this date we got the first entirely correct approved Articles of Organization, ACC approval letter and ACC website information of the 110 Articles we filed after May 20, 2018.

When the ACC approves new Articles of Organization there are three ACC created sources of information about the new company. Information about the new company is found in the following locations:

the top of the first page of the filed Articles of Organization returned to the company
the ACC’s approval letter given to the company
the ACC’s website

Not one of the 65 companies we formed between May 20, 2018, and July 13, 2018, that have been approved by the ACC has the correct filing date and correct information on all three of the above sources. Despite repeated requests given to ACC personnel asking them to correct the ACC errors it has not corrected a single company’s incorrect data.

Illustrations of ACC Created Problems

The images below contain numbers in circles that refer to areas of Articles and approval letters and the website that have un-fixable errors. The numbers in circles will be explained below.

Articles of Organization Problems

The information next to numbers in a circle above is imprinted on the Articles of Organization by the ACC and then given to the company after it approves the filing of the Articles of Organization or amendment to the Articles of Organization. The significance of each type of information shown above that has a number in a circle:

Circle 1: The “received” date. This is supposed to be the date the ACC received the Articles of Organization or the amendment. This line may or may not be the actual date the ACC received the document.

Circle 2: The “pending” or “filed” date. Some times this line says “pending” followed by a date. Some times it says “filed” followed by a date. The filed date should always be the date the ACC received the Articles of Organization or the amendment. Note: If the ACC approved the document this line should say “filed” (not “pending”) followed by the date the ACC received the Articles of Organization or the amendment. This line may or may not be the actual date the ACC received the document, which date is the actual date the document was filed.

Circle 3: I don’t have a clue what this long number is, but the ACC stamps it on the top right of each page of the approved document.

Circle 4: The approved document may or may not have this stamp under the first two lines the ACC puts on the top left of the first page. In the good old days when the ACC was doing its job it always stamped its “Filed” stamp on the top of the first page of the document. The stamp include the ACC’s file number given to the company. Now the ACC never stamps its “Filed” stamp or the company’s file number on the approved document. Sometimes the document may display the “Received” stamp, which is a good thing because the Received stamp always displays the correct date the document was received and filed.

ACC Approval Letter Problem

Circle 5: This image is the top of the ACC’s letter given to companies when it approves the filed Articles or Organization or amendment to the Articles of Organization. The document received date should be the date the ACC received the document. This date may not be the actual date the ACC received the document.

ACC’s Company Web Page

Circle 6: The formation date should be the date the ACC received the Articles of Organization or the amendment to the Articles of Organization. This date is frequently wrong.

Circle 7: The Original Incorporation Date is the Formation Date. These two dates should be the same and should be the date the ACC received the Articles of Organization or the amendment to the Articles of Organization. This date is frequently wrong.

Circle 8: The Entity Status should say “Active,” which means the company exists.

Circle 9: The Reason for Status should say “In Good Standing.”

Important Note: If a third party asks for proof that your company exists show the ACC’s web page for the company and point out that the Entity Status is “Active” and the company is “In Good Standing.”

Bottom Line

When your company’s paper filed (not filed online) Articles of Organization have been approved by the ACC the date the ACC received the document should be the same as the filed date. The received/filed date should be the same on each of the following locations:

Circle 1
Circle 2: This should say filed, not pending.
Circle 4: If this stamp is on your document it should show the date the document was received by the ACC
Circle 5
Circle 6
Circle 7

If your approved Articles of Organization, ACC approval letter or ACC website listing contain errors and you want to fix the errors call the Arizona Corporation Commission at 602-542-3026.

Richard Keyt2018-08-14T08:27:26+00:00July 15th, 2018|AZ Corporation Commission, Forming LLCs|0 Comments

Richard Keyt Formed Arizona LLC Number 6,000

I formed my first Arizona LLC the day Arizona’s LLC law became effective in October of 1992. I did not start counting the number of LLCs I formed until 2002 so I don’t know how many LLCs I formed the ten years after Arizona adopted LLCs. On June 1, 2018, I formed Arizona LLC number 6,000.

The reason I’ve formed so many Arizona LLCs is because my LLC services are second to none. Nobody offers as many LLC services as I provide for the low prices of $597 (Silver LLC) and $997 (Gold LLC that includes a revocable living trust). Read some of the 121 five star Google & Facebook reviews our clients have given me.

Richard Keyt2018-06-03T08:32:29+00:00June 3rd, 2018|Forming LLCs, Miscellaneous|0 Comments

Arizona Corporation Commission Way Behind on LLC Reviews

Just a few weeks ago the Arizona Corporation Commission was reviewing Articles of Organization filed with the $85 expedited filing fee in 3 – 9 business days. We had many Articles reviewed and approved in three business days.

That was the good old days. Since the ACC’s new online filing system went live on May 20, 2018, the ACC is taking 20 – 26 business days to review Articles of Organization filed with the expedited filing fee and 60 – 66 business days to review Articles filed with the regular $50 filing fee. When the Articles are approved the effective date (birth date) of the LLC is the date the Articles of Organization was received by the ACC unless the Articles provide for a later date.

This delay in approvals creates the following problems:

Some banks will not open a bank account for the LLC until its Articles of Organization are approved. If you can’t wait to open a bank account go to a bank that doesn’t require that the Articles be approved by the ACC before opening a bank account.

Real estate closings. A title insurance company will not issue title insurance when the buyer is an LLC until the ACC approves its Articles of Organization. Several years ago when the ACC had a 60+ day delay, it had a proceed that enabled a pending LLC to move to the front of the review line and get approved so that a real estate transaction could close. I don’t know if this procedure is still available, but call me if you need to expedite for a closing.

Moral of this story: Always pay the additional $35 and file using the $85 expedited filing fee when you form a new LLC or PLLC.

Richard Keyt2018-05-31T09:10:18+00:00May 31st, 2018|Articles of Organization, AZ Corporation Commission|0 Comments

Records? We Ain’t Got No Stinking Records: New Arizona LLC Law Says Disclose or Be Sued

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #9

The 1948 movie “The Treasure of the Sierra Madre” starring Humphrey Bogart contained these famous words:

“Badges? We ain’t got no badges! We don’t need no badges! I don’t have to show you any stinking badges!”

When I read new Arizona Revised Statutes Section 29-3410 it makes me think:

“LLC records? We ain’t got no LLC records! We don’t need no LLC records! I don’t have to show you any stinking LLC records!”

If you’ve been following my articles about the new Arizona Limited Liability Company Act that is effective September 1, 2019, you know I call the law the Arizona liability act because it creates many new ways members, managers and the company can sue each other. Section 29-3410 is one of the new statues that is baffling and that creates new grounds for lawsuits.

New Section 29-3410.A requires all Arizona LLCs to maintain the following records:

1. a current list of the full name and last known address of each member and manager.

2. a copy of the Articles of Organization and all amendments to the Articles of Organization.

3. a copy of all current and prior written operating agreements and amendments to all current and prior written operating agreements.

4. any record of a member’s obligation to make a capital contribution to the company.

5. a copy of the company’s federal, state and local income tax returns and reports, if any, for the three most recent years.

6. a copy of the company’s financial statements, if any, for the three most recent years.

The records all Arizona LLCs must maintain under new law Section 29-3410.A are the same records all Arizona LLCs must maintain under current LLC law. See Arizona Revised Statutes Section 29-607.

The problem with Section 29-3410 is that it contains a long list of new requirements that deal with whether or not the company must disclose any required records. Section 29-3410 states:

B. During regular business hours and at a reasonable location specified by the limited liability company, a member or manager may inspect and copy the records described in subsection A of this Section and any other company record regarding the activities, affairs, financial condition and other circumstances of the company as is just and reasonable if all of the following apply:

1. the member or manager seeks the records for a purpose reasonably related to the rights and duties of the member or manager under the operating agreement or this Chapter.

2. the member or manager makes a demand in a record received by the company describing with reasonable particularity the records sought and the purpose for seeking the records.

3. the records sought are directly connected to the member’s or manager’s purpose.

C. not later than ten days after receiving a demand pursuant to subsection B, paragraph 2 of this Section, the limited liability company shall inform in a record the member or manager that made the demand of:

1. the records that the company will make available in response to the demand and when and where the company will make the records available. The time and location may not be unreasonable under the circumstances.

2. the reasons for declining if the company declines to provide any demanded records.

D. Whenever this Chapter or the operating agreement provides for a member or manager to vote on or give or withhold consent to a matter, before the vote is cast or consent is given or withheld, the limited liability company, without demand, shall provide the member or manager with all information that is known to the company and all records in the company’s possession that are material to the member’s or manager’s decision except to the extent the company reasonably believes that the member or manager already knows the information or is in possession of the records.

E. To the extent that some or all of a limited liability company’s records are maintained by a member or manager, the member or manager shall make those records available to the company as necessary for the company to satisfy its obligations pursuant to this Section.

K. In addition to any restriction or condition stated in its operating agreement, a limited liability company may impose reasonable restrictions and conditions on access to and use of information to be furnished and records to be made available under this Section, including designating information and records confidential and imposing nondisclosure and safeguarding obligations on the recipient. In a dispute concerning the reasonableness of a restriction under this subsection, the company has the burden of proving reasonableness.

L. If a dispute arises regarding a member’s or manager’s right under this Section to obtain information or inspect or copy a record, or regarding whether any restriction imposed by the limited liability company on a member’s or manager’s right to obtain, inspect, copy or use any such information or record is unreasonable, the court may award the successful party reasonable expenses, including reasonable attorney fees and costs.

Current vs. Future Arizona LLC Records Law

Under current law members are entitled to get copies of the records. There is no procedures that allow the LLC to refuse to give records to members. New Arizona LLC law creates an elaborate process that must be satisfied before a member can get required records. Here are some of the potential problems created by Section 29-3410:

LLC has two members, Homer Simpson and Ned Flanders. Each owns 50% of the LLC. Ned sends Homer an email that he wants copies of the records the company must maintain. Here are some of the problems that arise:

1. Neither Homer nor Ned is obligated to maintain the records. The company is required to maintain the records, but it cannot do so unless somebody acts on its behalf.

2. Did Ned make a demand in a record received by the company describing with reasonable particularity the records sought and the purpose for seeking the records?

3. How does Ned make the demand for copies of records and who does he give the demand to?

4. Who determines if Ned’s purpose is a proper purpose?

5. Is Ned’s purpose reasonably related to his rights and duties as a member?

6. Are the records sought by Ned directly connected to his purpose?

7. Who determines if the records sought are directly connected to the member’s purpose in making the request?

8. If Ned sues to enforce his rights under Section 29-3410 who does he sue?

9. Does Homer have any personal liability for the company’s failure to satisfy its obligations under Section 29-3410 ?

What if Homer owns 90% of the LLC and Ned owns 10%? Do the answers to the above questions change?

Section 29-3410.L encourages litigation over records requests by expressly authorizing the prevailing party in a lawsuit to enforce Section 29-3410 to collect attorneys fees and costs from the losing party.

KEYTLaw’s Operating Agreement Eliminates Section 29-3410 Duties

The Operating Agreement we prepare for all of our multi-member LLCs contains language that eliminates all of the troubling duties in Section 29-3410. If your Arizona LLC wants to be subject to the duties levied in Section 29-3410 we will modify the Operating Agreement to make Section 29-3410 applicable to the LLC and its members.

(more…)

Richard Keyt2018-07-15T08:08:11+00:00May 19th, 2018|New Arizona LLC Act|0 Comments

Manager of an Arizona Manager Managed LLC Says “Toto, We’re Not in Kansas Anymore”

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #8

Yes Dorothy, beginning September 1, 2019, Arizona manager managed LLCs will no longer be in ~~Kansas~~ limited liability company land. Instead they will be in liability company land, a new environment in which a manager of an Arizona manager managed LLC can be sued for violating one or more of the fiduciary duties the new Arizona Revised Limited Liability Company Act (ALLCA) levies on managers of manager managed Arizona LLCs.. When ALLCA becomes effective all managers of manager managed Arizona LLCs will have numerous new duties the violation of which will give members and the company causes of action to sue managers. This is why I call ALLCA the Arizona liability company act.

What are the New Manager Duties under ALLCA?

Arizona Revised Statutes Section 29-3409 levies the following new fiduciary duties on all managers of Arizona LLCs that are manager managed. ALLCA is applies to all Arizona LLCs formed after August 31, 2019, and all Arizona LLCs after August 31, 2020. Section 29-3409 states:

I. A manager of a manager-managed limited liability company owes to the company and the members the duties of loyalty and care stated in subsections j and k of this Section.

J. The fiduciary duty of loyalty of a manager in a manager-managed limited liability company includes the following duties:

1. to account to the company and hold as trustee for the company any property, profit or benefit derived by the manager to which the manager is not entitled:

(a) in the conduct or winding up of the company’s activities and affairs.

(b) from a use by the manager of the company’s property.

(c) from the appropriation of a company opportunity.

2. to refrain from dealing with the company in the conduct or winding up of the company’s activities and affairs as or on behalf of a person having an interest adverse to the company.

3. to refrain from competing with the company in the conduct of the company’s activities and affairs before the dissolution of the company.

4. to disclose to each of the other members and managers who are considering or voting on a decision or transaction regarding the company or one or more of the members’ interests in the company both of the following:

(a) any material conflict of interest on the part of the disclosing manager with respect to the decision or transaction.

(b) if a material conflict of interest exists, all material facts relating to the decision or transaction that are within the disclosing manager’s knowledge and not known or reasonably available to the affected members or managers.

K. The duty of care of a manager of a manager-managed limited liability company in the conduct or winding up of the company’s activities and affairs is to refrain from engaging in grossly negligent or reckless conduct or willful or intentional misconduct.

L. A manager shall discharge the duties and obligations under this Chapter or under the operating agreement and exercise any right consistently with the contractual obligation of good faith and fair dealing.

Q. In a manager-managed limited liability company, a member does not have any fiduciary duty to the company or to any other member solely by reason of being a member.

R. A conflict of interest is material if the conflict would reasonably be expected to affect a member’s or manager’s judgment regarding the decision or transaction under consideration.

Does Anybody in Arizona Understand the New Duties in Section 29-3409?

Probably not! Imagine you are the manager of an Arizona manager managed LLC that is governed by ALLCA, which means you are subject to all of the duties set forth in Section 29-3409. Would you know you are subject to the duties levied in Section 29-3409? If you did know about the duties levied on managers would you know how to protect yourself and avoid liability by “doing the right thing?” I wouldn’t and I’ve formed 6,100+ LLCs and been advising LLC clients about Arizona LLC law since 1992 when Arizona adopted its current LLC law. I’m an LLC lawyer and I don’t know what the new duties mean or how to comply with them in the operation of an LLC.

Here is a short list of some of the questions all managers of an Arizona manager managed LLC need to ask and know the answer to:

What is the duty of loyalty?
How does a manager satisfy the duty of loyalty?
What is the duty of care?
How does a manager satisfy the duty of care?
When would a manager’s actions cause the company to act on behalf of a person having an interest adverse to the company?
When does the managers actions constitute competing with the company?
When the members are voting on an issue when does a manager have a conflict of interest that requires the manager to disclose all material facts to the members?
If disclosure of material facts is required, must the manager prepare a written disclosure document and give it to the members before they vote on the issue? Hint: Yes if the manager wants to be able to prove he or she satisfied the disclosure requirement.
What is grossly negligent conduct?
What is reckless conduct?
What is willful misconduct?
What is intentional misconduct?
What is the contractual obligation of good faith?
What is the contractual obligation of fair dealing?

When you know the answers to the above questions only then can you act in ways that will satisfy your fiduciary duties as a manager and avoid liability for failing to satisfy a duty.

People or companies that are managers of manager managed LLCs need to be aware of the potential liabilities the managers have under Section 29-3409. There is good news, however, a well drafted ALLCA compliant Operating Agreement can eliminate or modify all of the duties that apply to managers in Section 29-3409 except

Warning for Managers of Manager Managed Arizona LLCs

If you or your company will be the manager of an Arizona manager managed LLC you should not accept the job unless all the members of the LLC sign an Operating Agreement that eliminates or modifies the manager’s duties under Section 29-3409.

Operating Agreement Can Eliminate or Modify Some Section 29-3409 Duties

One reason your Arizona member managed LLC needs an ALLCA compliant Operating Agreement is to have it eliminate or modify the fiduciary duties set forth in Section 29-3409. The general rule of Section 29-3105.A.3 of ALLCA is “in the event of a conflict between a provision of the operating agreement and this Chapter, the provision of the operating agreement governs” except an Operating Agreement may not:

eliminate the contractual obligation of good faith and fair dealing or the duty to refrain from willful or intentional misconduct under Section 29-3409, or

limit or eliminate a person’s liability for any violation of the contractual obligation of good faith and fair dealing or conduct involving willful or intentional misconduct.

KEYTLaw’s Operating Agreement Can Eliminate or Modify Fiduciary Duties

The Operating Agreement we prepare for all of our multi-member LLCs contains language that eliminates all of the manager’s duties levied in Section 29-3409. Our Operating Agreements do not eliminate or modify the contractual obligation of good faith and fair dealing or the duty to refrain from conduct involving willful or intentional misconduct. If your manager managed Arizona LLC wants its managers to be subject to the fiduciary duties levied in Section 29-3409 we will modify the Operating Agreement to make Section 29-3409 applicable to the LLC and its managers.

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Richard Keyt2018-05-20T07:49:47+00:00May 17th, 2018|New Arizona LLC Act|0 Comments

Run Forrest Run: Arizona Liability Company Act Inflicts Numerous New Duties on Members

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #7

Forrest Gump’s mother used to tell him “Life is like a box of chocolates. You never know what you’re gonna get.” This statement applies to Section 29-3409 of the new Arizona Limited Liability Company Act (ALLCA) effective September 1, 2019. Members who are subject to Section 29-3409 will NEVER know what they get under this statute until they win or lose a law suit for breach of one or more of the new duties levied on members of member managed Arizona LLCs. This new law imposes fiduciary duties for the first time on members of all member managed Arizona LLCs.

Instead of calling the ALLCA by its full legal name, I frequently refer to ALLCA as the Arizona Liability Company Act because of the many fiduciary duties the new law levies on members of member managed Arizona LLCs. New duties means new potential liabilities imposed on members that can cause them to be named as defendants in lawsuits and to be liable for attorneys’ fees and damages.

Fortunately most of the new fiduciary duties levied on members and managers of Arizona LLCs under ALLCA can be eliminated or modified by a well drafted Operating Agreement. Members of Arizona LLCs that hire a competent Arizona LLC attorney will be able to sign an ALLCA compliant Operating Agreement. Unfortunately it will be the unsuspecting members of member managed multi-member Arizona LLCs that lack an ALLCA compliant Operating Agreement that will be subject to the new fiduciary duties. These new duties levied on members and mangers are a litigation attorney’s dream because they will have many new reasons to sue members of multi-member Arizona LLCs that are member managed.

Current Arizona LLC Law

Current Arizona LLC does not impose any fiduciary duties on members of an Arizona LLC. The Arizona Court of Appeals case called TM2008 Investments, Inc., vs. ProCon Capital Corp. involves a dispute among the two members of Doveland Developments, LLC, a company formed to buy land and develop it into homes. ProCon Capital sued TM2008 Investments for breach of a fiduciary duty called the implied covenant of good faith and fair dealing. The issue before the Arizona Court of Appeals was whether or not Arizona’s limited liability company law provides that a member of an Arizona LLC owes a fiduciary duty to the other members of the LLC. The court said:

“We decline in this case to mechanically apply fiduciary duty principles from the law of closely-held corporations or partnerships to a limited liability company created under Arizona law. The legislature did not explicitly outline any such duties for members of an LLC; instead, the LLC Act allows the members of an LLC to not only create an operating agreement, but also delineate in that agreement the duties members owe one another.”

The times they are a changing. The drafters of ALLCA decided to change drastically Arizona LLC law by adding language in ALLCA that expressly creates new fiduciary duties on members of member managed Arizona LLCs.

Definition of Fiduciary Duty

Cornell Law School’s Wex Legal Dictionary defines “fiduciary duty” as follows:

A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary. If an individual breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. His or her beneficiaries are entitled to damages, even if they suffered no harm.

Fiduciary duties exist to encourage specialization and induce people to enter into a fiduciary relationship. By imposing these duties, the law reduces the risk of abuse of a beneficiary by the fiduciary. As a result, potential beneficiaries can have greater confidence in seeking out a fiduciary.

New Arizona Revised Statute Section 29-3409

New Arizona Revised Statutes Section 29-3409 levies the following fiduciary duties on members of member managed Arizona LLCs formed after August 31, 2019, and members of all Arizona member managed LLCs after August 31, 2010:

A. A member of a member-managed limited liability company owes to the company and the other members the duties of loyalty and care . . .

B. The fiduciary duty of loyalty of a member in a member-managed limited liability company includes the following duties:

1. to account to the company and hold as trustee for the company any property, profit or benefit derived by the member to which the member is not entitled:

(a) in the conduct or winding up of the company’s activities and affairs.

(b) from a use by the member of the company’s property.

(c) from the appropriation of a company opportunity.

2. to refrain from dealing with the company in the conduct or winding up of the company’s activities and affairs as or on behalf of a person having an interest adverse to the company.

3. to refrain from competing with the company in the conduct of the company’s activities and affairs before the dissolution of the company.

4. to disclose to each of the other members that are considering or voting on a decision or transaction regarding the company or one or more of the members’ interests in the company both of the following:

(a) any material conflict of interest on the part of the disclosing member with respect to the decision or transaction.

(b) if a material conflict of interest exists, all material facts relating to the decision or transaction that are within the disclosing member’s knowledge and not known or reasonably available to the affected members.

C. The duty of care of a member of a member-managed limited liability company in the conduct or winding up of the company’s activities and affairs is to refrain from engaging in grossly negligent or reckless conduct or willful or intentional misconduct.

D. A member shall discharge the duties and obligations under this Chapter or under the operating agreement and exercise any right consistently with the contractual obligation of good faith and fair dealing. [Author’s comment: Section 29-3105.C.5 says that an Operating Agreement cannot limit or eliminate a person’s liability for any violation of the contractual obligation of good faith and fair dealing.]

Section 29-3409 inflicts seven new duties on members of member managed LLCs. This means ALLCA creates seven new ways a member can be sued by another member or the LLC. Now do you see why I call ALLCA the Arizona liability company act?

Welcome to the New Age of Arizona LLC Law Uncertainty

It’s 2021 and you are a member of a three member Arizona LLC that is member managed. You are subject to Section 29-3409. Anybody can read this statute, but until an Arizona appellate court rules on the duties levied on members in this statute nobody has a clue what the statute means or how a member must act to avoid liability under the statute. Consider the following questions every member will have about Section 29-3409:

What is the duty of loyalty?
How does a member satisfy the duty of loyalty?
What is the duty of care?
How does a member satisfy the duty of care?
When does a member get property, profit or benefit to which the member is not entitled?
When must a member refrain from dealing with the company as or on behalf of a person having an interest adverse to the company?
When does a member’s activities constitute competing with the company?
When the members are voting on an issue when does a member have a material conflict of interest with respect to the decision or transaction?
If the members are voting and a member has a material conflict of interest, how does the member with a conflict know if a fact is a material fact relating to the decision or transaction that are within the disclosing member’s knowledge and not known or reasonably available to the affected members.
All knowledgeable attorneys will advise members of an Arizona member managed LLC that if the member has any material conflicts of interest with respect to an issue the members are voting on the only way that the member can protect himself or herself is by preparing a written document that discloses all material facts, give the document to all the other members and get a receipt signed by all the other members in which they acknowledge getting the written disclosure document at a specified date and time.
What is the contractual obligation of good faith and fair dealing? How does a member satisfy this requirement?

How Do Members of a Member Managed Arizona LLC Eliminate or Modify Section 29-3409?

The Section 29-3409 problem is only a problem for member managed Arizona LLCs that are not single member LLCs and LLCs owned by a solely by a married couple. The member / members of these types of Arizona LLCs are not going to sue themselves or hold themselves liable for violating any duties in Section 29-3409.

The Section 29-3409 problem only exists for member managed multi-member Arizona LLCs other than a two member LLC owned by a married couple. My recommendation is that multi-member Arizona LLCs eliminate or modify member duties set forth in Section 29-3409. Here are two ways a member managed multi-member Arizona LLC can eliminate or modify the duties levied on members:

1. Form a manager managed LLC or amend the Articles of Organization of a member managed LLC to change it to a manager managed LLC. The duties imposed on members by Section 29-3409 apply to members only when the LLC is member managed. Warning: Although the members of an Arizona manager managed LLC are not liable for duties under Section 29-3409 all managers of a manager managed Arizona LLC will have similar fiduciary duties under Section 29-3409.

2. Have the members of a manager managed Arizona LLC adopt an Operating Agreement that eliminates unwanted duties in Section 29-3409 or that modifies the duties to make them acceptable to the members. Note: Section 29-3105.C.5 prohibits an Operating Agreement from limiting or eliminating a person’s liability for any violation of the contractual obligation of good faith and fair dealing.

Operating Agreement Can Eliminate or Modify Some Section 29-3409 Duties

eliminate the contractual obligation of good faith and fair dealing or the duty to refrain from willful or intentional misconduct under Section 29-3409, or

limit or eliminate a person’s liability for any violation of the contractual obligation of good faith and fair dealing or conduct involving willful or intentional misconduct.

KEYTLaw’s Operating Agreement Can Eliminate or Modify Fiduciary Duties

The Operating Agreement we prepare for all of our multi-member LLCs contains language that eliminates all of the members’ duties levied in Section 29-3409. Our Operating Agreements do not eliminate or modify the contractual obligation of good faith and fair dealing or the duty to refrain from conduct involving willful or intentional misconduct. If your member managed Arizona LLC wants its members to be subject to the fiduciary duties levied in Section 29-3409 we will modify the Operating Agreement to make Section 29-3409 applicable to the LLC and its members.

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Richard Keyt2018-05-31T17:08:06+00:00May 16th, 2018|New Arizona LLC Act|0 Comments

Arizona Corporation Commission’s New Online e-Filing System Goes Live 5/21/18

The Arizona Corporation Commission announced today that its franken-monster, i.e., its online e-document filing and document retention system is almost alive! That’s what the email I got today from the Arizona Corporation Commission tells me. Here’s the text of the message

We are pleased to inform you that we are going live with our upgraded E-filing/database system! Some details to note:

E-filing will NOT be available from Wednesday, May 16 at 5:00 pm until Monday, May 21 at 8:00 am.

The website is otherwise available for searching and viewing entity records up until Friday, May 18 at noon.

We will accept paper documents at our physical locations in Phoenix and Tucson up until Friday, May 18 at noon.

The new system/site will be available on Monday, May 21, at 8:00 am.

During implementation, penalties for late-filed corporation annual reports will be waived, and corporations will not be administratively dissolved for failing to file the annual report.

If you previously responded to a request to provide your email address (for some statutory agents and MOD account holders), beginning May 21 you can register in the new system using that email address. As a reminder, MOD accounts will be handled solely online.

We will send a separate email explaining how the statutory agent process works in the new system.

Online filing is not mandatory, but is strongly recommended. When the new system is up and running (as of May 21), we will continue to accept documents by mail, in person, by fax, and through the email address of documentintake@azcc.gov. The EMAIL document intake will be discontinued approximately 2-3 weeks after the go-live date. We will change the bounce-back auto message on that email to give a date certain for termination of that service.

Bottom line: A new Arizona Corporation Commission electronic world is about to begin. I’m sure there will be growing pains, but from the demo I saw last November it looks like the new digital / online filing and record-keeping system is going to be great. I anticipate that we will soon be filing all LLC and corporation documents with the Arizona Corporation Commission using its online e-filing system.

Watch the Arizona Corporation Commission’s short explanation video.

Richard Keyt2018-05-14T16:00:33+00:00May 14th, 2018|Miscellaneous|0 Comments

New LLC Law Warning: Operating Agreement Should Limit Managers’ Powers

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #6

New Arizona Limited Liability Company Act (ALLCA) Section 29-3407.C.3 provides:

“a majority of the managers shall decide . . .

(a) matters that are outside the ordinary course of the company’s activities and affairs but within the company’s purpose.

(b) matters on which there exists a known difference among managers.

This is a troubling statute that I recommend be amended or deleted in Arizona LLCs’ Operating Agreements. The problem with subsection (a) is ALLCA does not define: (i) the ordinary course of the company’s activities, and (ii) the company’s purpose.

If the manager managed LLC does not have an Operating Agreement that defines the ordinary course of the company’s activities or the company’s purpose then subsection (a) is meaningless. Few LLC Operating Agreements define the LLC’s purpose.

The practical significant of Section 29-3407.C.3(a) is that an LLC manager cannot exercise any power under this subsection unless the LLC has an Operating Agreement that defines the LLC’s ordinary course of activities and/or the company’s purpose, but very few LLCs have an Operating Agreement with that kind of language.

Another problem with Section 29-3407.C.3 is subsection (b), which provides “a majority of the managers shall decide . . . matters on which there exists a known difference among managers.” This provision could be interpreted to mean that any time the managers differ on a proposed action a majority of the managers can decide to adopt or reject the action despite contrary language in the LLC’s Operating Agreement. This provision is too broad and potentially dangerous to some of the members. It should be eliminated by an ALLCA compliant Operating Agreement.

An Arizona LLC’s Operating Agreement should contain language that expressly states what a manager can do and what the manager cannot do without getting approval from the members. My Operating Agreements contain these types of provisions.

In addition, my ALLCA compliant Operating Agreement deletes Section 29-3407.C.3 and many other problem provisions contained in Arizona’s new ALLCA.

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Richard Keyt2018-05-20T15:12:33+00:00May 7th, 2018|New Arizona LLC Act|0 Comments

Should My Arizona LLC Adopt an Operating Agreement Drafted for the New LLC Act?

Recently somebody for whom I formed an Arizona LLC asked me if Arizona’s new LLC act (ALLCA) that is effective 9/1/19 for LLCs formed after 8/31/19 and all Arizona LLCs after 8/31/20 will require Arizona LLCs to adopt an Operating Agreement that contains language that makes the agreement compatible with ALLCA. The short answer is no. ALLCA does not require an Arizona LLC to have an Operating Agreement or amend existing Operating Agreements.

As an Arizona LLC attorney who has formed 6,100+ LLCs my answer to the question, even though ALLCA does not require an Arizona LLC to have an ALLCA complaint Operating Agreement is that all Arizona LLCs should have an ALLCA compliant Operating Agreement because it would be extremely foolish and potentially a costly mistake for an Arizona LLC to fail to have an ALLCA compliant Operating Agreement.

I recommend that all Arizona LLCs adopt an Operating Agreement that contains provisions derived from or based on the statutory provisions contained in ALLCA. Because all of Arizona’s existing LLC statutes will be completely eliminated and replaced by the new ALLCA, all Arizona LLCs need an ALLCA compliant Operating Agreement. To me it is a no brainer.

New Arizona LLC law means all Arizona LLCs need an Operating Agreement drafted for the new law. If you are thinking of forming a new Arizona LLC and will not get an ALLCA compliant Operating Agreement, ask yourself WHY? Don’t you want an agreement drafted for Arizona’s new LLC law now? Your new Arizona LLC’s Operating Agreement should be ALLCA compliant now so you don’t have to modify the Operating Agreement before September 1, 2020, to make it compliant with Arizona’s new LLC law.

ALLCA Compliant Operating Agreement

What do I mean by an ALLCA compliant Operating Agreement? I mean an Operating Agreement that has been drafted by an experienced Arizona LLC attorney like me who has studied ALLCA and who has written provisions for the Operating Agreement that take into consideration statutory provisions in the new law.

I invested a lot of time reading and studying Arizona’s new LLC law because I know that all existing and future Arizona LLCs need an Operating Agreement that is drafted specifically for Arizona’s new ALLCA. My ALLCA compliant Operating Agreements contains 17 pages of new text that addresses Arizona’s new LLC law.

New ALLCA Sections Added to My Operating Agreement

Below is the table of contents for Article 13 of my ALLCA compliant Arizona LLC Operating Agreements. The table shows the titles of the 28 sections of new provisions in Article 13 that constitute 17 pages of text in my ALLCA compliant Operating Agreement. A quick review of the 28 new sections I added to my Operating Agreements to make them ALLCA compliant will show you that the new ALLCA has a lot of provisions that affect Arizona LLCs that all Arizona LLCs need to address.

Article 13 Arizona LLC Act Provisions

Section 13.1	ALLCA Provisions that Are Deleted & Not Applicable to this Company
Section 13.2	Definitions
Section 13.3	Company’s Principal Address After August 31, 2020
Section 13.4	Operating Agreement Can Modify the Act
Section 13.5	Members Who Do Not Sign This Agreement
Section 13.6	Liability for Inaccurate Information in Records Filed with the ACC
Section 13.7	Agency Power of a Member
Section 13.8	Agency Power of a Manager
Section 13.9	Liability of Members
Section 13.10	Liability of Managers
Section 13.11	How a Person Becomes a Member
Section 13.12	Termination of Joint Tenancy & Community Property with Right of Survivorship
Section 13.13	Liability for Capital Contributions
Section 13.14	Sharing of and Right to Distributions before Dissolution
Section 13.15	Limitations on Distributions
Section 13.16	Liability for Improper Distributions
Section 13.17	Management of the Company When It is Member Managed
Section 13.18	Management of the Company When It is Manager Managed
Section 13.19	Reimbursement; Indemnification; Advancement; Insurance
Section 13.20	Standards of Conduct for Members When the Company is Member Managed
Section 13.21	Standards of Conduct for Managers When the Company is Manager Managed
Section 13.22	Records to be Kept; Rights to Information and Records of Members & Managers
Section 13.23	Charging Order
Section 13.24	Wrongful Dissociation
Section 13.25	Events Causing Dissociation
Section 13.26	Effect of Dissociation
Section 13.27	Direct Action by Member
Section 13.28	Derivative Action

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Richard Keyt2018-05-06T15:13:01+00:00May 6th, 2018|New Arizona LLC Act|0 Comments

New Arizona LLC Law Nightmare: Vote at Member Meeting & Get Sued for Failing to Disclose Conflict of Interest

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #5

New Arizona Limited Liability Company Act (ALLCA) effective September 1, 2019, creates many new grounds for members of Arizona LLCs to sue each other and their company. I call the new law the Arizona liability company because its creates so many new grounds that members can use to sue each other.

New Arizona Revised Statutes Section 29-3409.B.4 is the new law that for the first time gives a member of an Arizona LLC grounds to sue one or more other members as a result of a vote by the members to cause the company to engage in an action or refrain from engaging in an action. Section 29-3409.B.4 states:

B. The fiduciary duty of loyalty of a member in a member-managed limited liability company includes the following duties:

4. to disclose to each of the other members that are considering or voting on a decision or transaction regarding the company or one or more of the members’ interests in the company both of the following:

(a) any material conflict of interest on the part of the disclosing member with respect to the decision or transaction.

(b) if a material conflict of interest exists, all material facts relating to the decision or transaction that are within the disclosing member’s knowledge and not known or reasonably available to the affected members.

The problem for members of Arizona LLCs under ALLCA is that Section 29-3409.B.4 for the first time creates liability for a member of an Arizona LLC who votes on an issue and fails to disclose that the member has a conflict of interest.

When Does a Conflict of Interest Exist?

The big problem is that the term “conflict of interest” is not defined in the statute and there are no Arizona appellate court cases that shed light on the term because the new ALLCA has not been the subject of any litigation yet. Nor do we have a clue as to whether an existing conflict of interest is material, because only material conflicts of interest must be disclosed.

Can You Find the Conflict of Interest?

Homer Simpson and Ned Flanders each own 50% of World Wide Widgets, LLC. They have a meeting to consider if WWW should enter into a contract with ABC, Inc., to hire it to manufacture 1,000 widgets for $100,000. Consider the following hypothetical situations and ask yourself when does a conflict of interest exist?

1. Homer is the sole owner of ABC, Inc. Clear conflict of interest and Homer must disclose he owns all of ABC, Inc.
2. Homer owns 50% of ABC, Inc.
3. Homer owns 49% of ABC, Inc.
4 Homer owns 5% of ABC, Inc.
5. Homer’s son is the sole owner of ABC, Inc.
6. Homer’s son owns 50% of ABC, Inc.
7. Homer’s son owns 49% of ABC, Inc.
8 Homer’s son owns 5% of ABC, Inc.
9. Homer’s son-in-law is the sole owner of ABC, Inc.
10. Homer’s son-in-law owns 50% of ABC, Inc.
11. Homer’s son-in-law owns 49% of ABC, Inc.
12 Homer’s son-in-law owns 5% of ABC, Inc.
13. Homer’s brother is the sole owner of ABC, Inc.
14. Homer’s brother owns 50% of ABC, Inc.
15. Homer’s brother owns 49% of ABC, Inc.
16 Homer’s brother owns 5% of ABC, Inc.
17. Homer’s brother-in-law is the sole owner of ABC, Inc.
18. Homer’s brother-in-law owns 50% of ABC, Inc.
19. Homer’s brother-in-law owns 49% of ABC, Inc.
20 Homer’s brother-in-law owns 5% of ABC, Inc.

Except for the situation where Homer owns 100% of ABC, Inc., I have no clue if any of the other scenarios involve a conflict of interest for Homer or if an existing conflict of interest is material. Do you?

You can see the practical problem all members of Arizona LLCs will have when they are subject to Section 29-3409.B.4. More often than not a member will not know if a conflict of interest exists or if a conflict of interest is material until a jury rules on the issue years later. Imagine being in a meeting of members of your LLC and you the members are getting ready to vote on an issue to which you may have a conflict of interest, but you are not sure if you do have a conflict of interest or if there is a conflict if the conflict is material. There is no place you can get an definitive answer to whether or not you have a conflict of interest and if a conflict is material.

Consequence of a Member Having a Material Conflict of Interest

If a member does have a material conflict of interest the member has a fiduciary duty to disclose the all material facts relating to the decision or transaction that are within the disclosing member’s knowledge and not known or reasonably available to the affected members. The practical problem for all members who think there are material facts that need to be disclosed is that the only way the member can protect against a future lawsuit for failing to disclose is by delivering a document to all of the other members that contains language that discloses the material facts and get all members to sign a receipt in which they acknowledge receiving the disclosure document.

Verbal disclosures of material conflicts of interest are worthless. My contracts professor in my first year of law school said that “if it is oral rather than written it’s as if it never happened.” Oral disclosures are invitations to litigation. The only way a member can protect against liability under Section 29-3409.B.4 is by giving the other members a written disclosure document before voting and get the members to sign a receipt.

For members who want to eliminate the voting disclosure requirement contained in Section 29-3409.B.4. they must arrange for all members of their LLC to sign an Operating Agreement that eliminates Section 29-3409.B.4.

KEYTLaw’s Operating Agreement Eliminates Section 29-3409.B Problem

The Operating Agreement we prepare for all of our multi-member LLCs contains language that eliminates Section 29-3409.B.4. If your Arizona LLC wants its members to be subject to the conflict of interest disclosure requirement in Section 29-3409.B.4 we will modify the Operating Agreement to make Section 29-3409.B.4 applicable to the LLC and its members.

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Richard Keyt2018-05-21T07:27:34+00:00May 5th, 2018|New Arizona LLC Act|0 Comments

New LLC Law Warning: Beware of Baffling Section 29-3407.B

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #4

Your Arizona LLC needs an Operating Agreement that eliminates or clarifies new Arizona Revised Statutes Section 29-3407.B that is effective September 1, 2019. This statute applies to member managed LLCs and states:

In a member-managed limited liability company, the following apply:

1. . . . the management and conduct of the company are vested in the members.

2. within the ordinary course of the company’s activities and affairs, each member has the right to manage and conduct the company’s activities and affairs.

3. . . . a majority in interest of the members shall decide any of the following:

(a) matters that are outside the ordinary course of the company’s activities and affairs but within the company’s purpose.

(b) matters on which there exists a known difference among members.

(c) whether to make an interim distribution before dissolution and winding up.

(d) whether to make an advance to a member or manager under Section 29-3408.C.

The first thing to know about this statute is that without an Operating Agreement that defines how members vote, a majority in interest of the members is determined by counting the number of members (husband and wife are two members) then asking what number is a majority of the total number of members? See New LLC Law Warning: Beware of Section 29-3404.A, which explains the new law’s definition of majority in interest. For example, if an Arizona LLC has two members, Homer who owns 90% and Ned & Molly, a married couple, who own 10%, Section 29.3404.A provides that there there are three members so Ned and Molly’s two votes overrule Homer’s one vote.

Subsection 3 of Section 29-3407.B creates a vast amount of uncertainty for the members. It is a time bomb waiting to explode into litigation. Here are some of the problems caused by this statute:

What matters are outside the ordinary course of the company’s activities?
What matters are within the company’s purpose?
How does a member know there is a known difference among members?
Who determines the answers to questions 1 – 3?
If this statute is breached, does the company have liability and can it be a defendant in a lawsuit?
What happens with there are an equal number of members and no majority? Apparently the members are deadlocked indefinitely.

An Arizona LLC that is subject to Section 29-3407.B may want to have a provision in its Operating Agreement that eliminates this statute or modifies it in a way that is understandable and that works in actual practice.

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Richard Keyt2018-05-07T07:11:58+00:00May 4th, 2018|New Arizona LLC Act|0 Comments

New LLC Law Warning: Majority in Interest Nightmare

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason # 3

Current Arizona LLC law Section 29-681.E provides a default method for determining what constitutes a majority of the members when an LLC lacks an Operating Agreement that defines members’ voting rights. Current LLC law Section 29-681.E states:

a majority consists of more than one-half of the members

The new Arizona Limited Liability Company Act (ALLCA) contains a bizarre and potentially unfair method for determining which members constitute a majority in interest who have control of the LLC. ALLCA Section 29-3101.12 states:

“Majority in Interest of the Members” means, at any particular time, one or more Members that hold in the aggregate a majority of the interests in the limited liability company’s profits held at that time by all Members . . . . The Members’ respective interests in the Company’s profits are in proportion to their rights to share in distributions that exceed the repayment of their contributions on dissolution and winding up of the Company.

This troubling statute says that the majority in interest of the members is derived from how the members “share in distributions.” ALLCA Section 29-3404.A states:

“Any distribution made by a limited liability company . . . must be in equal shares among Members.”

When you apply Section 29-3404.A (equal distributions to members) to Section 29-3101.12 (members’ profits equal how they share distributions) the result is a majority in interest of members of an Arizona under ALLCA is the same as current LLC law Section 29-681.E, i.e., a majority in interest consists of more than one-half of the members.

Multi-member LLCs whose members share profits equally don’t need an ALLCA Operating Agreement that defines how members vote because each member gets one vote. However, all multi-member LLCs that want a voting method that does not give each member one vote must sign an Operating Agreement that defines the desired voting method.

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Richard Keyt2018-05-06T10:07:36+00:00May 4th, 2018|New Arizona LLC Act|0 Comments

New LLC Law Warning: Managers Must Be Named in Operating Agreement

Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason # 2

New Arizona Limited Liability Company Act (ALLCA) Section 29-3101.13 effective September 1, 2019, states:

“Manager” means a person that under the Operating Agreement of a Manager-managed limited liability company is responsible, alone or in concert with others, for performing the management functions stated in Section 29-3407, subsection C.

ALLCA Section 29-3105.A.1(b) states:

The Operating Agreement governs . . . the rights and duties . . . of a person in the capacity of Manager

My interpretation of these two statutes is that under ALLCA the only way a manager of a manager managed LLC can be a manager and have manager power’s is if the LLC has an Operating Agreement and the person or entity is named in that Operating Agreement as a manager.

Conclusion: When a manager managed LLC becomes subject to the new ALLCA it will not have a manager unless the LLC has an Operating Agreement that names one or more managers.

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Richard Keyt2018-05-06T10:17:00+00:00May 3rd, 2018|New Arizona LLC Act|0 Comments

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