We have consulted with countless numbers of people who were members of multi-member limited liability companies whose lives were miserable and full of stress because of a problem that arose with one or more other members of their LLC.
When people join together with other people or companies to form a multi-member Arizona limited liability company they are stuck together forever because Arizona LLC law does not provide any way for the members to carry out what we call a company divorce. When members can’t agree or if something bad happens such as the death of a member if they cannot agree on somebody being bought our or leaving without getting any money the disgruntled members only have two options:
- continue suffering together indefinitely, or
- ask an Arizona superior court to dissolve the company, but this is expensive and kills a business.
Here are some of the most common reasons LLC owners need a company divorce:
- Death. A member dies and the surviving members do not want to be partners with the deceased member’s heirs. For example. Bob dies and his two minor children inherit Bob’s share of the LLC or Bob’s wife who nobody can stand inherits Bob’s share of the LLC. The surviving members’ only options are to: (i) do nothing and welcome their new partners/members, or (ii) ask a court to dissolve the LLC.
- Bankruptcy. When a member files for bankruptcy the bankruptcy trustee steps into the shoes of the bankrupt member, which means the bankruptcy trustee becomes a member of the LLC. If the trustee sells the membership interest in the bankruptcy then the buyer becomes a new member. You don’t want to be partners with a bankruptcy trustee or some creditor of the bankrupt member who buys the bankrupt member’s membership interest in the LLC.
- Member Defaults. Jim and Ralph are two members of an LLC. They signed an Operating Agreement that names Jim as the manager. The Operating Agreement imposes numerous obligations on Jim as the manager. Jim is required under the Operating Agreement to get Ralph’s approval before causing the LLC to enter into a contract that involves more than $5,000 or before paying any money to Jim. Without getting Ralph’s approval Jim causes the company to pay him a salary of $10,000/month. Jim also caused the company to enter into several contracts of more than $5,000 without getting Ralph’s consent. Ralph’s only options are to: (i) do nothing, (ii) sue Jim for breach of the Operating Agreement, or (iii) ask a court to dissolve the LLC.
- Disagreements. Andy and Bill each own fifty percent of a successful LLC. One of them wants the LLC to buy an asset needed by the LLC’s business and the other does not. Each of them strongly believes that his position is necessary for the future profitability and success of the company. Their disagreement is so great they don’t want to continue as partners in the business. Any and Bill’s only options are to: (i) do nothing, or (ii) ask a court to dissolve the LLC.
- Member Ceases Working for the LLC. Bob, Mary & Dana are members of an LLC that was funded by Mary and Dana. Bob did not put any of his money into the company because he was to work full time managing the company’s restaurant. Bob’s promise to work for the LLC was not evidenced by a written agreement signed by Bob, which is a requirement of Arizona LLC law if members want to be able to legally enforce a member’s obligation to pay money or property to the LLC or provide services to the LLC. The three members agreed to split the profits equally. The restaurant is successful and Bob ceases working for the LLC. The LLC had to hire a manager for the restaurant for $60,000/year, which reduces each member’s share of the profits by $20,000. Mary and Dana are not happy. They are stuck with Bob who contributed nothing, but now gets one third of the profits. Mary & Dana’s only options are to: (i) do nothing, or (ii) ask a court to dissolve the LLC.