by Richard Keyt, Arizona limited liability company attorney
You probably would not be surprised to learn that members of an Arizona limited liability company are not created by spontaneous combustion. Nor do members magically appear out of thin air. Time and time again we see situations where people completely ignore the legalities when it comes to documenting ownership of Arizona LLCs. If Homer Simpson files Articles of Organization for a new member managed Arizona LLC and the document only names him as a member, Ned Flanders does not become a member of the LLC because Homer says to Ned “you own 25% of my new LLC.”
There are legal formalities that must be followed to properly document the ownership of an Arizona LLC. We all know that we become the owner of a car by getting the current owner to sign the back of the title over to us. There is language on the back of the title to an Arizona vehicle that says that the owner transfers the title to the new owner on the date specified. The new owner must take the old title to the Department of Motor Vehicles and get a new title issued that shows the new owner as the owner of the vehicle. The same principles apply to Arizona LLCs. The former owner needs to sign a document that transfers the membership interest to the new owner and the Articles of Organization of the LLC on file with the Arizona Corporation Commission must be amended to reflect the change.
If you do not take care to properly document the addition or removal of one or more members to an Arizona LLC or the change of membership percentage between members, you are cruising for a legal bruising. Arizona law is very explicit as to how a person or entity becomes a member of an Arizona LLC. If a prospective new member fails to follow the requirements of Arizona law, a costly lawsuit may be required to get a court order that states who owns the membership interest.
Arizona Statutory Law
Arizona Revised Statutes Section 29-731 states:
A. At the time the limited liability company is formed, a person becomes a member by either of the following:
1. Being identified as a member in the initial articles of organization.
2. If the members are not identified in the initial articles of organization, being identified as a member in and signing in person or by an attorney-in-fact an operating agreement that exists at the time the initial articles of organization are filed or being identified as a member in a written statement certified, before or after the filing of the initial articles of organization, by each of the managers identified in the initial articles of organization.
B. After a limited liability company’s initial articles of organization are filed, a person may be admitted as an additional member as follows:
1. If a person is acquiring an interest in the limited liability company directly from the limited liability company, on the limited liability company’s written acknowledgment or acceptance of the person’s admission under the applicable provisions of an operating agreement, or if an operating agreement does not so provide, on the consent of all members.
2. If the person is an assignee of all or part of a member’s interest in a limited liability company, on the terms provided in an operating agreement or, if an operating agreement does not so provide, on the approval or consent of all members.
3. If the person is an assignee of an interest in the limited liability company of a member who has the power under an operating agreement to grant the assignee the right to become a member, on the exercise of the power in compliance with all conditions limiting the member’s exercise of the power.
4. If there are no members and all of the assignees consent in writing to the admission of one or more persons as a member or members, unless otherwise provided in the operating agreement.
If your Arizona limited liability company has a member that was not named in the initial Articles of Organization filed with the Arizona Corporation Commission or if it has a member who became a member after the company was formed, did the LLC comply with ARS Section 29-731? If not, that member has a problem and is technically not a member of the LLC.
Note the different procedures for admitting a member depending on whether the member becomes a member AS OF THE DATE OF FORMATION OF THE LLC or later. The method is different depending on the point in time when a person or entity is to become a member.
Potential Problem With Manager Managed LLCs
Arizona law says that a manager managed LLC must name in the initial Articles of Organization members who own 20% or more of the capital or profits of the LLC. If your Arizona LLC is manager managed, does it properly list those members who own 20% or more of the LLC and none of the members who own less than 20%? If the Articles of Organization are not correct, the company should immediately file an amendment to its Articles of Organization to correct the document with Arizona Corporation Commission.
Potential Problem With New Members
If your LLC added a member after the initial Articles of Organization were filed with the Arizona Corporation Commission, did your LLC comply with ARS Section 29-731 with respect to the member(s) added later? If not, it should do so immediately.
How to Document the Addition of a New Member
Has your Arizona LLC properly documented all changes involving members and their percentage of ownership of the company? If not, 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 documents changes involving members. The best time to document a change is when it occurs. Complete our Transfer of LLC Interest Agreement and order your change of member documents now before it is too late.
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:
1. 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.
2. Amendment to the Articles of Organization: If the LLC is member managed, the Articles of Organization must list the names and address of all members. If the LLC is manager managed, the Articles of Organization must list the names and addresses of only those members who own 20% or more of the company.
3. 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.
4. 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 $195 to prepare any one of the above-referenced documents, except the Resolution of Members, which is $100. We will prepare all four of the documents for $485, a $200 saving off the individual document price for the four documents. 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. 3 or firstname.lastname@example.org 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.
How to Hire KEYTLaw to Document Member Changes
The quickest way to hire Richard Keyt do prepare your change of member documents is to click on the following link to access our short online questionnaire in Adobe .pdf format.
Fill out the Transfer of LLC Interest Document Preparation Agreement online using your computer browser or print it and complete it with a pen. Next, mail, fax, email or deliver the Transfer of LLC Interest Agreement to the address shown on page 6 of the Agreement.
If you have questions about the Agreement or about documenting member changes involving your Arizona LLC, contact KEYTLaw LLC attorney Richard Keyt (ext. 1) or his son LLC attorney Richard C. Keyt (ext. 3) at 602-906-4953. We do not charge for change of member related questions.