Question: The members of my multi-member Arizona limited liability company never signed an Operating Agreement. The members now disagree on how to run the company. What are the members’ voting rights?
Answer: One of the primary reasons the members of a multi-member LLC should sign an Operating Agreement is to set rules on members’ voting rights and to set what major actions require the prior approval of a majority or super majority of the members or the unanimous approval of all members. If the members fail to adopt a good Operating Agreement then the default voting rules of Arizona’s LLC law apply and its a matter of time before the members disagree on action and big problems arise.
When the members of an Arizona LLC fail to adopt an Operating Agreement that provides for members’ voting rights or if the members adopt an Operating Agreement that is voting rights deficient, Arizona Revised Statutes Section 29-681 applies and provides the default members’ voting rules and rights.
The voting rules that apply to an Arizona LLC that does not have an Operating Agreement with voting rules signed by all of the members are listed below. There are only nine actions that require the approval of members – four of which of which require the approval of all members and five of which require the approval of a majority of the members.
- All Members Get One Vote: Every member has one vote regardless of how much money the member invested or how much of the LLC the member owns. For example, if Homer and Marge Simpson invested $1,000 in World Wide Widgets, LLC and acquired a 1% membership interest as community property and Ned Flanders invested $99,000 for 99% of the company then each of the three members has one vote with respect to the nine major actions listed in Section 29-751. Warning: If you are the major investor and/or the owner of a majority of the percentage interests in an Arizona LLC Section 29-751 is the reason you must have a good Operating Agreement that sets forth voting rules and rights.
- When Unanimous Approval is Required: Only four actions require that all members approve the action. “The affirmative vote, approval or consent of all members is required to:
1. Adopt, amend, amend and restate or revoke an operating agreement or authorize a transaction, agreement or action on behalf of the limited liability company that is unrelated to its purpose or business as stated in an operating agreement or that otherwise violates an operating agreement.
2. Issue an interest in the limited liability company to any person.
3. Approve a plan of merger or consolidation of the limited liability company with or into one or more business entities as defined in Section 29-751.
4. Authorize an amendment to the articles of organization that changes the status of the limited liability company from or to one in which management is vested in a manager or managers to or from one in which management is reserved to the members.”
- When Approval of a Majority of the Members is Required: Only five actions require the approval of a majority of the members. “The affirmative vote, approval or consent of a majority of the members, or if management of the limited liability company is vested in one or more managers, the affirmative vote, approval or consent of the sole manager or a majority of the managers, is required to:
1. Resolve any difference concerning matters connected with the business of the limited liability company.
2. Authorize the distribution of limited liability company cash or property to the members.
3. Authorize the limited liability company to repurchase all or part of any member’s interest in the limited liability company from that member.
4. Authorize the filing of articles of termination concerning the limited liability company.
5. Subject to subsection C, paragraph 4 of this section, authorize an amendment to the articles of organization, except that an amendment that merely corrects a false or inaccurate statement in the articles of organization may be filed at any time by a manager if management of the limited liability company is vested in one or more managers or by a member if management of the limited liability company is reserved to the members.
When there is no Operating Agreement Section 29-751.E.1 & 2 give the majority of members a lot of power to out vote the minority members and run the company.
The members failure to to adopt an Operating Agreement more often than not will eventually lead to a dispute among members as to how to run the company. One of the most common reasons people call me is to learn their options when their Arizona LLC does not have an Operating Agreement and the members need a company divorce.
The post What are Arizona LLC Members Voting Rights? appeared first on Arizona Limited Liability Company Law.
The Arizona legislature passed Senate Bill 1238, in April of 2013. Governor Brewer signed the bill on April 30, 2013. SB 1238 provides for the creation of a new type of Arizona corporation called the “benefit corporation” beginning January 1, 2015. As of the date of this post, 27 states have adopted benefit corporation statutes.
The benefit corporation is not a type of nonprofit corporation. An Arizona benefit corporation is a type of for profit corporation that seeks higher standards of corporate purpose, accountability, and transparency. The Articles of Incorporation on an Arizona benefit corporation must state that the corporation is formed for a general public benefit.
An Arizona benefit corporation may also promote one or more “specific public benefits.” Arizona Revised Statutes Section 10-2402.5 provides that “specific public benefits” include:
(a) Providing low-income or underserved individuals or communities with beneficial products or services.
(b) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business.
(c) Protecting or restoring the environment.
(d) Improving human health.
(e) Promoting the arts, sciences or advancement of knowledge.
(f) Increasing the flow of capital to entities with a purpose to benefit society or the environment.
(g) Conferring any other particular benefit on society or the environment as specified in the benefit corporation’s articles of incorporation.
To learn more about Arizona’s newest type of entity, go to Arizona Benefit Corporation Law. See also “How to Form an Arizona Benefit Corporation.”
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Question: Does Arizona limited liability company law require the members and managers of an Arizona LLC to hold an annual meeting?
Answer: No. However, some badly worded Operating Agreements do require that the members hold annual meetings.
Although no Arizona statute or case requires annual meetings or special meetings of the members or managers of an Arizona LLC as an Arizona LLC attorney who has formed 4,400+ Arizona LLCs I recommend that both types of meetings be held. There are two reasons why members and managers should hold meetings.
- To reduce the chance that a court will pierce the veil and hold the members of the LLC liable for the debts of the LLC. One of the factors courts consider when asked to pierce the veil is “did the LLC operate like a business or a hobby?” Prudent businesses hold meetings and document the actions approved or rejected by the members and managers. LLCs operated like a hobby do not hold meetings. Note: If your LLC’s Operating Agreement requires that the members or managers hold annual meetings then you must make sure that the meetings are actually held and document that fact. The failure of members to hold annual meetings required in an Operating Agreement is a factor that counts against the members when a court is asked to pierce the veil and hold the members liable for the debts of the LLC.
- To inform members and managers of important proposed company before it occurs and give them the opportunity to vote to approve or reject the proposed action. This is especially important when an LLC has multiple unrelated members. Consider two hypotheticals: (1) LLC is considering whether to enter into a contract that will require the company to pay a third party a lot of money. The member who owns more than 50% who is a manager signs the contract without prior notice to the other members who learn of the contract after it’s a done deal. (2) Same facts, but majority member holds a meeting of the members at which all of the members discuss the proposed contract and then vote on whether or not to sign the contract. The first method risks alienating the other members who will rightly feel left in the dark. The second method gives everybody a chance to be informed in advance
and give their two cents on signing or rejecting the contract. Guess which method is less likely to result in disgruntled members who may want a company divorce.
Purchase My Do-It-Yourself Meeting Minutes & Resolutions
I’ve made it very easy for Arizona LLCs to document actions approved by members and managers. Just purchase my editable Word meeting minutes and resolutions that you can modify whenever needed to document special and annual meetings of your LLC’s members and managers. You can also purchase a document called “Action by Consent” by which the members and managers can adopt resolutions approving company actions in lieu of actually holding a meeting. Each document comes with 16 resolutions for the most common types of actions voted on by members and managers.
Go to my Arizona legal form store to purchase your do-it-yourself minutes and resolutions.
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Question: My group is considering forming a tax-exempt charitable organization. Can the organization be a limited liability company or must it be a nonprofit corporation?
Answer: It can be an LLC if the LLC is wholly owned by a single exempt organization and the LLC satisfies the 12 conditions described in an IRS paper called “Limited Liability Companies as Exempt Organization Update.” The LLC cannot have individuals or nonexempt organizations as members, and its organizing documents must state a purpose to further the charitable purpose. To learn more about nonprofit corporations see my website called “Nonprofit Corporations & Charitable Organizations.”
The 12 conditions are:
1. The organizational documents must include a specific statement limiting the LLC’s activities to one or more exempt purposes.
2. The organizational language must specify that the LLC is operated exclusively to further the charitable purposes of its members.
3. The organizational language must require that the LLC’s members be section 501(c)(3) organizations or governmental units or wholly owned instrumentalities of a state or political subdivision thereof (“governmental units or instrumentalities”).
4. The organizational language must prohibit any direct or indirect transfer of any membership interest in the LLC to a transferee other than a section 501(c)(3) organization or governmental unit or instrumentality.
5. The organizational language must state that the LLC, interests in the LLC (other than a membership interest), or its assets may only be availed of or transferred to (whether directly or indirectly) any nonmember other than a section 501(c)(3) organization or governmental unit or instrumentality in exchange for fair market value.
6. The organizational language must guarantee that upon dissolution of the LLC, the assets devoted to the LLC’s charitable purposes will continue to be devoted to charitable purposes.
7. The organizational language must require that any amendments to the LLC’s articles of organization and operating agreement be consistent with section 501(c)(3).
8. The organizational language must prohibit the LLC from merging with, or converting into, a for -profit entity.
9. The organizational language must require that the LLC not distribute any assets to members who cease to be organizations described in section 501(c)(3) or governmental units or instrumentalities.
10. The organizational language must contain an acceptable contingency plan in the event one or more members ceases at any time to be an organization described in section 501(c)(3) or a governmental unit or instrumentality.
11. The organizational language must state that the LLC’s exempt members will expeditiously and vigorously enforce all of their rights in the LLC and will pursue all legal and equitable remedies to protect their interests in the LLC.
12. The LLC must represent that all its organizing document provisions are consistent with state LLC laws, and are enforceable at law and in equity.
The post Can an LLC be a Tax-Exempt 501(c)(3) Charity? appeared first on Arizona Limited Liability Company Law.