I met recently with a group of people who are members of an Arizona limited liability company that is a disaster because the members never signed a “good” Operating Agreement.  The multimember LLC was formed several years ago, but the members did not properly document their company.  Here’s a short list of the member’s problems:

  • A majority of the members say that until recently they never saw an Operating Agreement, but the “CEO” recently produced an Operating Agreement with forged signatures.  These members deny that the members signed an Operating Agreement.
  • Even if the members had signed the Operating Agreement presented to them the document was grossly deficient.  One big problem was that all major decisions be approved by ALL of the members.
  • The company has been run by a dictator since its formation.  This man has exercised total control and he acts without any input or approval from or approval of the members.
  • Members have come and gone without any documentation or approval of the members.
  • The members get a K-1 every year that lists their purported percentage of ownership of the LLC and their share of the LLC’s income.  Note if your LLC does not have an Operating Agreement that specifies how profits will be allocated Arizona Revised Statutes Section 29-3102.12  states:

“Members’ respective interests in the Company’s profits are in proportion to their rights to share distributions.”

Arizona Revised Statutes Section 29-3404.A states:

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

  • The dictator has determined the amount and timing of all distributions from the company to its members.  This is a violation of Arizona Revised Statutes Section 29-3407.B.3, which states:

“a majority in interest of the members shall decide . . . whether to make an interim distribution.”

  • The members have never been given copies of the LLCs’ federal or state income tax returns or its annual financial statements, all of which are required by Arizona Revised Statutes Section 29-3410.A.5, which says members are entitled to copies of the following records the LLC must keep :

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

The dictator has violated many Arizona LLC laws for which he is liable to the members and the company for damages.

My Recommendation

I recommend that members of an out of control Arizona LLC take the following actions:

  • Gather all the facts.  This includes one or more members demanding to see and copy the records that are required to be kept by Arizona Revised Statutes Section 29-3410.
  • Consult with an experienced Arizona LLC attorney like me to learn their rights, remedies and options.
  • Subject to complying with a valid Operating Agreement give all the members a notice and call of a meeting of the members to vote on the following issues: (i) removing and replacing management, (ii) hiring a CPA to conduct a forensic audit to determine how much money the company has received and where it went, and (iii) filing a lawsuit to get a court order removing anybody in management that does not voluntarily comply with the change of management resolution.
  • If the results of the forensic audit finds that money was embezzled or improperly paid, file a lawsuit against the people who are responsible.

Another option is to file a lawsuit asking the court to dissolve the company, but this is frequently the worst option.