LLC Law Blog

Arizona Corporation Commission Forms

All forms are in PDF format and are fillable (you can type in them). We recommend that you type the information so the documents are legible.

CORPORATION FORMS	INSTRUCTIONS	PURPOSE OF FORM
Annual Report Extension Request	Instructions C002i	Obtain an extension to file a corporation annual report.
Application for Authority to Transact Business or Conduct Affairs in Arizona	Instructions C018i	Any foreign corporation may seek authority to transact business or conduct affairs in Arizona.
Application for Withdrawal	Instructions C025i	Foreign corporations only – voluntarily withdraw from Arizona.
Application to Register Foreign Corporation Name	Instructions C007i	Foreign corporations only – register the corporation name for a year. *This is not a grant of authority to transact business in Arizona.
Application to Reserve Corporation Name	Instructions C006i	Reserve a corporation name for a non-renewable period of 120 days.
Articles of Amendment – For-profit	Instructions C014i	Amend corporation articles of incorporation. Arizona for-profit or professional corporations only.
Articles of Amendment – Nonprofit	Instructions C015i	Amend corporation articles of incorporation. Arizona nonprofit corporations only.
Articles of Amendment to Application for Authority	Instructions C115i	Amend the original Application for Authority to reflect a change in name, domicile, or duration.
Articles of Correction	Instructions C031i	Correct a non-substantive error in a previously-filed document (example – typographical errors).
Articles of Dissolution	Instructions C022i	Voluntarily dissolve any Arizona corporation.
Articles of Incorporation – For-Profit	Instructions C010i	Create or form an Arizona for-profit or professional corporation.
Articles of Incorporation – Nonprofit	Instructions C011i	Create or form an Arizona nonprofit corporation.
Certificate of Disclosure	Instructions C003i	Required to form a corporation or to obtain authority to transact business in Arizona. Credit unions file this annually.
Certificate of Disclosure Bankruptcy Attachment	Instructions C005i	Attachment to Certificate of Disclosure only – do not submit as a stand-alone document.
Certificate of Disclosure Felony / Judgment Attachment	Instructions C004i	Attachment to Certificate of Disclosure only – do not submit as a stand-alone document.
Corporation Statement of Change of Known Place of Business Address, Principal Office Address, or Statutory Agent	Instructions C016i	Change statutory agent, Arizona address, or foreign corporation address in other jurisdiction. For use by Arizona or foreign corporations.
Director Attachment		Attachment only – do not submit as a stand-alone document.
Incorporator Attachment		Attachment only – do not submit as a stand-alone document.
Notice of Cancellation of Approved Corporation Name Reservation or Registration	Instructions C009i	Cancel an approved corporation name reservation.
Notice of Transfer of Corporation Name Reservation	Instructions C008i	Transfer an approved corporation name reservation.
Officer Attachment		Attachment only – do not submit as a stand-alone document.
Officer/Director/Shareholder Change Form	Instructions C017i	Change officer or director information. For use by all corporations.
Restated Articles – For-Profit – Certificate Concerning Restated Articles Of Incorporation with Restated Articles Of Incorporation or Amended and Restated Articles Of Incorporation	Instructions C012i	File this with restated or restated and amended articles of incorporation. Arizona for-profit or professional corporations only.
Restated Articles – Nonprofit – Certificate Concerning Restated Articles Of Incorporation with Restated Articles Of Incorporation or Amended and Restated Articles Of Incorporation	Instructions C013i	File this with restated or restated and amended articles of incorporation. Arizona nonprofit corporations only.
Shareholder Attachment		Attachment only – do not submit as a stand-alone document.
Shares Authorized Attachment		Attachment only – do not submit as a stand-alone document.
Shares Issued Attachment		Attachment only – do not submit as a stand-alone document.
Statement of Bankruptcy or Receivership	Instructions C026i	Any corporation that has filed for bankruptcy must submit this form.
Statement of Bankruptcy or Receivership Major Stockholder Attachment	Instructions C027i	Attachment to Statement of Bankruptcy – do not submit as a stand-alone document.
Statement of Bankruptcy or Receivership Other Corporation Attachment	Instructions C028i	Attachment to Statement of Bankruptcy – do not submit as a stand-alone document.
Statutory Agent Acceptance	Instructions M002i	New statutory agents must sign, and acceptance must be submitted with document making the appointment.
Statutory Agent Resignation	Instructions C029i	Statutory agent may resign from that appointment.
Trustee Attachment		Attachment only – do not submit as a stand-alone document.
Voting Attachment		Attachment only – do not submit as a stand-alone document.

LIMITED LIABILITY COMPANY FORMS	INSTRUCTIONS	PURPOSE OF FORM
Amendment Attachment – Managers		Attachment only – do not submit as a stand-alone document.
Amendment Attachment – Members		Attachment only – do not submit as a stand-alone document.
Application for Registration of Foreign Limited Liability Company	Instructions L025i	Any foreign LLC may seek registration to transact business in Arizona.
Application to Reserve LLC Name	Instructions L001i	Reserve an LLC name for a non-renewal period of 120 days.
Articles of Amendment	Instructions L015i	Amend LLC articles of organization – Arizona LLCs only – covers most types of amendments.
Articles of Amendment to Application for Registration	Instructions L017i	Foreign LLCs only – amend information on the application for registration.
Articles of Correction	Instructions L030i	Correct a non-substantive error in a previously-filed document (example – typographical errors).
Articles of Organization	Instructions L010i	Create or form a limited liability company (LLC).
Articles of Termination	Instructions L031i	Voluntarily terminate an Arizona LLC.
Certificate of Cancellation of Foreign LLC Registration	Instructions L026i	Foreign LLCs only – voluntarily withdraw registration in Arizona.
Manager Structure Attachment		Attachment only – do not submit as a stand-alone document.
Member Structure Attachment		Attachment only – do not submit as a stand-alone document.
Notice of Cancellation of Approved LLC Name Reservation	Instructions L003i	Cancel an approved LLC name reservation.
Notice of Transfer of Limited Liability Company Name Reservation	Instructions L002i	Transfer an approved LLC name reservation.
LLC Statement of Change of Principal Address or Statutory Agent	Instructions L020i	Change statutory agent or the LLC’s principal address. For use by Arizona or foreign LLCs.
Statement of Change of Manager or Member Addresses	Instructions L021i	Change manager or member addresses only. For use by Arizona LLCs only. (Foreign LLCs use Articles of Amendment to Application for Registration.)
Statutory Agent Acceptance	Instructions M002i	New statutory agents must sign, and acceptance must be submitted with document making the appointment.
Statutory Agent Resignation	Instructions L032i	Statutory agent may resign from that appointment.

MISCELLANEOUS FORMS	INSTRUCTIONS	PURPOSE OF FORM
Cover Sheet		All documents must be submitted with a Cover Sheet.
Statutory Agent Acceptance	Instructions M002i	New statutory agents must sign, and acceptance must be submitted with document making the appointment.
Expedite Pending Document Request	Instructions M004i	Get faster processing on a previously submitted document that has not yet been examined.
Records Request Form		Request copies of documents or information on old entities.
Public Records Request, Database Extraction		Request a report of information from the Corporations Division database (do not use to request documents from a specific entity).
Statement of Merger	Instructions M075i	Use for mergers involving corporations or LLCs.
Statement of Interest Exchange	Instructions M080i	Use for corporations or LLCs involved in an interest exchange.
Statement of Conversion	Instructions M085i	Use to convert any entity into an Arizona corporation or LLC.
Statement of Domestication	Instructions M090i	Use for an Arizona entity moving out of state or for a foreign entity that is moving to Arizona.
Statement of Division	Instructions M095i	Use for divisions involving Arizona corporations or LLCs.
Newspaper Qualfying Form		Newspapers must oomplete and submit this to be listed on the ACC’s courtesy newspaper list.

All forms are in PDF format and are fillable (you can type in them). We recommend that you type the information so the documents are legible.

Richard Keyt2022-12-07T10:45:46-07:00July 14th, 2012|AZ Corporation Commission|0 Comments

Taxpayer Victory in U.S. Tax Court Blesses New Way to Transfer Family Buiness

Wall St. Journal: “Small-business owners often complain of feeling caught in the cross hairs of the tax code. For a change, here’s good news. The Tax Court has just blessed a new technique that owners of closely held businesses—and wealthy families—can use to pass assets to heirs with a minimum of taxes and complications. The ruling in the case, Wandry v. Commissioner, is stirring up excitement among experts.”

The taxpayers owned a limited liability company worth approximately $1 million dollars. In 2004 they created a plan by which they would make gifts each year of membership interests in the LLC to their children and grandchildren. Their gift plan provided that at no time could an annual gift to a donee exceed the then amount of the U.S. gift tax exemption (currently $,3,000). The court ruled that because of the method the taxpayers used to make the gifts it was not possible for any gift to ever exceed the amount gift tax exclusion amount therefor no gift tax was owed.

P.S. The taxpayers plan included a clause that provided that to the extent any gift ever exceeded the annual gift tax exclusion amount the excess over the exclusion amount would go to a charity rather than the donee. This type of clause gives the IRS no reason to challenge the taxpayers action because even if the IRS were successful on its claim the excess gift amount would go to the charity and the taxpayers would be entitled to a corresponding charitable deduction.

Richard Keyt2018-10-07T10:39:24-07:00April 30th, 2012|Tax Issues|0 Comments

Abolishing LLC Veil Piercing

University of California, Los Angeles (UCLA) – School of Law Proffessor Stephen M. Bainbridge wrote a great article called “Abolishing LLC Veil Piercing.” The abstract says:

“Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is unsupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to affect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.

A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question – did the defendant – LLC member do anything for which he or she should be held directly liable.

Richard Keyt2016-11-16T08:23:46-07:00April 21st, 2012|Asset Protection, Veil Piercing|0 Comments

Arizona Attorney General Gets Judgment Against Arizona Corporate Minutes Scammer

The wheels of Arizona justice turn slowly, but Arizona Attorney General ~~Terry Goddard~~ Tom Horne finally got a judgment against the perpetrators of a 2008 corporate minutes scam. I wrote about the scam in 2008 in an article entitled “LLC Minutes Scam Alert.” Attorney General Goddard’s September 2009 complaint alleged:

11. From November 2008 until May 2009, Defendants disseminated at least 137,500 solicitations, using direct mail, to Arizona corporations and limited liability companies. The solicitations, under the fictitious name Arizona Corporate Headquarters, were official-looking forms which implied that a business had to complete the form and return it with an “Annual Fee” of $125 by a “REPLY BY” date to preserve its corporate status. The form is entitled “Annual Minutes Disclosure Statement.” Below this title is a date designated as the “NOTICE DATE: XIX./XX” followed by the “CORPORATE NAME:
[Name of Corporation or LLC]” and the “CORPORATION NUMBER: [#######J,” which was the corporation number of the business addressee as assigned by the Arizona Corporation Commission. The form has the format of an official-looking document and includes a citation to the Arizona Corporations Code requiring a corporation to hold annual meetings of shareholders.

12. The forms contain a warning, in boldface capital letters: “TO ENSURE APPROPRIATE PROCESSING AND FULFILLMENT, PLEASE RETURN THIS FORM WITH YOUR PAYMENT TO: ARIZONA CORPORATE HEADQUARTERS-BUSINESS DIVISION – 5025 N. CENTRAL AVENUE, SUITE 573, PHOENIX, AZ 85012.” The address is a private mail box used by Defendants and located in a UPS Store.

13. The form also contains a warning that “[fjailure to comply with certain requirements could cause your corporation to lose its limited liability status. If so, personal liability exposure to tax agencies, or other creditors could possibly be put on the directors and shareholders for failing to document formalities.” Thereafter each form states that it should be submitted “with the ANNUAL FEE OF $125.00 WITHIN 15 BUSINESS DAYS.”

14. The back of the forms utilized by Defendants states that payment should be submitted “along with the Annual Minutes Disclosure Statement for proper processing and fulfillment of the Annual Minutes for your corporation.” It directs payments be sent to the “Business Division” of Arizona Corporate Headquarters.

15. Defendants represent that in exchange for payment they will prepare corporate minutes. In fact, in the limited cases in which Defendants did provide corporate minutes, those minutes reflected meetings that never took place and actions that never occurred.

17. Defendants have received over $350,000 from the thousands of Arizona corporations and limited liability companies that completed the form and paid the $125.00.

In February of 2012 Attorney General Horne obtained a judgment for $338,225 damages plus $48,900 attorney fees against defendants Y.M.S., Inc., a Nevada corporation, Gaston Muhammad, aka Gaston Greene and Ronna Muhammad, aka Ronna Greene.

Richard Keyt2016-11-16T08:23:46-07:00April 19th, 2012|AZ Corporation Commission, Lawsuits|0 Comments

Arizona Corporation Commission Nails Real Estate LLCs Selling Unregistered Securities

On April 12, 2012, the Arizona Corporation Commission announced that it sanctioned multiple individuals and their affiliated companies whose unregistered investment programs—most of which involved real estate—caused investors to lose over $8.57 million. The Commissionordered that amount in restitution and a total of $377,500 in administrative penalties.

First, the Commission ordered Kent M. Axtell of Phoenixand his affiliated companies to pay $1,142,747 in restitution and a $75,000 administrative penalty for committing securities fraud in connection with an unregistered real estate investment program. The Commission found that,while doing business as Sherlock Homes and Finding Homes for Investors, and as the sole member of Executive Real Estate Solutions, LLC, Axtell sought investor funds to buy and sell real estate in Arizona. The Commission found that, while not registered as a salesman or securities dealer in Arizona,Axtell and his companies pooled the money of at least 26 investors and issuedpromissory notes, some of which were collateralized by deeds of trust. Further, the Commission found that, through promotional materials, Axtell touted his extensive real estate experience, representing to investors their funds would be secured with a collateral assignment in a sizable life insurance policy owned by Axtell. The Commission found that, in at least one instance, Axtell failed to record a deed of trust to secure the amount invested and used investor funds to repay another investor. In settling this matter, Axtell neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

In a separate case, the Commission ordered James F. Curcio of Sun Lakes to pay over $4.94 million inrestitution and a $40,000 administrative penalty for fraudulently offering and selling unregistered membership interests in limited liability companies that were in the house-flipping business. The Commission found that, while not registered to offer and sell securities in Arizona, Curcio and his affiliated companies—3CG, LLC and Choice Property Group, LLC — sold the unregistered investments to over 50 investors, promising them 15% annual returns. The Commission found that Curcio informed some of the investors they could rollover their IRA funds to purchase the unregistered LLC membership interests. The Commission found that Curcio promised investors their money would be used to purchase real estate, but Curcio and his affiliated companies actually used the money to service loans from institutional lenders who were creditors of the house-flipping business. In settling this matter, Curcio agreed to the entry of the consent order and admitted to the Commission’s findings only for the purposes of the administrative proceeding.

In the next case, the Commission issued a default order against former Scottsdale resident Arthur Fried who bilked more than $1.05 million from 16 investors. The Commission ordered Fried to pay a $150,000 administrative penalty for fraudulently offering and selling the unregistered real estate investment program. The Commission found that Fried managed four companies—Comprehensive Cash Flow Funding, Inc., WeBuyHomesinAZ, LLC, My Bargain Gift Bag, LLC and Loan Mod Shrink, LLC—and, while not registered to offer or sell securities, raised money from investors to fund the purchase, renovation and sale of real estate properties in Arizona. The Commission found that, through various sources—websites, real estate investment clubs, and advertisements in newspapers, including the Jewish News of Greater Phoenix—investors were promised a guaranteed, double-digit return with an investment secured by a first-lien position on real estate. The Commission found, however, that Fried, in some instances, did not even hold title to the real estate, and as a result, issued fictitious deeds of trusts to some investors. The Commission entered a separate default order against Fried’s business entities in March 2012.

In another case, the Commission ordered Robert Coleman Stephens of Cave Creek to pay $1,366,897 inrestitution and a $100,000 administrative penalty for fraudulently offering and selling an unregistered real estate investment program. The Commission found that, while not registered to offer or sell securities in Arizona, Stephens raised money from investors to fund a large, real estate and commercial resort development involving condominium timeshares with access to a golf course, indoor mall as well as air, car and boat racing. The Commission found that, through free seminars in the Scottsdale area, Stephens misrepresented to investors that he was a successful real estate developer when, in fact, his prior businesses had failed, resulting in multiple judgments against Stephens and his companies. Additionally, the Commission found that Stephens failed to inform investors that he would use some of their money to pay for questionable expenses, including personal vehicle repairs. Further, the Commission found that Stephens failed to secure on behalf of the investors liens against his jet aircraft, which Stephens pledged as collateral. In settling this matter, Stephens neither admitted nor deniedthe Commission’s findings, but agreed to the entry of the consent order.

Finally, the Commissionordered respondent G4i Capital Partners, Inc., a Delawarecompany, to pay a $2,500 administrative penalty for offering and selling anunregistered securities offering in Arizona. The Commission found that, while not registered as a securities dealer, G4iCapital Partners, through two websites, made a general solicitation forinvestor money to fund its government contracting and consulting operations,offering potential investors a secure, high-yield return on their investment. The Commission found that G4i Capital Partners sold the unregistered investmentprogram to a least one investor who was subsequently repaid withinterest. In settling this matter, G4i Capital Partners neither admittednor denied the Commission’s findings, but agreed to the entry of the consent order.

More caution for investors:

Evenwhen selling a legitimate product, some promoters do not recognize theinvestment program they have created is a security. Determining whetheran alternative investment program is a security is not always easy to determineand depends upon the unique facts and circumstances of the transaction and noton what a promoter calls the investment product. Even when investing with someone they know, investors shouldverify the registration of sellers and investment opportunities and investigatedisciplinary histories by contacting the Arizona Corporation Commission’sSecurities Division at 602-542-0662 or toll free in Arizona at 1-866-VERIFY-9. TheDivision’s investor education web site also has helpful information at www.azinvestor.gov.

Richard Keyt2016-11-16T08:23:46-07:00April 17th, 2012|LLCs & Securities Laws, Real Estate Issues|0 Comments

Is an LLC Formed to Get a Federal Firearms License Different from Other LLCs?

Question: I want to form a limited liability company that will obtain a federal firearms license (FFL). Are there significant differences between a “vanilla” LLC and one that will hold an FFL for the sale or manufacture of firearms?

Answer: Yes. Although Arizona LLC law is the same for all LLCs formed in Arizona regardless of an LLC’s intended purpose, LLCs that intend to obtain an FFL for the sale or manufacture of firearms require an Operating Agreement that contains provisions that relate to the LLC’s purpose and the need to comply with federal weapons laws.

I work with attorney David Goldman, the Guntrust Lawyer, to prepare a special type of trust called a gun trust for Arizona residents. David is an expert on federal weapons laws and he has a wealth of information about gun trusts and firearms law on his website. This what David says about LLCs that will obtain an FFL:

“One of the biggest problems with many FFL’s is that they use regular operating agreements or corporate bylaws. There are some specific issues why using a canned or shell company documents may not be appropriate and why you should consider using agreements that are specifically drafted for FFLs.

Your Operating Agreement or By-Laws needs to deal with specific FFL related issues as well as issues that are common to the firearms industry. Prohibited Person issues must deal with not only the owners or manages as mentioned above, but also employees. These documents should mandate policies that need to be in place for issues regarding federal and state requirements and recommendations.

Part of the process included determining the proper licenses as we often see that FFLs are confused about what is manufacturing and what is gunsmithing and the requirements of each. Many FFLs sell parts and then assemble them for clients and are actually manufacturing firearms because of the way the transaction and work is structured. They often do not have the licenses nor collect the required excise taxes.

If the business entity is used correctly, the business entity can stop the liability from going to the owners and managers. Many corporate and LLC docs can prohibit some of the activities that FFL, their owners, managers, and employees engage in. If you are violating the terms of your agreement, your business entity may not shield you from the actions or liability

Properly drafted agreements allow for growth including taking on new members or shareholders which could provide additional resources to the business. Today a prohibited person may not know they are prohibited and traditional operating agreement do not shield them from prohibited transactions or activities. Your agreement should help a person determine if they are prohibited as well as guide them in which activities they may and may not participate and who needs to be updated upon such a change.

A properly drafted business agreement can help you sell the entire business with the licensing already in place. Most FFL’s when sold have to go through a new authorization process because they are not properly structured and/or do not allow for this type of transition.

Thinking about how the ownership of the business is structured and dealing with this in the business agreements can allow the business to pass down through the generations and keep it within the family.”

In addition to the industry specific business agreements, it is important to properly prepare your FFL and/or SOT applications so that they are not rejected and they should be designed and incorporated into an overall plan to provide insulation from problems down the road.

FFL’s are historically weak in business and the understanding of the complex rules and regulations regarding the firearms industry. Many have skated by in the past, but with the new 100% compliance audits, it is more important than ever to be setup correctly or modify your existing business rules and documents to comply with the industry.”

To learn more about this topic real Joshua Prince’s article called “Starting Your New Firearms Business – FFL/LLC Formation” in which he states:

“While some individuals may turn to online corporate formation providers or contact their family attorney, neither of these avenues can provide the proper legal advice on setting up either a Corporation or Limited Liability Company (LLC) for an FFL, unless the provider has experience with the firearms industry and pertinent issues. I have developed FFL-specific By-Laws (for a Corporation) and Operating Agreements (for an LLC) that deal with these issues and set the foundation for any firearms industry specific issue that may arise.”

Hire Arizona LLC Attorney Richard Keyt & Firearms Attorney Joshua Prince to Prepare an Operating Agreement for an FFL LLC

The Operating Agreement I prepare for people when I form an Arizona LLC does not contain language that should be in the Operating Agreement of an LLC that will be an FFL for the sale or manufacture of firearms. If you have or intend to have an Arizona LLC that needs this special industry specific Operating Agreement I recommend that you hire Pennsylvania attorney Joshua Prince and me to prepare the unique industry appropriate Operating Agreement needed for this type of LLC. See Josh’s blog topics on Firearms Law and Gun Trusts.

Joshua Prince’s primary area of law practice is federal firearms and weapons laws. For more information about this special Operating Agreement or if you have questions about why your LLC needs it call Josh at 610-845-3803. When Josh and I work together on an Operating Agreement, he is responsible for the federal firearms portions and I am responsible for the Arizona law portions. If you hire Josh and I to prepare a firearms law specific Operating Agreement, the fee you pay us includes Josh’s services to prepare and file all of the paperwork required to get the type of FFL or licenses needed from the BATF for your LLC (the fee does not include filing / application fees or costs). Josh does so much work in this area that he uses the services of a retired BATF agent who reviews applications and makes sure there are no problems before submitting them to BATF.

Richard Keyt2017-08-25T14:39:39-07:00March 14th, 2012|FAQs, Operating Agreements|0 Comments

Court Rules LLC Member not Obligated to Contribute Money to LLC

The New York case of Duff v.Curto, 2012 NY Slip Op 30264(U) (Sup Ct Suffolk County Jan. 25, 2012), by Suffolk County New York Justice Emily Pines involved a claim by one LLC member that the other member failed to contribute money to the company. Duff claimed he contributed $523,000 to the capital of Fairlea Court Holding, LLC, of which Gary Duff and Peter Curto, Jr., were the only two members. Duff claimed that Curto breached the Operating Agreement because he did not contribute any money to the company and that Curto was unjustly enriched.

They signed an Operating Agreement that said:

“[u]pon the execution of this Agreement, each Member shall contribute cash and/or property to the Company as set forth opposite their names in Exhibit A”

Exhibit A stated that each member had a 50% interest in the company, but it did not show that either member was to contribute any capital to the company. The Court said:

“The Court finds that the documentary evidence provided raises an issue of the parties intent in placing the 50% figure in the Agreement and does not definitively dispose of the plaintiff’s claim”

The Court found that Duff reported on his tax returns that he loaned $309,000 to the LLC and that Curto never agreed to contribute any money to the company.

Lesson for Arizona LLCs

Arizona LLC law provides that no member of an Arizona limited liability company is liable to contribute money or property or services to the LLC unless the member agrees to do so in writing. Arizona Revised Statutes Section 29-702.A states:

“A promise by a member to make a capital contribution to the limited liability company is not enforceable unless set out in writing and signed by the member.”

If you have an Arizona LLC and want to create a legal obligation on the part of one or more members then the LLC must obtain a written document signed by the member(s) that states the amount of money or the description of the property or the nature and extent of the services and when the money or property or services must be contributed. The best place for these provisions is the Operating Agreement.

Richard Keyt2017-05-29T14:55:11-07:00March 5th, 2012|Forming LLCs, Lawsuits, Members, Operating Agreements|0 Comments

KEYTLaw vs. LegalZoom

Question: I received an email message that asked “Can your law firm provide the services that our business needs or should we should use Legal Zoom?”

Answer: We are a small business law firm, but unlike Legal Zoom, we are licensed attorneys. We can provide all of the legal services typically needed by small businesses. If you need legal advice you should hire an attorney. LegalZoom is not a law firm and does not employ attorneys to provide legal services. In fact, here is the disclaimer language I got from the bottom of LegalZoom’s home page on March 4, 2012:

“LegalZoom is not a law firm and is not a substitute for an attorney or law firm. Communications between you and LegalZoom are not protected by the attorney-client privilege or work product doctrine. LegalZoom cannot provide legal advice“

Anybody who is considering using LegalZoom should ask: “Why does LegalZoom warn that it IS NOT A SUBSTITUTE FOR AN ATTORNEY?” I found a page on LegalZoom’s website that inadvertently answered this question. If you click on the link above and then scroll to page three you will see this legally incorrect and misleading statement LegalZoom makes about an LLC Operating Agreement:

“Personalized operating agreement, including provisions protecting officers and managers from liability“

This statement illustrates perfectly why you do not want LegalZoom to be your lawyer or provider of your legal services. No language or provisions in an Operating Agreement can or will protect a member or manager from liability. People who sue the LLC and its members or managers NEVER SIGN and are NOT PARTIES TO the Operating Agreement so they are not bound by any provisions it may contain.

LLCs Must Comply with Applicable State LLC Laws

Members and managers of an LLC may be protected from liability by the LLC law of a state, but only if the LLC operates in compliance with applicable LLC laws. If you do not know what your state’s LLC laws are then it is unlikely your LLC will comply with those laws and your LLCs and members and managers may become personally liable when a court pierces the company veil and holds the members and/or managers liable for the debts of the LLC. For an example of this LLC nightmare read my article called “Colorado Court Pierces LLC Veil & Holds Single Member Liable for LLC’s Debt.” The reason I wrote my book called the “Arizona LLC Operations Manual” is educate my LLC clients on Arizona’s LLC laws and what the LLC must do to comply with the laws to prevent a court from piercing the company veil and holding the members liable for the debts of the LLC.

KEYTLaw’s Legal Services

In addition to forming LLCs, KEYTLaw attorneys provide the following legal services:

1. Contract law – preparing and reviewing contracts of all types.

2. Entity administration – preparing Buy Sell Agreements and documents to add or remove members of LLCs, shareholders of corporations and partners of partnerships.

3. Real estate law – preparing or reviewing contracts to buy, sell or lease Arizona real estate of all types, including commercial leases for businesses.

4. Employment law – preparing employment agreements, independent contractor agreements, employee policies and procedures and employee manuals.

5. Nonprofit law – forming Arizona nonprofit corporations, including preparing IRS Form 1023 and applying for an obtaining income tax exemptions from the IRS for charitable organizations.

6. Commercial litigation representing plaintiffs and defendants in all types of typical business lawsuits.

7. Landlord tenant law – preparing and reviewing residential leases and representing landlords, including evicting residential and commercial tenants.

If you have any questions about legal needs for your business, please call me, Richard Keyt, at 480-664-7478.

Richard Keyt2017-02-26T08:40:13-07:00March 4th, 2012|FAQs|0 Comments

ABA’s Revised Prototype Limited Liability Company Act May 2011

On May 1, 2011, the Editorial Board LLCs, Partnerships and Unincorporated Entities Committee, Business Law Section, of the American Bar Association published its proposed Revised Prototype Limited Liability Company Act. The following is the Committee’s summary its proposed LLC act:

1. Articles of Organization Changed to Certificate of Formation.

The term “articles of organization” has been changed to “certificate of formation” to better align the Act with current limited liability company acts.

2. Operating Agreement Changed to Limited Liability Company Agreement.

In an effort to better signify the nature of the agreement among the members by referring to the agreement in a manner consistent with the general and limited partnership statutes (which refer to the agreement of the partners as the “partnership agreement”), the term “limited liability company agreement” has been used in lieu of the term “operating agreement.”

3. Consolidation of Provisions on Limited Liability Company Agreement Override.

Following the RUPA formulation and subsequent uniform act formulations, the Act places in one section (section 110) the various provisions that may not be modified by the limited liability company agreement. This centralization allows for the elimination of the phrase “unless otherwise provided in the limited liability company agreement” or similar phrases throughout the Act and the ambiguity that results in the absence of the proper override language. Therefore, all provisions within the Act are default provisions that may be modified by the limited liability company agreement unless modifications are prohibited under section 110.

4. Elimination of Manager-Managed and Member-Managed Dichotomy and Statutory Actual and Apparent Authority.

The Act changes significantly the original Prototype Act in that it eliminates the member-managed and manager-managed bifurcation of management structures and the statutorily conferred actual and apparent authority of members and managers in those paradigms. Instead, the Act provides that a person’s actual or apparent authority to bind the limited liability company will be determined with reference to the limited liability company agreement, decisions of the members in accordance with the limited liability company agreement or the default rules of the Act, a statement of authority, or law other than the Act such as the common law of agency. This approach allows drafters to provide for managers, officers, boards of directors, and other forms of governance that were difficult if not impossible to accomplish under the original Prototype Act.

5. Fiduciary Duties or Standards of Conduct; Express Authorization to Eliminate Fiduciary Duties by Agreement. (more…)

Richard Keyt2017-08-25T14:41:55-07:00February 28th, 2012|LLCs & Corporations|0 Comments

Have Estate Planners Hijacked the LLC?

Attorney Tanya Simpson’s article in the Florida State University Law Review is subtitled “How Restrictions on Dissolution have Crippled the LLC as a Viable Small Business Entity.” Here is her introduction to her article:

“When blushing couples walk down the aisle, they hope to live happily ever after, promising ‘ ’til death do us part.’ Even with such high hopes, many savvy couples sign prenuptial agreements in anticipation of the possibility that the marriage might not turn out as they had planned. Indeed, many individuals will not enter into a marriage without having such an agreement in place. How many would enter into a marriage today if it were possible that their state might not permit them to divorce at all?

When a marriage isn’t going well, all states have a judicial mechanism whereby the unhappy couple can divorce without either spouse having to prove fault, and many states provide the option of proving fault as well.1 However, when the “marriage” is one of members in a Limited Liability Company (LLC), the availability and mechanisms of dissolution vary from state to state. Some states have default rules whereby one member can force a dissolution,2 while other states require the consent of at least a majority of members.3 In states requiring majority consent, a minority member may still be able to obtain judicial dissolution, but to do so, the minority member must not only state that the “marriage” is irretrievably broken but must also prove this assertion to the satisfaction of the court by meeting standards that range from relatively easy to nearly impossible to achieve.4 Furthermore, with the paucity of case law on the subject and the lack of judicial consistency as to which body of law the courts will apply, determining which standards the court will likely apply is a gamble at best–making it difficult for the member to prepare its case appropriately. If the member is unsuccessful in predicting the court’s standards and proving that its case has met them, the member will find itself stuck in the marriage indefinitely, with its capital tied up and no say as to the decisions that affect its investment. This has not always been the case.”

Richard Keyt2017-08-25T14:43:33-07:00February 27th, 2012|Asset Protection, Operating Agreements, Operating LLCs|0 Comments

Colorado Court Pierces LLC Veil & Holds Single Member Liable for LLC’s Debt

When On February 2, 2012, the Colorado Court of Appeals issued its opinion in the case of Martin vs. Freeman, a case that is important for all limited liability company owners who want to avoid becoming liable for the debts of their LLC.

The Facts

Dean C.B. Freeman was the sole member and manager of Tradewinds Group, LLC, a Colorado limited liability company. Tradewinds only asset was an airplane that it owed free and clear with a value of approximately $300,000. Tradewinds hired Robert L. Martin to build an airplane hangar for its airplane. Tradewinds sued Martin in 2006 for breach of the construction contract. In 2007 Tradewinds sold the airplane for $300,000. After making sure that all creditors were paid Freeman caused the LLC to pay him all funds that remained in the LLC’s bank account. Thereafter Freeman paid all of Tradewinds’ litigation expenses from his funds.

In 2008, the trial court entered a judgment in favor of Tradewinds. Martin appealed and won the appeal. The Colorado Court of Appeals found that Tradewinds’ damages were speculative and sent the case back to the trial court with directions to enter judgment in favor of Martin. The trial court ruled in 2010 that Martin was the prevailing party and awarded him $36,645.40 in costs.

When Martin won the $36,645 judgment against Tradewinds Group, LLC, it did not have any because it had sold its only asset and paid all of the company’s funds to its sole member, Dean Freeman. Martin then sued to pierce the LLC veil and collect Tradewinds’ debt from Freeman, the sole member of the LLC.

The primary issue before the Colorado Court of Appeals was should the court allow Martin to pierce the LLC’s veil and hold its sole member liable for Martin’s judgment against Tradewinds Group, LLC? The appellate court stated:

“To pierce the LLC veil, the court must conclude

the corporate entity is an alter ego or mere instrumentality;

the corporate form was used to perpetrate a fraud or defeat a rightful claim; and

an equitable result would be achieved by disregarding the corporate form.”

The Colorado Court of Appeals in a two to one decision ruled that all three criteria existed and that Dean C.B. Freeman was personally obligated to pay the judgment owed to Robert L. Martin.

1st Factor: Alter Ego

The majority’s opinion says that courts consider a variety of factors in determining alter ego status, including whether:

“the entity is operated as a distinct business entity;

funds and assets are commingled;

adequate corporate records are maintained;

the nature and form of the entity’s ownership and control facilitate insider misuse;

the business is thinly capitalized;

the entity is used as a mere shell;

legal formalities are disregarded; and

entity funds or assets are used for non-entity purposes.”

The Court does not, however, tell us if alter ego status exists if a majority of the factors exist or if all all of the factors must exist or it is is merely a gut feeling determined by the court that sufficient factors exist to justify a finding that the company was the alter ego of the member. The Court found the following facts that justified its conclusion Tradewinds was Freeman’s alter ego:

“Tradewinds’ assets were commingled with Freeman’s personal assets and the assets of one of his other entities, Aircraft Storage LLC;

Tradewinds maintained negligible corporate records;

the records concerning Tradewinds’ substantive transactions were inadequate;

the fact that a single individual served as the entity’s sole member and manager facilitated misuse;

the entity was thinly capitalized;

undocumented infusions of cash were required to pay all of Tradewinds’ operating expenses, including its litigation expenses;

Tradewinds was never operated as an active business; legal formalities were disregarded;

Freeman paid Tradewinds’ debts without characterizing the transactions;

Tradewinds’ assets, including the airplane, were used for nonentity purposes in that the plane was used by Aircraft Storage LLC, without agreement or compensation;

Tradewinds was operated as a mere assetless shell, and the proceeds of the sale of its only significant asset, the airplane, were diverted from the entity to Freeman’s personal account.”

2nd Factor: Defeat of a Rightful Claim

The Court stated:

“The second prong of the veil-piercing test is whether justice requires recognizing the substance of the relationship between the corporation and the person or entity sought to be held liable over the form because the corporate fiction was ‘used to perpetrate a fraud or defeat a rightful claim.”

The Court went on to make the unfortunate statement that there is no Colorado case that ruled “that a party seeking to pierce the corporate veil must show wrongful intent.” The Court found:

“We conclude that defeating a potential creditor’s claim is sufficient to support the second prong. We further conclude, as a matter of first impression, that wrongful intent or bad faith need not be shown to pierce the LLC veil.”

The Court’s ruling effectively throws out the second prong of the three prong alter ego test and ignores 100+ years of corporate law. If a company has assets sufficient to pay its debt, the creditor does not need to sue the owner and try to pierce the corporate/company veil. It is only when the company cannot pay its debt that a creditor will sue the owner in an attempt to collect the company’s debt from the owner.

The corporate and LLC law of most if not all states provides that a fundamental asset protection concept is that the owners of the entity are not liable for the entity’s debts or obligations. It may be appropriate in some cases to find that a rightful claim of a creditor should be paid by an owner of the company after a court finding that the company was the owner’s alter ego and used to perpetrate a fraud, but the mere fact that the creditor was not paid should never be considered and used to find the owner liable. If people will be held liable for the debts of a company simply because the company has unpaid debts it will have a chilling affect on business and prevent many people from investing in businesses that would hire employees.

3rd Factor: Equitable Result

The Court did not discuss the facts that support a finding that an equitable result would be achieved by disregarding the corporate form, nor did it rule on the issue. Apparently Colorado now has a two prong test to determine if the when a Colorado court will pierce the company veil and hold the owner of an LLC liable for its debts.

Let’s hope this case is appealed because it is bad law for the owners of LLCs, corporations, limited partnerships, limited liability partnerships and limited liability limited partnerships.

What Martin v. Freeman Means for LLC Members

Some commentators have written that this case is another reason people should shy away from the single member limited liability company. I disagree. The court did not discuss that the fact the LLC had only one member was significant. What was significant to the court was the historical facts as to how the LLC operated and conducted its affairs. The case stands for the proposition that LLC owners, both single and multiple members) must follow the formalities of operating the company or risk having the veil pierced and the owners becoming liable for the LLC’s debts.

Consider the facts that the Court found that cased it to conclude that the company was Freeman’s alter ego:

1. Tradewinds’ assets were commingled with Freeman’s personal assets and the assets of one of his other entities, Aircraft Storage LLC: This is a fundamental no no. Never allow assets of a member to be commingled with the company’s assets.

2. Tradewinds maintained negligible corporate records: Again this is a no brainer.

Your LLC must maintain a good set of financial books. Use Quickbooks. Have an experienced Quickbooks expert set it up. It’s not too expensive. Make sure all income and expenses are entered and properly annotated.

If you loan money to your LLC, the books must show the date and amount of the loan and the loan should be documented by a promissory note signed by the LLC and a resolution signed by all of the members that authorizes the loan.

If you transfer assets to the company, prepare a Bill of Sale signed by the transferor that lists the assets transferred as of the stated date. If you are an employee of the company, sign an employment agreement with the company and have the members sign a resolution authorizing the LLC to enter into the employment agreement.

If the company enters into a contract with a third party have the members sign a resolution authorizing the LLC to enter into the contract.

3. The records concerning Tradewinds’ substantive transactions were inadequate: The tasks listed in the prior paragraph apply here too. In addition, one of the best things every LLC should do is routinely document all significant major actions taken by the company with minutes or resolutions signed by the members. Here is a partial list of company actions that EVERY LLC should document with minutes or resolutions:

Contributions of money or property by a member to the LLC.

Loans of money by a member to the LLC.

Adding or removing a member.

Changing the percentage ownership of a member.

Employing a member or key employee.

Hiring an independent contractor.

Buying, selling or leasing real property or personal property with significant value.

Entering into contracts with third parties.

Purchasing insurance.

Applying for licenses such as a real estate broker’s license or a contractor’s license.

Doing business in another state.

Entering into an Operating Agreement with the members.

Entering into a Buy Sell Agreement with the members.

An annual meeting of members and managers (if manager managed).

It is imperative that the members of the company document all significant actions taken by the company with minutes or resolutions. I know from being a business lawyer since 1980 that very few companies have the self discipline to document their actions. Routinely documenting transactions is one of the most important things the members of an LLC should do to prevent a court from finding that the company was the alter ego of the members.

3. Solution to the Lack of Records Problem: Prepare minutes and resolutions and have them signed by the members and managers.

4. The fact that a single individual served as the entity’s sole member and manager facilitated misuse: Note the Court said that having a single member “facilitated” misuse. It did not say that having a single member LLC is always a negative factor. The Court recognized that doting the eyes and crossing the tees is less likely to occur with a single member LLC because it takes more self discipline to have meetings with yourself and document those meetings. This fact of life is another reason why it is particularly important for single member LLCs to follow all of the formalities of operating the LLC and using a minutes service like Just a Minute.

5. The entity was thinly capitalized: The law requires that every LLC to be adequately capitalized, but it does not give LLC owners a clue as to what that term means. Adequate capitalization for an LLC means the company must always have sufficient assets for its needs, but the law doesn’t tell LLC owners exactly what constitutes adequate capitalization. LLC owners only know if their company is adequately capitalized years later if they are sued and a judge or jury rules one way or the other on the issue. Another problem is that adequate capitalization is a moving target because the number changes as the LLCs business facts and circumstances change. If the LLC does not have sufficient assets to meet its capital needs then it is not adequately capitalized. However, if the LLC does have sufficient assets to meet its capital needs a court could still find the company was not adequately capitalized. Remedy: Make sure the company has sufficient capital to pay its expenses plus a reserve of as much as you can afford and hope that if your LLC is ever challenged the judge or the jury will rule in your favor.

6. Undocumented infusions of cash were required to pay all of Tradewinds’ operating expenses, including its litigation expenses: This is a common problem that is easily avoided. If your LLC needs money there are two ways to get the money: (a) one or more members make a capital contribution to the company, or (b) the company borrows money from one or more members or a third party lender.

Capital Contributions: A capital contribution is a gift of money or property by a member of an LLC to the company. The company is not obligated to repay the contribution at any time except on liquidation if the contribution was not previously repaid. The company should document all capital contributions by: (a) making a proper entry in the company’s books that the member made a contribution of $x on a specified date, and (b) having the members sign minutes or a resolution that authorizes and approves the contribution.

Loans: Regardless of who loans money to the LLC, the loan must always properly documented by: (a) having the LLC sign a promissory note that states the loan amount, interest rate and repayment terms, and (b) having the members sign minutes or a resolution that authorizes and approves the loan. For more on this topic see my article called “How Do I Loan Money to My LLC?“

Undocumented infusions of cash are a routine event in most LLCs, but that does not make it right. Protect yourself by always documenting cash infusions. It’s easy to do and could make the difference between whether a court will one day allow or refuse to allow a creditor of the company to get a judgment against you. Undocumented cash infusions should never happen if you use a minutes service like Just a Minute, LLC, to automate the preparation of minutes on a monthly basis.

7. Tradewinds was never operated as an active business: Tradewinds only purpose was to own and operate Freeman’s airplane. It did not have any customers or generate any revenue. This factor is what other courts call the business purpose doctrine. A concept in asset protection law is that a court may disregard the formation of an entity like an LLC or a corporation if it has no business purpose. For example there is no business purpose to transfer title to your home to your solely owned LLC while you continue to live in the home. If the only reason you put property into an LLC is to protect it from the claims of your creditors, then the plan probably will not work. Imagine what would happen if you take the witness stand and the plaintiff’s attorney asks why did you put your home in the LLC and you answer to prevent my creditors from getting it. You lose. Because Tradewinds did not have a business, customers or revenue, it failed the business purpose test.

8. Legal formalities were disregarded: Yes the are legal formalities that apply to operating LLCs and your LLC must comply with all of them. One of the reasons I wrote my 170 page book called the Arizona LLC Operations Manual is so I could notify my LLC clients and purchasers of the book about the legal formalities applicable to Arizona LLCs. Every LLC must comply with the legal formalities of its formation state.

9. Freeman paid Tradewinds’ debts without characterizing the transactions: This is a no brainer. Members should never pay the LLCs debt. The LLC should never pay a member’s debt. DO NOT DO THIS. If your LLC needs money, write a check payable to the LLC and deposit the funds in the LLC’s bank account then pay the debt with the LLC’s money. Don’t forget to properly document the transaction as a capital contribution or a loan. If you need LLC money to pay your debt, have the LLC write a check to you so you can deposit the funds in your account and pay from your account. Don’t forget to properly document the distribution of money as a loan, compensation or a return of capital (if you have a positive capital account balance). Document the distribution with a promissory note (if a loan) and minutes or resolutions signed by the members.

10. Tradewinds’ assets, including the airplane, were used for nonentity purposes in that the plane was used by Aircraft Storage LLC, without agreement or compensation: The LLC allowed another entity to use its $300,000 airplane without paying any compensation and without a written agreement. Why? This type of transaction is a red flag asking for trouble in more ways than one. No person or entity should ever use LLC assets for non-LLC purposes unless the LLC enters into a written agreement with the user and the user compensates the LLC for the reasonable value of the use.

11. Tradewinds was operated as a mere assetless shell, and the proceeds of the sale of its only significant asset, the airplane, were diverted from the entity to Freeman’s personal account: The Court is wrong on this factor. The LLC was not assetless. It owned a $300,000 asset free and clear. It sold its assets and distributed the proceeds to its only member. The Court calls this “diversion” of assets, but this is the common and accepted method of liquidating an LLC or a corporation. The law does not require companies to retain cash in the company in perpetuity after the company liquidates its assets. It is not right that the Court found this fact to be a negative factor.

Conclusion

This case is a wake up call to all LLCs that do not dot the eyes and cross the tees. If your LLC is not religiously following the legal formalities of your state’s LLC law and properly documenting LLC transactions, especially transactions with members, then the company is setting the groundwork for a court ruling that the company veil should be pierced and the member(s) should be liable for the debts of the company.

Does your LLC properly document all significant transactions? If not, then I have two statements for you:

If your LLC has not been documenting LLC transactions with minutes and resolutions, you won’t be doing it in the future.

Here are some other articles on this important topic:

Martin: The Inherent Dangers Of The Single Member LLC And Alter Ego Veil Piercing

Colorado Court of Appeals Erodes Liability Protection of Corporations and LLCs that says:

“With the stripping of the requirement to prove wrongful conduct and expansion of liability for contingent claims, the ruling diminishes the limited liability protection afforded to all corporations and LLCs operating in Colorado. Incorporation in a jurisdiction with more robust liability protections seemingly provides no remedy – the Martin Court applied Colorado LLC statutes and case law without discussion of why Colorado law should apply to Tradewinds, a Delaware LLC. The ruling also highlights the renewed importance of maintaining adequate corporate records and practices as a means of avoiding ensnarement under the first prong of the veil-piercing test.”

Piercing the Corporate Veil – Breakdowns in Limited Liability Protection in PA

Asset Protection Strategies for Your Business that says:

“Update Corporate Records and Follow Required Formalities. Many closely held businesses do not keep their corporate record books up to date. In the event of a lawsuit against the company, a plaintiff’s attorney can attempt to “pierce to corporate veil”. This means the corporation will essentially be ignored and the owners (shareholders) will be personally liable for the corporate debts. Following basic corporate formalities, including

Holding an annual shareholders meeting;

Holding regular meetings of the Board of Directors;

Avoiding any mixing of personal and corporate assets; and

Keeping corporate records up to date.

will all help to insure that the assets of the owner(s) of the business are insulated from any judgment against the business.”

Noack: The Single Member LLC, Alter Ego, and Undercapitalization

For People Who Want to Form an LLC Themselves

If you think you might want to create a do-it-yourself Arizona LLC you must read Arizona LLC attorney Richard Keyt’s article called “Step by Step Guide: How to Form Arizona LLC 2019 in (6 Easy Steps).”

Richard Keyt2019-10-26T15:25:19-07:00February 19th, 2012|Asset Protection, Lawsuits, Veil Piercing|1 Comment

You Don’t Have To Move Your Money Offshore To Get Asset Protection

Forbes: “If you’re aiming to stiff creditors, litigants or an ex-spouse, should you hide your money in Nevis or Nevada? Forget about hiding money offshore from the Internal Revenue Service–unless you want to risk the penalties, back tax bills and threat of prosecution that thousands of American clients of ubs now face. But what about protecting your cash from vexatious litigants, a grasping ex-spouse or pesky creditors? Then offshore trusts are still an option, but a far less attractive one now that legal reporting requirements for offshore holdings have become more onerous and some U.S. judges have taken to jailing folks who won’t (or can’t) turn over offshore assets. That’s good news for the lawyers and bankers promoting domestic asset protection trusts instead.

Richard Keyt2016-11-16T08:23:50-07:00December 27th, 2011|Asset Protection|0 Comments

Question: What are the reasons why I should have my revocable living trust own my membership interests in a limited liability company?

Answer: The following is a list of the benefits of having a revocable living trust own all of your LLC membership interests:

Incapacity: The co-trustee or successor trustee can administer assets held in trust if the owner / current beneficiary becomes incapacitated.
Avoid Probate: Assets held in trust avoid probate when a current beneficiary dies.
Asset Management: You can name a trusted person or a trust company to be the trustee to manage and invest the assets held in trust after your death if your beneficiaries are too young, cannot be trusted with the money, have creditor problems or a money-grabbing spouse.
Payment of Funds After Death: The trust contains your estate distribution plan, i.e., who will inherit your assets after your death. It states how much and when beneficiares will be paid distributions from the trust.
Asset Protection: If the trust is drafted properly, it will be an excellent asset protected device for your beneficiaries. A properly worded trust will prevent your beneficiaries’ creditors, ex-spouses and bankruptcy court from getting any of their inheritance.

Hire Arizona Wills & Trusts Attorney Richard Keyt to Prepare Your Trust

To learn more about my wills, trusts and estate planning services, go to my website called “Arizona Wills & Trusts.”

Richard Keyt2023-10-24T10:23:41-07:00December 23rd, 2011|Asset Protection, FAQs|0 Comments

How Do I Loan Money to My LLC?

Question: I want to loan money to my Arizona limited liability company. How do I document the loan so it will stand up to a challenge by the IRS, another member of the LLC or a creditor?

Answer: The lender must take care to prepare and have the appropriate parties sign the following documents:

A Promissory Note: The promissory note must be signed by at least one member of a member managed LLC or one manager of a manager managed LLC. The promissory note should state the principal amount of the loan, the lender to whom payments will be made, where payments are to be sent, the date of the loan, no interest will accrue or interest will accrue at a specified rate, the repayment terms and a maturity date by which the loan must be repaid in full.

Resolutions or Action by Unanimous Consent: This is a document that shows that the members of the LLC authorize the company to borrow the money on the terms set forth in the promissory note and that specifies which member or manager has the authority to sign the promissory note on behalf of the LLC.

Action by Unanimous Consent: This is the simplest and easiest way for members to approve the loan. If all members of the LLC agree to the loan and its terms, they can sign an Action by Unanimous Consent that contains the resolutions adopted by the members.

Resolutions: If any member refuses to sign the Action by Unanimous Consent, the members must call a special meeting of the members to consider and vote on the loan and give appropriate notice of the date and time of the meeting to all the members. The special meeting must be held, the loan discussed, a motion must be made and seconded that the members authorize the company to borrow $X,XXX from <name of lender> on the following terms <state the terms referred to above in the discussion of the Promissory Note> and that <name of member or manager> is authorized to sign the Promissory Note and related documents on behalf of the company.

Security Agreement and / or Deed of Trust: If the lender insists that the Promissory Note be secured by a lien on the LLC’s personal property and/or real property then this is done by having the LLC’s authorized signer sign a Security Agreement (for personal property) and/or a Deed of Trust (for real property). If the lender gets a Security Agreement the lender must also file a UCC-1 Financing Statement with the Arizona Secretary of State. If the lender gets a Deed of Trust, the original document must be recorded with the county recorder of the county in which the encumbered property is located.

In addition to the above documents, the lender must write a check payable to the LLC or wire the funds to the LLC’s bank account and the LLC must indicate in its books that it borrowed the funds from the lender.

Purchase Our Do It Yourself Loan Documents

Promissory Note – Do-It-Yourself for $47: A Promissory Note is the legal document signed by a borrower that evidences a promise to repay and the payment terms and conditions. It specifies the amount owed, if interest will be charged, the interest rate, when payments are due, the amount of payments and the maturity date. It contains other important terms such as events that can cause a default and allow the holder of the Note to accelerate the entire balance due after a default, late payment charges and increased interest rate after a default. The Promissory Note is the fundamental loan document, i.e., it is the primary document that evidences the borrower’s legally enforceable promise to repay. If you are owed money and you do not have a Promissory Note signed by the borrower(s), you are at a great disadvantage if you have to sue to collect the debt. Suing to collect a debt evidenced by a Promissory Note is one of the easiest types of lawsuits because you only have to prove the borrower gave you a note and didn’t pay in full. Related Documents: A Promissory Note can be secured by a lien on personal property (use our Security Agreement for personal property in Arizona) and by a lien on real property (use our Deed of Trust for real property located in Arizona).

Limited Liability Company Borrowing Resolution – Do-It-Yourself for $47: If the borrower or signer on a Promissory Note is limited liability company, the lender must obtain a borrowing resolution from the members of an limited liability company to prevent the company from claiming that the person who signed the Promissory Note or other loan documents did not have the authority to sign for the company and therefore the company is not obligated. It is prudent business practice to obtain a borrowing resolution. Commercial lenders almost always require a borrowing resolution as a condition to making a loan.

Security Agreement – Do-It-Yourself for $47: If a lender wants to secure payment of a Promissory Note with a lien on personal property located in Arizona, the lender must obtain the borrower’s signature on a document that creates the lien. When the lender has a lien on personal property and the borrower defaults under the Promissory Note, the lender can foreclose on the personal property and sell the encumbered property at an auction and apply the proceeds to the debt. The Security Agreement is the document that when signed by a borrower or a guarantor creates a lien on the signer’s personal property that is described in the Security Agreement. My Security Agreement gives you the option to describe specific items of personal property to be encumbered or you can use the all encompassing language that gives the lender a lien on all of the borrower’s personal property. Note: The Security Agreement is not a stand-alone document. This document is intended to be used with a Promissory Note. There must be a debt or obligation created to which the Security Agreement creates a lien. No debt, no lien. Additional Required Document: The lender/secured party must immediately file a UCC-1 Financing Statement with the Arizona Secretary of State to perfect notice to the world that the lender/secured party has a lien on the collateral described in the UCC-1. For more about the UCC-1 and a link to the form, see Richard Keyt’s article that explains the UCC-1 Financing Statement.

Deed of Trust – Do-It-Yourself for $47: The Deed of Trust is the document that creates a lien on Arizona real property to secure payment of a debt or satisfaction of an obligation. It must be signed by a person, people, entity and/or entities that own the real property to be encumbered. The Deed of Trust is the preferred method of obtaining a lien on Arizona real property. Mortgages can also be used to create a lien on Arizona real property, but the Mortgage is rarely used in Arizona. Common Usage: When a borrower gives a lender a Promissory Note to evidence a promise to pay money to the lender and the lender wants security for the loan, the Deed of Trust is used frequently to create a lien on Arizona real property to secure the obligations contained in the Promissory Note. If the borrower / debtor defaults on the Promissory Note or other contractual obligation secured by a Deed of Trust, the lender / creditor can foreclose the Deed of Trust and cause the real property that is encumbered by the Deed of Trust to be sold at an auction to the highest bidder for cash.

Caution #1: A lender does not have a lien on any of the borrower’s real property simply because the borrower signs a Promissory Note or other document that creates a legal obligation that the lender may enforce. If the lender wants a lien on Arizona real property, the lender must get the owner(s) of the Arizona real property to sign a Deed of Trust (best type of lien) or a Mortgage (rarely used in Arizona).

Caution #2: The lender must record the properly signed and notarized Deed of Trust with the County Recorder of the Arizona county in which the encumbered real property is located.

Caution #3: The Deed of Trust will not be valid unless the owner(s) of the Arizona real property owe a debt or other obligation to the lender / secured party. For example, if Bart Simpson borrows $10,000 to buy a car and Homer and Marge give the lender a Deed of Trust on their home, the Deed of Trust will not be valid because Homer and Marge do not owe money or any obligation to the lender. If the lender wants to be able to foreclose on Homer and Marge’s home if Bart defaults on the loan, the lender must have Homer and Marge sign a Personal Guaranty by which they guaranty Bart’s debt and then the Deed of Trust would secure the satisfaction of Homer and Marge’s obligations under the Personal Guaranty, not under the Promissory Note because they did not sign it.

Richard Keyt2016-11-16T08:23:51-07:00December 22nd, 2011|FAQs, How Do I, Operating LLCs|0 Comments

Ohio LLC’s Incentive Compensation Creates Partnership With Former Employee

LLC Law Monitor: “Business acquirors sometimes give the acquired company’s management financial incentives to enhance the acquired company’s value. These are often structured as bonus compensation for achieving defined milestones, and sometimes include equity in the acquired company or in the buyer. In a recent Ohio case the buyer of a company’s assets provided incentive compensation to the company’s management, based on the profits of a division of the company. The employee was later terminated, and claimed the company had entered into a partnership with him and then breached its fiduciary obligations.”

KEYTLaw recommendation: This type of provision should be in a written employment agreement that provides for a compensation bonus in an amount equal to the profits of a specific entity or division of an entity. Be sure to define profits precisely. The agreement should state that the provision does not create a partnership, joint venture, ownership interest in the entity or any other arrangement other that the employer / employee relationship and that it does not cause the employer (or the entity if it is not the employer) to owe any fiduciary duties to the employee.

On the Net2018-05-22T18:46:19-07:00December 19th, 2011|Lawsuits, Operating LLCs|0 Comments

Arizona Attorney General Sues Spouse Because She Owned a Community Property Interest in Husband’s LLC

Arizona Attorney General Tom Horne sued a Phoenix-area firearms dealer for consumer fraud in a lawsuit filed in Maricopa County Superior Court. The defendants in the lawsuit are Lancaster Arms, LLC, owned by co-defendants Chester Durda and his wife Marsha. The AG alleges that the LLC and its member Chester Durda defrauded consumers by failing to provide promised merchandise and services to dozens of customers between February of 2009 and September of 2011.

The Attorney General’s press release states:

“Protecting consumers is one of the most important jobs of this office,” Horne said. “Businesses such as the one named in this lawsuit cannot be allowed to make promises to customers and not deliver on those promises. The problem is made even worse when, as in this case, some customers made advance payments with the expectation that they would get either merchandise or services in return, and instead they got nothing. The legal action requests that the court order the business to make restitution, pay penalties, and prevent it from defrauding additional consumers.”

According to the complaint, Lancaster Arms claimed to consumers, some of whom worked in law enforcement and the military, and to some weapons dealers, on the internet and through personal contact by Chester Durda, that the company sold weapons, parts and accessories and that it provided weapon kit assembly services to consumers who sent their kits to the company. Additionally, Lancaster Arms represented that some of its weapons were subject to its “Limited Life Time Warranty”. The lawsuit alleges that Lancaster Arms failed to ship merchandise that consumers had paid for, failed to repair weapons under warranty, and failed to provide refunds. The lawsuit also alleges that Lancaster Arms failed to assemble weapons kits sent to it by consumers and failed to return the un-assembled kits to the consumers or to provide them with refunds. The complaint asks the court to enter an injunction prohibiting the defendants from engaging in any further unlawful acts, require the defendants to restore money and property to consumers, order the payment of civil penalties of up to $10,000 per violation, and to reimburse the State’s court costs and other related expenses.

The lesson to be learned from this lawsuit is that assuming that Mrs. Durda did not have any involvement with the LLC or the alleged unlawful activities she was named as a defendant because the plaintiff wants to be able to collect damages from her community property. When spouses own an interest in an LLC as community property there always the risk that the non-active spouse could be named as a defendant in a lawsuit for this reason. If this is a concern and the non-involved spouse wants to protect his or her assets from liabilities arising from the active spouse’s involvement with the LLC, then the active spouse should own all of the LLC as separate property and the non-active spouse would not own any of the LLC.

See my article called “How Do I Acquire an Ownership Interest in an Arizona LLC as Separate Property?“

Read the Complaint.

Richard Keyt2016-11-16T08:23:51-07:00December 15th, 2011|Asset Protection, Lawsuits, Members|0 Comments

Question: Are there limitations on who can own a membership interest in an Arizona limited liability company?

Answer: No. Arizona limited liability company law does not restrict either the type of person or entity that can own an interest in an Arizona LLC or the citizenship or residence of an LLC owner. Arizona LLCs can be owned by one person, multiple people, one entity, multiple entities or any combination thereof. All of the following types of entities can own an interest in an Arizona limited liability company:

trust
corporation (for profit)
nonprofit corporation
limited liability company (LLC)
limited partnership (LP)
limited liability partnership (LLP)
limited liability limited partnership (LLLP)
general partnership (GP)
joint venture (JV)

Any or all of the owners of an Arizona LLC can be non-U.S. citizens and non-U.S. residents.

Richard Keyt2016-11-16T08:23:51-07:00December 14th, 2011|FAQs, Forming LLCs, Members|2 Comments

An Examination of the Charging Order Under Kentucky’s LLC and Partnership Acts

Attorneys Thomas E. Rutledge and Sarah Sloan Wilson wrote an excellent and very comprehensive two part article called “An Examination of the Charging Order Under Kentucky’s LLC and Partnership Acts.” Although the article is based on Kentucky limited liability company and partnership law, it covers many concepts and legal issues that apply to partnerships and LLCs in all fifty states. The two part article is a must read for attorneys and lay people who want to understand the important LLC charging order issue.

Richard Keyt2017-08-25T15:30:44-07:00December 3rd, 2011|Charging Orders|0 Comments

50 State LLC Charging Order Table

Carter G. Bishop, Professor of Law at Suffolk University Law School compiled a summary of the status of limited liability company charging order protection or lack thereof in all fifty states. His work entitled “Fifty State Series: LLC Charging Order Statutes” is dated October 6, 2011. The table reflects the statutory charging order language of all fifty states. It also classifies each state’s charging order statutes in one of four classes. All links in the table are live to Westlaw and the table is updated a new legislative activity occurs.

Arizona’s LLC charging order statute is Arizona Revised Statute Section 29-3503.E, which states in part:

“This Section provides the exclusive remedy by which a person seeking in the capacity of judgment creditor to enforce a judgment against a member or transferee may satisfy the judgment from the judgment debtor’s transferable interest.”

Richard Keyt2021-01-02T15:59:29-07:00December 3rd, 2011|Asset Protection, Charging Orders|0 Comments

Virginia Supreme Court Rules Death of LLC Member Transferred only Rights to Profits, Not Management or Voting Rights

Every person who is a member of an LLC will die, but few people take action while alive that will insure that the right person or people or entity inherits their membership interest in their LLC or that their heir(s) will become full members of the LLC after the LLC member dies. A November 5, 2011, Virginia Supreme Court case illustrates the problem that arises when the deceased member failed to take action to insure that his daughter would become a member of the LLC of which he owned 80%.

The case of Ott v. Monroe involves a dispute between a 20% member and the daughter a deceased member who inherited the deceased member’s 80% interest in the LLC. This case is an excellent teaching tool for everybody who is a member of an LLC. The court ruled that the daughter who inherited the 80% LLC interest inherited only the right to receive 80% of the profits and distributions from the LLC and that she did not become a member of the LLC with any voting rights. The bottom line is that after the death of the 80% member the 20% member became the sole member of the company and the only person able to vote and control the LLC.

A member’s interest in an LLC consists of two types of interests. The first interest is a control interest, which is the member’s right to participate with other members in the management of the LLC’s affairs. The second interest is a financial interest, which is the member’s right to a share of the LLC’s profits and losses and right to receive distributions from the LLC. The general rule of Virginia and Arizona law is that a member may transfer only the member’s financial interest. The control interest in an LLC is personal to the member and cannot be transferred to another person or entity by the unilateral act of the member. Arizona Revised Statutes Section 29-732.A provides:

“The assignment of an interest in a limited liability company does not dissolve the limited liability company or entitle the assignee to participate in the management of the business and affairs of the limited liability company or to become or to exercise the rights of a member, unless the assignee is admitted as a member as provided in section 29-731. An assignee that has not become a member is only entitled to receive, to the extent assigned, the share of distributions, including distributions representing the return of contributions, and the allocation of profits and losses, to which the assignor would otherwise be entitled with respect to the assigned interest.” Emphasis added.

The failure to plan caused the minority member to obtain control of the LLC when the majority member died. This is a wake call for all people who are majority owners of an LLC. The failure of the majority member to plan could cause the loved one(s) who inherit the majority owners interest in the LLC to lose control of the company when the majority owner dies. Does your LLC’s Operating Agreement provide that the control interest of a deceased member transfers automatically to the member’s heirs(s)? Should it? The members of every multi-member LLC must decide if the control interest will or will not transfer automatically to an heir when a member dies. If the control interest is to transfer automatically after a death, the only way to cause it to happen is by having all of the members sign a document (preferably an Operating Agreement) that provides for the automatic transfer of the control interest when a member dies.

Do you know who will inherit your membership interest in your LLCs if you were to die? Will your heirs have to waste time and money in probate court? For more on this topic read my article called “Who Will Inherit Your Membership Interest in Your Arizona LLC When You Die?“

P.S. The Operating Agreement I prepare for every Arizona LLC I form contains a section entitled “Transfer of a Membership Interest on Death of a Member by a Transfer of Membership Interest Testament,” which provides in part:

“Notwithstanding anything herein to the contrary, if a Member dies after making a valid Transfer of Membership Interest Testament that names one or more people or entities (“Heirs”) to inherit all or a portion of the deceased Member’s Membership Interest, the following shall occur after the death of the Member:

a. Each Heir shall inherit the portion of the deceased Member’s Membership Interest stated in the Transfer of Membership Interest Testament.

b. An Heir inherits the right to receive profits, losses and distributions attributable to the inherited Membership Interest, but shall not become a Member and have any other rights of a Member unless and until all of the requirements of Section 7.1 other than subsection (i) are satisfied.”

Do you know what your LLC’s Operating Agreement says about transfers of the financial interest and the control interest after the death of a member? If not, do your loved ones a favor and read your Operating Agreement or if your LLC does not have an Operating Agreement, take action to have all of the members adopt an Operating Agreement that deals with what happens to a member’s interest after death.

The text of Ott v. Monroe follows.

OTT v. MONROE
Janet M. OTT v. Lou Ann MONROE, et al.
Record No. 101278.No. 101278.
November 04, 2011

PRESENT: All the Justices.

I. BACKGROUND AND MATERIAL PROCEEDINGS BELOW

Admiral Dewey Monroe, Jr. (“Dewey”) and his wife Lou Ann Monroe (“Lou Ann”) formed a Virginia limited liability company, L & J Holdings, LLC (“the Company”), which was governed by an operating agreement they executed in April 2003 (“the Agreement”). The Agreement provided that Dewey and Lou Ann were the sole members and that they held an 80% membership interest and a 20% membership interest, respectively. It also provided that Lou Ann would be the managing member and Joseph G. Monroe (“Joseph”) would serve as the successor managing member in the event of her death, disability, removal, or resignation.

Paragraph 2 of the Agreement provided that “

[e]xcept as provided herein, no Member shall transfer his membership or ownership, or any portion or interest thereof, to any non-Member person, without the written consent of all other Members, except by death, intestacy, devise, or otherwise by operation of law.” Paragraph 10(B) provided in relevant part that “[n]o Member shall, directly or indirectly, transfer, sell, give, encumber, assign, pledge, or otherwise deal with or dispose of all or any part of his Membership Interest now owned or subsequently acquired by him, other than as provided for in this Agreement.” Paragraph 10(C) provided in relevant part that, Paragraph 10(B) notwithstanding, “any Member ․ may transfer all or any portion of the Member’s Interest at any time to ․ [o]ther Members [or][t]he spouse, children or other descendants of any Member.”

Dewey died in 2004. Through a will executed prior to the formation of the Company, he bequeathed his entire estate to his daughter, Janet. After the will was admitted to probate, Janet asserted that Dewey’s bequest transferred his membership in the Company to her. She called a meeting of the Company, sending notice to Lou Ann, with the intent to remove Lou Ann and Joseph from their positions as managing member and successor managing member, respectively. Lou Ann responded that Janet had inherited only Dewey’s right to share in profits and losses of the Company and to receive distributions to which he would be entitled.

Janet proceeded with the meeting and putatively removed Lou Ann and Joseph, electing herself as the Company’s new managing member and electing Susan Shackelford as successor managing member in the event of her death, disability, removal, or resignation. Thereafter, Janet filed a complaint in the circuit court seeking declaratory judgment that she had inherited her father’s full membership in the Company and Lou Ann and Joseph had been validly removed from their positions. Lou Ann and Joseph filed a demurrer, again asserting that Janet had inherited only Dewey’s right to share in profits and losses and to receive distributions.

The court denied the demurrer and the case proceeded to a bench trial. At its conclusion, the court held that Dewey was dissociated from the Company upon his death by operation of Code § 13.1–1040.1(7)(a). Consequently, the court concluded that all his rights as a member to participate in the control of the Company’s affairs terminated and only the right to share profits and losses and to receive distributions survived to be inherited by Janet through his will. Accordingly, the court ruled that Janet was not a member of the Company and thus lacked the authority to remove Lou Ann and Joseph from their positions. We awarded Janet this appeal.

II. ANALYSIS

This appeal assigns error to the circuit court’s interpretation of the Agreement and the relevant statutes. Accordingly, we review the judgment de novo. Uniwest Constr., Inc. v. Amtech Elevator Servs., 280 Va. 428, 440, 699 S.E.2d 223, 229 (2010).

When interpreting a contract, we construe it as a whole. When its terms are clear and unambiguous, we give them their plain meaning. We harmonize its provisions and give effect to each of them when it reasonably can be done. Id. Similarly, we construe statutes as a consistent and harmonious whole to give effect to the overall statutory scheme. Virginia Electric & Power Co. v. Board of County Supervisors, 226 Va. 382, 388, 309 S.E.2d 308, 311 (1983). We apply the plain meaning of a statute unless its terms are ambiguous or doing so would lead to an absurd result. Covel v. Town of Vienna, 280 Va. 151, 158, 694 S.E.2d 609, 614 (2010).

Janet argues that the circuit court erred in ruling that Dewey was dissociated upon his death by operation of Code § 13.1–1040.1(7)(a) because that provision is preceded by the proviso, “[e]xcept as otherwise provided in the articles of organization or an operating agreement.” She asserts that Paragraph 2 of the Agreement constitutes such an exception and supersedes dissociation under the statute. FN 1. We disagree.

A. THE VIRGINIA LIMITED LIABILITY COMPANY ACT

We begin our analysis by examining the statutory framework governing Virginia limited liability companies, the Virginia Limited Liability Company Act, Code § 13.1–1000 et seq. (“the Act”). “The [limited liability company] is a hybrid entity, borrowing from both the corporate and partnership models” to combine a corporation’s limited liability for its owners with a partnership’s pass-through treatment for income tax purposes. S. Brian Farmer & Louis A. Mezzullo, The Virginia Limited Liability Company Act, 25 U. Rich. L.Rev. 789, 790 (1991). When the Act was enacted in 1991, federal tax regulations denied the pass-through treatment afforded partnerships if a business entity possessed three of the four principal characteristics of corporations: (1) perpetual existence, (2) central management, (3) limited liability of owners, and (4) free transferability of ownership interests. Id. at 813–15, 694 S.E.2d 609. Because limited liability was an indispensable characteristic of limited liability companies, the provisions of the Act were drafted to avoid the three remaining corporate characteristics. Id. at 815–21, 694 S.E.2d 609. Thus, the transferability of a member’s interest in a limited liability company is analogous to the transferability of a partner’s interest in a partnership.

When the Act was enacted in 1991, the Uniform Partnership Act expressly provided that

[a] conveyance by a partner of his interest in the partnership does not ․ entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled.

Former Code § 50–27(1) (Repl.Vol.1989). FN 2.

Implicit within this language was the recognition that a partner’s interest in a partnership comprises two distinct and divisible components. The first component, the control interest, encompasses the partner’s entitlement to participate with the other partners in the administration of the partnership’s affairs. The second component, the financial interest, encompasses only the sharing of profits and losses of the partnership and receipt of distributions from its accumulated income and assets. Under the statute, only the financial interest is alienable. Thus, the control interest in a partnership is personal to the partner and cannot be bestowed on another by the unilateral act of a partner even if the words of his conveyance do not expressly limit its scope.

The division of a partner’s interest into a control interest, which may not be transferred unilaterally, and a financial interest is mirrored in the Act. Both when the Company was formed and when Janet inherited through Dewey’s will, Code § 13.1–1039 provided that

[u]nless otherwise provided in the articles of organization or an operating agreement, a membership interest in a limited liability company is assignable in whole or in part․ An assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member. Such an assignment entitles the assignee to receive, to the extent assigned, only any share of profits and losses and distributions to which the assignor would be entitled. FN 3.

Thus, an assignee of a financial interest has no control interest in a limited liability company without becoming a member. Code § 13 .1–1040(A) provides the means by which the assignee of a financial interest may become a member: “Except as otherwise provided in writing in the articles of organization or an operating agreement, an assignee of an interest in a limited liability company may become a member only by the consent of” a majority of those members exercising the direct management of the company.

In light of this statutory background, we turn to Janet’s argument.

B. DIRECT INHERITANCE OF MEMBERSHIP IN A LIMITED LIABILITY COMPANY BY DESCENT OR DEVISE

Janet argues that she inherited Dewey’s membership directly by operation of his will. She asserts the Agreement permitted her to inherit directly because Paragraph 2 superseded Code § 13.1–1040.1(7)(a). However, Paragraph 2 merely prohibits any member from transferring any part of his membership except (a) where specifically allowed under the terms of the Agreement, (b) with the consent of all the other members, or (c) upon death, intestacy, devise, or otherwise by operation of law. It does not address statutory dissociation and does not state an intent to supersede Code § 13.1–1040.1(7)(a). Consequently, it lacks specific language that would constitute an exception to the rule of dissociation set forth in Code § 13.1–1040.1. Dewey thus was dissociated from the Company upon his death and Janet became a mere assignee by operation of Code § 13.1–1040.2, entitled under Code § 13.1–1039 only to his financial interest.

Even if Paragraph 2 had superseded dissociation under Code § 13.1–1040.1, it is not possible for a member unilaterally to alienate his personal control interest in a limited liability company. Code § 13.1–1039(A). The words “[u]nless otherwise provided in the articles of organization or an operating agreement” in Code § 13.1–1039 make it possible for a limited liability company to restrict the assignment of members’ financial interests because they modify the remainder of the sentence, which continues “a membership in a limited liability company is assignable in whole or in part.” The words “[u]nless otherwise provided in the articles of organization or an operating agreement” do not make it possible for a limited liability company to allow a member to assign his control interest because they do not modify the separate sentence, which states that “[a]n assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member.” Additionally, Code § 13.1–1023(A) provides that an operating agreement may not contain provisions inconsistent with the laws of the Commonwealth. Thus it was not within Dewey’s power under the Agreement unilaterally to convey to Janet his control interest and make her a member of the Company upon his death because the Agreement could not confer that power on him.

III. CONCLUSION

For the foregoing reasons, the circuit court did not err in holding that Janet inherited only Dewey’s financial interest in the Company—the right to share in profits and losses and to receive distributions. Because she was not a member, the circuit court did not err in holding that she lacked authority to remove its managing member and successor managing member. Accordingly, we will affirm the judgment of the circuit court.

Affirmed.

FOOTNOTES

1. Janet also asserts that statutory dissociation is preempted by Paragraph 10(A), which states that “no Member shall have any right to voluntarily resign or otherwise withdraw from the Company ․ without the prior written consent of all remaining Members of the Company. Any attempted resignation or withdrawal without the requisite consent shall be null and void and have no legal effect.” Nothing in the record of this case establishes that Dewey’s death was a voluntary attempt to resign or otherwise withdraw from the Company. Paragraph 10(A) therefore is not implicated.

2. This limitation was preserved in Code § 50–73.106 when Chapter 1 of Title 50 was repealed and replaced upon the enactment of the Virginia Uniform Partnership Act in 1996. 1996 Acts ch. 292.

3. Code § 13.1–1039 was subsequently amended and reenacted to add a new subdivision not relevant to this appeal. 2006 Acts ch. 912.

OPINION BY Justice WILLIAM C. MIMS.

Richard Keyt2016-11-16T08:23:51-07:00November 22nd, 2011|Lawsuits, Members|0 Comments