Adding A Member

Amend the Articles of Organization. There are additional considerations if the LLC adds a member to the company after it is formed.  If the addition of the member requires preparing an Article of Amendment, you will need to prepare and file it with the AZ Corporation Commission (ACC) within thirty (30) days of adding the member to the company.   An Article of Amendment will be required if management of the LLC is reserved to the members and there is a change in the persons who are members or if the management of the LLC is vested in a manager or multiple managers and there is a change in the members who own a twenty percent (20%) or greater interest in the profits or capital of the LLC.

Amend Operating Agreement and Prepare Additional Documents. Additionally, if the company has an operating agreement, it should be amended to document the addition of the new member, the member’s ownership interest and the consideration paid for the interest.  It is a recommended practice to prepare a subscription agreement, or a purchase agreement, which documents the interest being acquired and the consideration paid for the interest.  It is very important for the company to consider any security issues that may be involved by selling the interest to a new member.  For a detailed discussion of securities issues, click here.

Prepare Minutes. The members or managers should hold a meeting and prepare minutes or prepare a consent in lieu of a meeting (a resolution) in writing which documents the addition of the new member to the company, the terms of the consideration paid by the new member to acquire the interest and the percentage of ownership that is being acquired.  The minutes or consent should also approve the subscription agreement, the articles of amendment and the amendment to the operating agreement.   The minutes or consent  should be signed by the number of the members or managers required by the operating agreement or, if there is no operating agreement or if it is silent on this issue, by a unanimous vote of the existing members.  The new member should sign the operating agreement so it is binding on him/her.

Acquisition of the Interest from an Existing Member. After the LLC is formed, if a member wants to assign his/her interest to a new member, then the new member can be admitted to the LLC according to the provisions of the company’s operating agreement.  If there is no operating agreement, or if the operating agreement is silent on this issue, then the Arizona statute requires unanimous consent of the existing members to allow a member to assign his/her interest to a third party. As is always the case, the first place to look when you want to modify your company structure is to review your operating agreement.  However, if your operating agreement does not address the situation, you have to review the relevant provisions of the Arizona statute.

An assignment of a membership interest from a member to a third party can occur for numerous reasons and the consideration for the interest may take many forms.  For example, the interest may be assigned to a third party for monetary consideration.  Or the interest may be assigned as a gift to a third party.  Or it may be assigned by operation of law, such as upon the death or bankruptcy of a member.  Whatever the unique circumstance may be, the terms should be documented in an assignment, which is an agreement between the parties, which confirms the terms of the transfer of the interest from the member to the assigned party, also called the Assignee.

Articles of Amendment. There are several considerations when a membership interest is assigned to a third party.  If the assignment requires preparing Articles of Amendment, you  will need to prepare and file them within thirty (30) days of the assignment.  Articles of Amendment will be required if management of the LLC is reserved to the members and there is a change in the persons who are members or if the management of the LLC is vested in a manager or multiple managers and there is a change in the members who own a twenty percent (20%) or greater interest in the profits or capital of the LLC.

Amend Operating Agreement and Prepare Assignment. If the LLC has an operating agreement, it should be amended to document the removal of the existing member and the addition of the newly assigned member.  The terms of the membership transfer should be documented in the assignment.  Some of the important terms include the percentage of the interest being transferred and the consideration paid for the interest.  It is very important for the company to consider any security issues that may be involved by assigning the interest to a new member.  For a detailed discussion of securities issues, click here.

Prepare Minutes. The members or managers should hold a meeting and prepare minutes or prepare a consent in lieu of a meeting (a resolution) in writing which documents the assignment of the interest, the removal of the member and the addition of the new member to the company, the terms of the consideration paid by the new member to acquire the interest and the percentage of ownership that is being acquired.  The minutes or consent should also approve the assignment, the Articles of Amendment and the amendment to the operating agreement.  The minutes or consent  should be signed by the number of the members or managers required by the operating agreement or, if there is no operating agreement or if it is silent on this issue, by a unanimous vote of the existing members.  The new member should sign the operating agreement so it is binding on him/her.
For additional assistance on amending your company, please contact us as we provide these services as well.