Here are some member rights in an LLC that you should be aware of before you join one Understanding your rights and responsibilities in a limited liability company (“ LLC”) is critical for protecting yourself now and in the future. Your rights and duties will be based on a combination of statutory law, case law (from courts) and, if the LLC members negotiate and agree, in a written operating agreement. Arizona gives the LLC a lot of flexibility and freedom to restrict or enhance the rights and duties that the statues or court cases would have created if the members did not have an operating agreement. Your operating agreement is the lifeblood of the relationship between members in an LLC, and how you set it up has many important implications for how you and the other members will interact.
Some of the most important aspects associated with your LLC member rights are the right to distributions. Distributions are essentially the profit a company makes after paying all of its expenses. One of the most important factors to consider in an operating agreement is how much an LLC will pay its officers and employees, who are often also members of the company. A “passive” investor or member of an LLC may never receive any distributions, or only receive minimal distributions, if the LLC pays its managers and employees all or most of the funds that might otherwise have been available as profit. When forming an LLC, or deciding to join or invest in an LLC, asking how investors will receive distributions and how expenses will be managed is essential.
An LLC can be member-managed or manager-managed. By law, every LLC member maintains management interest in the business, but members can give their management rights away to a manager or other member or members. It is a good idea to have an Arizona commercial attorney review your LLC documentation before you set up the company so that you are clear about the benefits and disadvantages of various membership decisions.
All LLC members have the right to access certain information related to the LLC. They may be required to do this with reasonable notice such as inspecting any records of the LLC as far as financial position, material matters or business transactions. The key word in this particular situation has to do with reasonable request. Instead of relying on the statutory rules for when members are entitled to review business records, and what records they are entitled to review, it is advisable for members to define the right to review LLC business information in the operating agreement.
When organized properly, an LLC may be a valuable way to protect yourself and the company. It is imperative that each member understand his or her rights and responsibilities. Knowing this upfront can help to minimize confusion or disputes down the line. Udall Shumway’s Mesa, Arizona commercial and business attorneys can assist you in drafting an operating agreement or amendment to an operating agreement that protects members’ rights and reduces the likelihood of disputes.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Member Rights in an LLC, or any other commercial litigation matters, please feel free to contact Joel E. Sannes at 480.461.5307, or log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.