May 31, 2019
In accordance with Arizona law governing LLC companies, an operating agreement is not a requirement. However, this does not mean that an operating agreement is not highly recommended. An operating agreement is a verbal or written agreement that outlines how the company will be operated, the structure of the company and how profits and losses will be distributed. Although oral agreements are recognized in Arizona, these can be difficult to prove and a written, formal document is preferable.
In the event that an LLC does not have an operating agreement in place, the Arizona Limited Liability Company Act will govern all aspects of the operation of the business including members, capital contributions and withdrawal of a member from the company.
So what happens to the capital contribution of a member who wants to withdraw from the LLC when there is no operating agreement in place?
The Act states that a member may withdraw from an LLC at any time providing that they give written notice of their withdrawal. The member is entitled to the return of their capital contribution at the time of withdrawal. However, if an operating agreement is in place and he withdrawal contravenes any provisions made in the document, the withdrawing member may lose their right to the return of their capital contribution. The company then has the legal right to recover any damages from the member with regards to breach of contract.
The action of withdrawal from the company does not give the dissociated member the automatic right to distribution in relation to their capital contribution. In other words, the company does not need to pay the withdrawing member a portion of assets in proportion to their capital contribution. However, this distribution is payable upon the dissolution of the company.
With no operating agreement in place, the withdrawing member can retain interest in the LLC although they are no longer a member of the LLC. This means that they can continue to receive distributions as long as the company is in operation in relation to their capital contribution. Distributions include both profits and losses of the LLC for as long as the disassociated member retains interest in the company.
The capital contribution of a member is used to calculate their interest in the business and therefore the portion of distribution that they will receive from the LLC. It is important to note that a member is not an employee and does therefore not receive a salary. However, a member can become an employee and receive a salary over and above their distribution in relation to their capital contribution. Resigning from the company is not the same as withdrawing as a member.
A member may withdraw funds from their capital contribution at any time. If they withdraw their membership from the LLC, they may also withdraw their capital contribution. Interest in the LLC is however calculated according to capital contribution and if this contribution is withdrawn, the member will no longer retain any interest in the company. Contact Monahan Law Firm PLC for any questions.