Member Wishes To Sell LLC Interest To Outside Party

Question: We have 3 equal members in an LLC formed in Georgia in 2005. Can one of the members sell or transfer his/her stake to an outside buyer (non-member) without consent from the remaining two buyers? There is no operating agreement established among members. Will the buyer automatically become member of the LLC? Does he have to get consent from the remaining two current members? May, Georgia

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Answer: When a limited liability company (LLC) lacks an operating agreement, then the default provisions of your state LLC Act control. Thus, answering your question turns on the application of Georgia LLC law to the facts presented. Specifically, whether Georgia laws prevents a third-party from purchasing an ownership interest of a member without the consent of the other LLC members and, then, stepping into the sellers shoes as a voting member.

Georgia Rev. Stat., Title 14, Ch. 11 contains the LLC laws for your state. The matter really boils down to two separate questions. First, whether an existing member can sell his company interest without consent of the other members. Second, if sale of the member interest is allowed, what status does the buyer acquire? Absent a member buy-sell agreement or other restrictions in the operating agreement preventing members from transferring LLC interests, the answer appears to be "yes", members have a right to sell their LLC interest. O.C.G.A. § 14-11-502 states, "Except as otherwise provided in the articles of organization or a written operating agreement: (1) A limited liability company interest is assignable in whole or in part; ... ." The term "sale" falls within the broader definition of "assignment".

Thus, this Georgia statute authorizes the sale of a member interest but what status does the buyer acquire in the LLC? Does the buyer become a voting member? Under Georgia LLC law (as with most states), an assignee of an LLC ownership interest does not automatically become a member of the company. O.C.G.A. § 14-11-503, entitled "Rights of assignee to become member", states that "Except as otherwise provided in the articles of organization or a written operating agreement: (1) An assignee of a limited liability company interest may become a member only if the other members unanimously consent; ... ." This means that, unless the operating agreement or articles of organization provide otherwise, the buyer of an LLC interest from an existing member does not also become a member of the LLC absent unless the remaining members of the company consent.

What is the status of an assignee of an LLC interest who is blocked from becoming a member? The assignee lacks any ability to participate in the management of the company but is, however, granted rights in the profits and losses of the company under O.C.G.A. § 14-11-502(2), "An assignment entitles the assignee to share in the profits and losses and to receive the distributions to which the assignor was entitled, to the extent assigned; .... ." This means the assignee is allocated all profits and losses (and property distributions) that otherwise would have normally been allocated to the ownership interest he/she purchased. The assignee's role in the LLC somewhat resembles a passive shareholder in a corporation. It's not a perfect analogy but, hopefully, conveys the nature of the relationship of the parties’ relationship after assignment of the member interest.

Member Blocking Sale of an LLC interest

Q. I own 65% of an LLC and want to sell. Other member agreed but is now making certain demands or he will block the sale. Can he do that even if I own the majority ownership interest in the LLC? Scott, Oregon

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A. To my knowledge, one LLC member cannot block the sale of a limited liability company interest by another member unless such authority is granted in a buy-sell agreement between the members (or language of the operating agreement). However, we must make a distinction between blocking the sale of a limited liability company interest and blocking the buyer from becoming a member. These are not synonymous concepts. The Oregon Limited Liability Company Act states the following regarding admission of new members:

Section 63.245 Admission of members. * * *
(2) After the filing of the limited liability company’s initial articles of organization, a person may be admitted as a member of the limited liability company upon compliance with the articles of organization or any operating agreement, or, if neither the articles of organization nor any operating agreement so provide:
(a) In the case of a person acquiring a membership interest directly from the limited liability company, upon the consent of a majority of the members;
(b) In the case of an assignee of a limited liability company membership interest not governed by paragraph (c) of this section, upon the consent of a majority of the members other than the assignor; or
(c) In the case of an assignee of a membership interest in a limited liability company in which, immediately following the assignment, the limited liability company otherwise would have no members, simultaneously with and upon the assignment of the membership interest.

Emphasis Added. Your situation, based on the above facts, is covered by Section 63.245 in my view. That means that although you can sell your LLC interest to a 3rd party, that individual does become an LLC member unless and until a majority of the remaining members votes in favor of admitting the buyer as a member. If you have an operating agreement and it addresses how a new member is admitted to the LLC, then the terms of the operating agreement override Section 63.245.

When the owner of an LLC members interest transfers the interest to a third party who for whatever reason does not become a member, the transferee becomes the holder of an economic interest in the LLC. I didn't see a statute expressly addressing the rights of a holder of an economic interest in an Oregon LLC so I won't comment further. Perhaps your operating agreement addresses the issue. Normally, an economic interest holder is allocated all income and losses (and receives all property distributions) that otherwise would have gone to the member from who the LLC ownership interest was acquired.

Bankruptcy of Member--California LLC

Question: We have an LLC in California with 4 equal members. Two members are going through Ch.13 bankruptcy. Our operating agreement states that the LLC shall be dissolved by bankruptcy of a member. It also states that if at least two members remain they can vote to continue the company within 90 days. If the two remaining members vote to continue the company does that mean the two members in bankruptcy only have an economic interest in the company? Does just filing for bankruptcy dissolve the LLC or does the court need to take their ownership in order for the LLC to be dissolved?

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Answer: The bankruptcy of a member is not an event of dissolution under the California LLC Act, see Cali. Corp. Code § 17350, et alia. Thus, unless your LLC operating agreement clearly states that the company is to be dissolved due to the events described above, there is no dissolution. It comes down to interpretation of the LLC operating agreement. More importantly, I believe the burden will be on those members wishing the LLC to be dissolved to show that events have occurred that require dissolution of the LLC under the operating agreement. Those members wishing dissolution will have to file a petition with the court claiming an event of dissolution has occurred under the operating agreement per Section 17350.(a).

Your ultimate questions seems to be what happens to the interests of the members who declared bankruptcy if the company is able to continue. The LLC Acts of most states explicitly provides that status as an LLC member ends upon the filing of bankruptcy petition and, thereafter, the member (or his bankruptcy estate) is merely a holder of an economic interest. For example, see Del. LLC Code § 18-304. Events of bankruptcy. I could not find a section in the California LLC Act specifically addressing bankruptcy of a member such as the linked section from the Delaware Act; however, there are several provisions in the California Act regarding assigned of LLC members interests that I think essentially get one to the same place.

Cal. Corp. Code. § 17300. A membership interest and an economic interest in a limited liability company constitute personal property of the member or assignee. A member or assignee has no interest in specific limited liability company property.

Cal. Corp. Code. § 17302. (a) On application by a judgment creditor of a member or of a member's assignee, a court having jurisdiction may charge the assignable membership interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect to the limited liability company and may make all other orders, directions, accounts, and inquiries that the judgment debtor might have made or that the circumstances of the case may require.

Cal. Corp. Code. § 17303. (a) Except as otherwise provided in the articles of organization or the operating agreement, an assignee of an interest in a limited liability company may become a member only if a majority in interest of the other members vote in favor of the assignee's admission to the limited liability company as a member.

These are default provisions of the California LLC Act for the situation where a creditor takes possession through assignment of a member's interest in the company. They apply when the operating agreement is silent on the issue. If your operating agreement states that a member becomes an economic interest holder upon filing bankruptcy, then it controls over the Cali. LLC Act. Under the California LLC Act, it looks like the bankruptcy estate of the members who declared bankruptcy are essentially assignees of the member-debtor and, thus, only entitled to a charging order and, further, are not entitled to become members of the LLC.

Please take the issue to a local bankruptcy attorney for a legal opinion on this issue.

Documenting LLC Ownership Interests

Q. How can I show evidence of a sale or transfer of an LLC in MO? My son and I own 50% of a family LLC and my husband has either given or sold the LLC to his brother in KS who did own only 1%. Sandra, Mo

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A. I am a little confused by the question; however, I read the situation as one where your husband has attempted to sell an LLC ownership interest to his brother that you believe you and your son have an ownership interest in. Further, your issue is how to prove or document that you and your son own a 50% interest in an LLC now claimed by your brother-in-law.

This is a good question as the ownership interests of the respective members is not (to my knowledge) recorded in the annual report filed with the Missouri Secretary of State. However, the ownership interest of each member should be recorded in the LLC operating agreement. If your company does not have an operating agreement (or the ownership interests have changed and the new percentages not documented) then the next best document source is probably the LLC's annual federal income tax report (which is most likely an IRS form 1065 although an LLC can file another form depending on its tax status). If the LLC is taxed as a partnership (which is the most common form of taxation for LLC's with more than one member), each member is supposed to receive a form K-1 when the tax return for each year is filed. The form K-1 contains the ownership interest in the LLC for the member.

Other than that, the LLC should maintain internal books and records that record the ownership interest of each member. RSMO § 347.091 sets out the documents each LLC is required to maintain and the right of a member to inspect said documents.

Articles of Organization versus LLC Operating Agreement

Question: Is this document sold on your web site filed with the state of Florida? Is it what I use to start my LLC? Stan, Orlando.

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I often receive this question. No, the document you linked to is an LLC operating agreement. That is an agreement between the members setting forth such things as ownership percentages, method of allocation of profits and losses, voting procedures, et cetera. The document filed with the state (usually the corporate division of the secretary of state) is generally called "articles of organization". Here is a link to the version of this form used in Florida. The articles of organization are brief and something that a non-lawyer should be able to fill out on his or her own without professional assistance.

"Qualified Income Offset" Under Trea. Reg. 1.704

LLC's taxed as partnerships must meet the "substantial economic effect" test of Treasury Reg. § 1.704-1(b)(2) for the allocation of income, losses and other items. This is an especially important point in regard to pass-through LLC losses as a deduction could be denied by the IRS if it finds the allocation lacks substantial economic effect. There are two alternative tests for providing that allocations by an LLC have substantial economic effect.

Under the first test, the LLC operating agreement must unconditionally obligate all members with a negative capital account to restore the amount of such deficit balance to the LLC by the end of the taxable year during which liquidation occurs (or, if later, within 90 days after the date of such liquidation). Treas. Reg. § 1.704-1(b)(2)(ii)(b)(3). One of the main reasons people find the LLC form attractive for business is it's limited liability feature. If the operating agreement requires all members to repay capital account deficits upon the liquidation of the LLC, this could make them liable to some degree for LLC debts. For obvious reasons, this is not an attractive option for complying with the substantial economic effect requirement.

The alternate test for substantial economic effect is less draconian. It requires the LLC operating agreement to contain a "qualified income offset" (in addition to other requirements). In laymans terms (to the best of my reading of the regulations), a qualified income offset merely suspends any special allocations to an LLC member that would increase a capital deficit and requires the LLC to allocate income or gain to the member to eliminate any the negative capital account as quickly as possible. For an example of such a provision, see this operating agreement at Section 6.2(c). Another common way one sees for addressing "qualified income offset" requirement in LLC operating agreement is including the following short phrase: "To the extent a Member shall have a negative capital account balance, there shall be a qualified income offset, as set forth in Treasury Regulation 1.704-l(b)(2)(ii)(d)." I personally prefer more of an explanation of what the offset entails but I have seen no ruling for the IRS indicating that this phrase is inadequate. For more extensive sample language, click here and language contained in PLR 145623-04.

For more on this topic, see Federal Income Taxation of LLC Members By Charles R. Beaudrot.

Fudging Loan Application Of LLC

Question: I'm a 1/3 partner in an LLC - we are having credit problems getting a loan because of my credit - not too bad, just not good enough. We need this $65,000 loan for biz improvements - the broker suggested taking me off the LLC paperwork just until the loan is approved then putting me back on. Your thoughts or suggestions would be greatly appreciated. thank you. Barry, CA

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Answer: My reaction is that the broker is suggesting you commit banking fraud. Stop and think about what it means to "take me off the LLC paperwork just until the loan is approved". If I understand the suggestion correctly, at all times you will be the true beneficial owner of a 1/3rd interest in the LLC; however, the broker recommends submitting loan applications to banks showing just two LLC members each having a 50% interest. It is a federal crime to lie on a loan application to a federally insured bank. See Lying on mortgage application can lead to a fine and even jail time.

I'm not sure what problem a bank has with your bad credit if the other two members have good credit. Normally, all owners "jointly and severally" guaranty small business loans. That means the bank can recover the full amount of the loan to the LLC from any member. If the issue is that the bank does not wish one with bad credit to have control over the money loaned, then perhaps there is another way to deal with the situation. The LLC could be converted to a manager-managed LLC. Then the two members with good credit are made the managers. You are left a member but not a manager. For good measure, the LLC operating agreement could state that only managers may have signature authority over LLC financial accounts. Not sure if this will calm the loan officer's fears but it never hurts to inquire. Lying is not an option.

Dissolving A Maryland LLC

Question: I co-own a Maryland LLC with three other people. We are looking to dissolve and do not know where to begin. Where can we find the best information, and where is the best place to start? Are the Articles of Cancellation the same as the Articles of Dissolution? Stephalauren, Maryland

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Response: In responding, I'll assume all members wish to dissolve the LLC. Basically, here are the steps to a voluntary dissolution of an LLC in Maryland--(a) members unanimously vote to dissolve the LLC, (b) file articles of dissolution with the Maryland Department of Assessments & Taxation, (c) wind-up the business, sell all assets not to be distributed to owners or creditors, pay the credit and, if any assets are leftover, distribute remaining assets to the members and (d) file articles of LLC cancellation with the Maryland Department of Assessments & Taxation. This information was gleaned from reading Subtitle 9. Dissolution, Forfeiture, and Reinstatement. of the Maryland LLC Act. In many states, those wishing to dissolve an LLC must also get a tax clearance letter from the state certified that they have paid all of the business entity's state tax obligations before the state officially dissolves the LLC. I would contact the Maryland Corporate Charter Division to ask whether I've left anything off the list: charterhelp@dat.state.md.us.

Here is a link to the official form for articles of LLC cancellation. There does not appear to be a recommended form for LLC articles of dissolution on the state website but that should pose no large hurdle. The contents of the articles of dissolution are rather straight forward as set out in Maryland LLC Act §4A–907.

(2) Articles of dissolution shall contain:
      (i) The name of the limited liability company;
      (ii) The date of filing of the articles of organization and each amendment thereto;
      (iii) The date of the dissolution; and
      (iv) Any other information the members determine.

As to the order of priority in distribution of the LLC's assets during the windup process, this is specified in Maryland LLC Act §4A–906.

Pro Se Representation of LLCs

Question: We have come across some judges classifying an LLC as a type of corporation or an association which requires the use of an attorney for representation in court. Can an LLC represent itself through one of it's members (partnership) or through it's sole member (single member LLC) pro se without a lawyer in a court of law or other civil proceeding? Herman, New York.

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Response: "The general rule for corporate representation is that corporations, as 'artificial entities, may only appear in court through an attorney.' Thus, any non-lawyer representing the corporation engages in 'the unauthorized practice of law.'" Link. LLCs with more than one member are clearly artificial legal entities that the law will treat no different than partnership, which must be represented by a lawyer in court. However, what about single-member LLCs? The IRS allows a single-member LLC to be disregarded for tax purposes (and treated as a sole proprietorship). It would seem to make sense that single member LLCs should be excepted from the general rule such that the sole member is allowed to represent the LLC in court. That argument was expressly rejected by the federal Court of Appeals in Lattanzio v. COMTA, 481 F.3d 137 (2nd Cir. 2007); see also Collier v. Cobalt LLC, 2002 WL 726640 (E.D. La. 2002). I'm not aware of a reported case where a court has allowed a single member LLC to proceed pro se (without a lawyer).

Who can be an LLC manager?

Question: Can the managing member of an LLC be another unrelated LLC? Michael, California.

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Answer: The nice thing about LLCs is their flexibility. The answer to your question is found in the definitions section of the California Limited Liability Company Act (Section 17001 of the California Corporations Code). Section 17001(w) defined "Manager" as "a person elected by the members of a limited liability company to manage the limited liability company", emphasis added. The legal definition of "person" is not the same as the everyday usage. Section 17001(ae) defines "Person" as "an individual, partnership, limited partnership, trust, estate, association, corporation, limited liability company, or other entity, whether domestic or foreign", emphasis added. Thus, under my reading of the above statutes, an LLC (whether foreign or domestic) may be the manager of a second LLC formed in California.

Who is master of the ship?

Question: With a DE LLC, since LLC agreements are not required, how do you determine who are the authorized persons acting on behalf of the LLC if there is no LLC agreement? Is the person who executed the certificate of formation the only person responsible for the entity in the absence of any operating agreement? Kayla, DE.

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Response: A run on Delaware questions lately. I'm not sure what you mean by "responsible". I take it from the question that is an LLC of which you are NOT a member and, thus, you want to know how to go about discovering the identity of the members. The individual who signs the certificate of formation may or may not be a member of the LLC. How do you tell who the members are when there is no operating agreement? In some states, an annual report is filed listing the members. However, I do not believe Delaware LLCs list the members in any annual filing. The best evidence absent both an operating agreement and annual filing with the secretary of state's office is the most recent federal tax return (usually IRS form 1065 when there is more than 1 member and IRS form 1040 when 1 member). Unfortunately, tax returns are privileged information that the government does not divulge. You would need to get this type of information directly from an LLC member. You might want to contact the Delaware Secretary of State's office and ask them if there is a mechanism to find out through their office the identity of the members of a Delaware LLC.

Kicking out the deadbeat member

Question: We formed a Delaware LLC in June 2006. We have no operating agreement, nor are our 3 members recorded. Two of us file our schedule K-1's listing us at 45% each and the 3rd at 10%. Can the (2) 45% members remove the 10% member for lack of participation and contribution? If so, how can this legally be accomplished? Tracy, CA.

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Response: This is a frequent question / complaint in LLCs. The root of the problem lies at the inception of the LLC. Frequently, members are given LLC ownership interests based upon future promises of sweat equity (i.e., services). Greatly complicating the process is the the situation where the LLC member neglected to enter into a written operating agreement. Let's break down the problem.

Is there a promise to perform services by the deadbeat member? I assume the promise was oral. Oral operating agreements are allowed in Delaware. See § 18-101(7). The issue is enforcement of an oral promise to perform services. Delaware Statute § 18-306, Remedies for breach of limited liability company agreement by member. covers that topic. Basically, it states that the operating agreement may provide the penalties for failure to comply with its terms. What happens if there is an oral or written operating agreement that does not contain terms setting forth the penalties for breach? I think your remedy in that case is to sue for monetary damage (i.e., the amount by which the failure to comply with the agree has damaged you).

Can you involuntary kick the deadbeat member out of the LLC? I don't think so unless there is a provision in the operating agreement stating what services are to be performed and, also, that the penalty for failure to provide said services is removal as a member of the LLC.

Can the two 90% members jointly pass a written LLC operating agreement that contains the necessary provisions? No. The initial LLC operating agreement has to be unanimous.

LLC & Return of Capital

Question : Do I have to pay taxes on my initial investment in an LLC if I want to now start receiving some of the money? Basically I paid in with taxed dollars so do I have to pay taxes again if I remove the intial investment? Brent, Missouri.

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Response: The taxation of a multi-member LLC is very similar to that of a partnership. Members are taxed on their distributive share of LLC income each year regardless of actually distributions of cash or property from the LLC to the member. A member may withdraw cash from the LLC tax free up to the extent of his or her basis in the LLC. Distributions in excess of basis are generally taxable as capital gain. Link. Basis calculations are best left to the accountants, especially in the case of LLCs. Please check with your account for a determination of the tax effect of your anticipated distributions from the LLC.

How to Withdraw From A New York LLC

Question: We have father and son LLC. The son started an independent practice and no longer wants to continue with LLC as member.
What is the procedure for withdrawal from membership of the LLC? DOLAT, NEW YORK

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Response: New York Consolidated Laws, LLC § 606 covers withdrawal of LLC members. It states, in pertinent part:

§ 606. Withdrawal of a member. (a) A member may withdraw as a member of a limited liability company only at the time or upon the happening of events specified in the operating agreement and in accordance with the operating agreement. Notwithstanding anything to the contrary under applicable law, unless an operating agreement provides otherwise, a member may not withdraw from a limited liability company prior to the dissolution and winding up of the limited liability company.

Under this provision of New York law, an LLC member cannot withdraw unless the LLC operating agreement provides the authority to do so. What is the procedure for withdrawal? The statute merely refers to the operating agreement for the procedure meaning the withdrawing member follows whatever procedures, such as written notice to all other members, found in the operating agreement.

If you don't have an operating agreement for your LLC, you'll need one that both authorizes withdrawal of a member and contains procedures for withdrawal. The MedLawPlus.com® operating agreement template contains these features.

'Legalizing' an LLC

Question: Once I have completed the ORGANIZING AGREEMENT, do I need to send it to the Texas Dept. of State to have it legalized? If so, what is the proceedure for doing this? Jim.

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If I understand your question correctly, I think you have a misconception of the process. The document filed with the Texas Secretary of State's office that legally brings your LLC into being is called Certificate of Formation (in other states, it is called "Articles of Organization"). Here is a link to the Texas form. See the instructions at the front of this form. An LLC operating agreement is an agreement between the LLC members setting forth such matters as how to allocate profits and losses, duties of the members, procedure for withdrawal from the LLC, etc. It is not filed with the state. An LLC operating agreement is not required in Texas. See state survey on issue of whether operating agreement required. Hopefully I have pointed you in the right direction.

Are a Husband and Wife Considered One Member of an LLC?

Question: My wife and I are members in a LLC in New Jersey. We would like to remove her so tax filing will be easier. Is this possible and how would we go about it?

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Answer: I assume you are referring to the fact that a single member LLC can elect to be a disregarded entity for tax purposes and, thus, not file a separate federal tax return. In the case of an LLC that is a disregarded entity for federal income tax purposes, the owner reports the income / loss from this business on his individual income tax return, form 1040, schedule C or perhaps Schedule E if the LLC is solely involved in real estate rental activity. The advantage of the disregarded entity is avoiding the need for a federal tax return (and, also, the state return in most states). First, let's look at the issue of whether you and your wife may qualify as one member for tax purposes in order to take advantage of the disregarded entity rule. In the nine community property states, a husband and wife who own an LLC interest as community property can be treated as one member under Rev. Proc. 2002-69, 2002-2 C.B. 831. Unfortunately, New Jersey is not a community property state, therefore, you are considered two members.

Although it does not apply to your case, the law recently changed allowing a husband and wife who both materially participate in a business not organized as a legal entity under state law to be disregarded for tax purposes (i.e., treated as a sole proprietorship). See Election for Husband and Wife Unincorporated Businesses. It's a nice option where the business circumstances do not make the liability protection offered by incorporating or forming an LLC necessary.

Back to your initial question: how is a member removed from a New Jersey LLC? The first step is to check if the state requires a form to be filed at the time the member withdraws. I did not see a form for this on web site of the NJ Division of Revenue. My assumption is that no form is filed with the state at the time of the withdrawal; however, they are made aware of the change in membership with next annual filing. I invite you to contact the Division of Revenue to confirm my above assumption. If you have a written operating agreement, it may specify the procedure for withdrawal of a member. If not, I recommend that the withdrawing member sign a notice of withdrawal and deliver it to the other members. There is no set form for a notice of withdrawal from an LLC (just a short letter or memo with the withdrawing member's signature should suffice).

Collecting From A Dissolved LLC

Question: An LLC borrowed a sum of money from me for equipment for their new business in 06. The LLC still owes me $15,000 and is going to dissolve without having paid me in full. I do have a written contract. What is my recourse for collection of the funds still due? Anroln, Virginia.

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Two remedies come to mind. First, have an attorney review the contract to see if it forms the basis for a direct collection action against the LLC members as guarantors or cosignors of the debt. I'm not sure if you had an attorney prepare the contract but, when extending credit to new LLCs, the wise course of action is to make the LLC members cosign the loan. Secondly, I would hope you got a security interest in the equipment. This is done by correctly executing and filing a UCC1 form. More info on UCC1. Thus, when the LLC ceases operation, you can at least get the equipment back.

The option of last resort is collection against the LLC. I'm not sure about Virginia but, in most states, the LLC must file a plan of dissolution with the Secretary of State's office. The plan should list you as a creditor of the LLC and state how they plan to pay you, if at all. Check with the Secretary of State's office (called the State Corporation Commission in VA) to see if such plan was filed for this LLC. See contact info for VA State Corporation Commission. If the LLC has assets that are not subject to lien and other remedies are not viable, the best course of action is to institute a collection action ASAP to get your judgment on file before the others that may be coming. Just because an LLC has filed a notice of dissolution does not mean it no longer exists. The voluntary notice of dissolution starts the winding up process. See VA statute on winding up LLC.

Collections are not my specialty so, as always, I encourage you to sit down with a local lawyer to review your options in this matter.

Oral LLC Operating Agreements

They are like putting the condom halfway on. Why in God's name would anyone do this? The reason oral operating agreements make no sense is that when they are violated it's very, very difficult for the wronged party to prevail. Remember that the plaintiff has the burden of proof in American civil cases. So when you sue the other LLC member for breach of an oral operating agreement, it is your word against his. Without some additional evidence such as course of dealing or emails / correspondence from the defendant acknowledging the terms of the oral agreement, the plaintiff loses for failing to carry his burden of proof.

Are oral operating agreements enforceable at all? To my knowledge, other than in the District of Columbia, oral operating agreements are enforceable; however, certain terms such as the agreement to make capital contributions must be in writing depending on the state. See state survey of LLC law.

Member Voluntary Bankruptcy

I'm a member of an Arizona LLC. What happens if I file for bankruptcy?

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Unless otherwise provided for in the operating agreement, a person ceases to be a member of an Arizona LLC upon filing a voluntary petition in bankruptcy. See AZ stat §29-733(4)(b). In Chapter 13 bankruptcies, the debtor retains possession of his or her assets, therefore, there cannot be a collection action by your creditors against the LLC interest unless the plan is not approved or your fail to complete it. In a Chapter 7, the bankruptcy trustee takes possession of your assets. However, Arizona law provides the following regarding the rights of a creditor against an LLC interest after withdrawal:

On any event of withdrawal of a member, except as otherwise provided in an operating agreement, the withdrawn member and the withdrawn member's personal representatives, successors and assigns do not have the right to receive any distribution by reason of the withdrawal but do have the rights of an assignee of the withdrawn member's interest in the limited liability company to receive distributions with respect to the member's interest during any continuation of the business of the limited liability company and during and on completion of winding up less any damages recoverable against the withdrawn member if the event of withdrawal violated an operating agreement. AZ stat. §29-707.

What this means is that the bankruptcy trustee (in the case of a Chapter 7) will receive a charging order against your LLC interest requiring the LLC to turn over any distributions payable on your interest.

To sum up, absent an operating agreement giving a different result, you shall cease to be an LLC member upon filing for bankruptcy. In the case of a Ch. 13, you shall retain an interest in the LLC but only to distributions payable to that interest. In the case of a Ch. 7, the bankruptcy trustee shall become the owner of your interest in the LLC and the bankruptcy estate shall receive distributions from the LLC.

Forming an LLC in Missouri

Question: I want to form an LLC in Missouri, what do I do?

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It's a fairly easy process (especially for a single-member LLC). Here are the steps.

1. Check to ensure that your name is available. The name must include "Limited Liability Company", "Limited Company", "LC", or "LLC". You can either call the secretary of state’s office or search their web site here:
   www.sos.mo.gov
   I generally search online even though the data may be month or so old.
   
2. Fill out and send in Articles of Organization for your LLC.
   www.sos.mo.gov
   This is a fillable PDF form (one page plus directions).
   
3. LLC operating agreement. Does a single member LLC need one? Missouri states that all LLCs must have an operating agreement. As a practical matter, the bank will ask to see it when you go to open an account even if this is a single member LLC. MedLawPlus.com® has a form for that.
   
4. Tax identification Number. You can quickly obtain a Federal tax ID number for your business by applying online--
   www.irs.gov (Click "Apply Online" link.)
   For entity type, check the box for “LLC”. If you are forming a one-person LLC, you will automatically be a disregarded entity for tax purposes allowing you to forgoe filling an LLC tax return and, instead, report income / loss from your LLC on your individual income tax return (Schedule C).

I hope you find the foregoing helpful. Steps three and four are the same for all states. Those wishing links for steps 1 & 2 in another state, please leave a comment.