Can There Be a Mandatory Buy-Out of an LLC Member?

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Can There Be a Mandatory Buy-Out of an LLC Member?

Majority shareholders of corporations can, in certain situations, force a buy-out of the minority’s shares, under A.R.S. § 10-1434. Not so for limited liability companies. A mandatory buy-out of a dissenting LLC member is not an option under Arizona law in virtually identical circumstances.

Under A.R.S § 29-785, an LLC member can request a judicial dissolution of the LLC in the following circumstances:

  1. It is not reasonably practicable to carry on the limited liability company business in conformity with an operating agreement;
  2. Unless otherwise provided in an operating agreement, the members or managers are deadlocked in the management of the limited liability company and irreparable injury to the limited liability company is threatened or being suffered or the business of the limited liability company cannot be conducted to the advantage of the members generally because of the deadlock;
  3. Unless otherwise provided in an operating agreement, the members or managers of the limited liability company have acted or are acting in a manner that is illegal or fraudulent with respect to the business of the limited liability company;
  4. Unless otherwise provided in an operating agreement, substantial assets of the limited liability company are being wasted, misapplied or diverted for purposes not related to the business of the limited liability company.

These grounds for judicial dissolution are largely the same as those set forth in A.R.S. § 10-1430(B) for the involuntary judicial dissolution of a corporation. But a dissenting shareholder can be subject to a mandatory buy-out by majority shareholders, whereas a dissenting member of an LLC is not subject to the same sort of buy-out under any set of circumstances.

Due to these differences, minority members of an LLC arguably have more influence over the business than the minority shareholders of a corporation. While minority shareholders risk becoming subject to a forced buy-out of their shares in attempting to force a judicial dissolution of a corporation, LLC members do not have the same risk.

If you have questions about the business divorce process or find yourself in a dispute with a business partner, you will greatly benefit from calling us today. Williams Mestaz, L.L.P., has the experience and knowledge to handle your case the right way. Contact Williams Mestaz, L.L.P., today at (602) 256-9400.

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