Problem if Sole Member is Not the Organizer of a CA LLC

Question:  I am to be the sole member of a new California limited liability company, but I did not sign the Articles of Organization as the organizer of the LLC.  Is that a problem?

Answer:  Maybe!  California Corporations Code Section Section 17704.01(a) states:

If a limited liability company is to have only one member upon formation, the person becomes a member as agreed by that person and the organizer of the limited liability company.

If the organizer of a single member LLC is the sole member then everything is good.  However, if the would be sole member of a single member California LLC (the “Prospective Member”) is not the organizer who signed the Articles of Organization filed with the California Secretary of State then:

• The Prospective Member will never be a member of the LLC unless and until the Prospective Member and the organizer agree that the Prospective Member is the sole member.  The agreement should include the date the Prospective Member becomes a member and any conditions required by the organizer.

• How does the sole member prove that the organizer agreed that he/she/it could be the member?

• A prudent Prospective Member will obtain a written statement signed by the organizer that states that the Prospective Member is the sole member of the LLC as of a specified date.  Recommendation:  The Prospective Member must get a written statement from the organizer.  If the Prospective Member does not obtain a written statement from the organizer, how can the Prospective Member prove he/she/it is the sole member if challenged in court?

Warning to Entities and Trusts:  When a California LLC is to be owned by a sole member that is an LLC, corporation, partnership or trust most of the time the organizer is a person rather than the sole member.  To avoid the California Corporations Code Section Section 17704.01(a) problem the sole member should be the organizer that signs the Articles of Organization.  The California Secretary of State says:

• If Form LLC-1 is signed by an entity, the person who signs on behalf of the entity should note their name and position/title and the entity name. Example: If a limited liability company (“Smith LLC”) is the organizer, the signature of the person signing on behalf of the Smith LLC should be reflected as Joe Smith, Manager of Smith LLC, Organizer.

• If Form LLC-1 is signed by a trust, the trustee should sign as follows: ___________, trustee for ___________ trust (including the date of the trust, if applicable). Example: Mary Todd, trustee of the Lincoln Family Trust (U/T 5-1-94).

Practice Pointer:  If the organizer is not the Prospective Member the best way to solve this problem is to: (i) have a statement at the end of the LLC’s Operating Agreement that says the organizer authorizes the Prospective Member to be the sole member of the LLC as of the date the Articles of Organization were filed with the California Secretary of State, and (ii) have the organizer sign the Operating Agreement immediately under the statement.  This is something we do routinely when we know that the sole member was not the organizer.