What Are Springing Members and Non-Economic Members in an LLC?
Springing Members and Non-Economic Members are special categories of members that you can have in your LLC, but neither are required unless a lender dictates that you name one as a requirement for a loan to the LLC. However, there are reasons you might want to name a Springing Member for your LLC in your operating agreement, particularly if you are the only member (owner) of the LLC.
Although the reasons for having these types of members are similar, there are differences between the springing member and noneconomic member. Here’s a quick explanation of each:
Under Arizona law, an LLC automatically ceases to exist upon the death of the last remaining member of the company. If the LLC no longer exists, it has no authority to continue business operations, continue in or enforce contracts, settle the affairs of the company, sell assets, pay distributions, etc. In order to avoid this outcome, Arizona law allows you to name a springing member in the operating agreement for your company.
The springing member doesn’t actually become a member of the company at the time he or she is named in the operating agreement, but in the event the last remaining member of the LLC were to die (or, if the last remaining member is a trust or business entity, the termination of the trust or business entity) then the springing member becomes a limited member with only one function: to appoint a new owner, called a "substitute member," who will either continue the business or wind up the affairs of the business then dissolve it.
In addition to preparing operating agreements naming a springing member, I also prepare "springing member agreements," which allow you to specify your desires with respect to the actions to be taken by the springing member and substitute member.
In some situations, specific actions may be required by a lender. If a substantial loan is made to the LLC, the lender may require that a springing member appoint a substitute member to continue business operations until the loan is repaid in full. Although the springing member has no right to any profits of the business, no voting rights, etc., you can establish a method for compensating the springing member for his or her time and the costs incurred to appoint a new substitute member if you so desire.
Unlike the springing member, a noneconomic member becomes a limited member right away, but this member’s only purpose is to provide truly independent oversight and governance to ensure, essentially, that the members of the LLC don’t run the business into the ground and to do whatever is necessary to prevent a bankruptcy filing by the LLC. Again, lenders will sometimes require that the LLC name a noneconomic member if a substantial loan is being made to the LLC. The noneconomic member must act in good faith in the interest of all parties involved.
While many LLC owners name a springing member of their own volition to ensure continued operations or to preserve their business assets for their heirs or chosen successors, most owners won’t name a noneconomic member unless required by a lender.
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