Can oral agreements establish LLC membership under Utah's former LLC Act? Sorensen v. Sparks Explained

In Sorensen v. Sparks, the Utah Court of Appeals addressed whether oral partnership agreements and post-formation conduct could establish membership in limited liability companies under Utah’s former LLC Act. The decision clarifies the strict statutory requirements for LLC membership and provides important guidance for practitioners handling business formation disputes.

Background and Facts

Jared Sorensen and David Sparks formed a joint venture in 2012, with Sorensen leaving his company to work full-time on the venture as a partner. Despite their agreement to work as partners, they never executed formal partnership documents. When Sparks registered various LLCs for the venture, he listed himself and his wife as the sole owners, excluding Sorensen. Sorensen later developed successful business components including Diesel Power Gear, which generated $60,000 in its first month, but was again excluded from the formal LLC filings. After their relationship soured, Sorensen sued seeking declaratory judgment establishing his ownership interests in the LLCs.

Key Legal Issues

The primary issue was whether Sorensen satisfied the statutory requirements for LLC membership under Utah’s former LLC Act. Section 702 required membership to be established through: (1) signing articles of organization, (2) signing an operating agreement, or (3) evidencing intent to become a member with acknowledgment by the company at formation. The court also considered whether Sorensen’s motion for leave to amend his complaint five years into litigation was timely.

Court’s Analysis and Holding

Applying correctness review to the judgment on the pleadings, the court held that Sorensen failed to satisfy any statutory pathway to membership. Although the LLC Act was intended to be liberally construed, Section 702(2) expressly prohibited membership prior to company formation, limiting relevant facts to the narrow window at formation. Sorensen’s allegations of oral agreements, post-formation negotiations, and being held out as an owner occurred either before or after formation, failing to meet the statutory requirements. The court also affirmed the denial of leave to amend under abuse of discretion review, finding the motion untimely after five years of litigation and four years post-discovery.

Practice Implications

This decision emphasizes the critical importance of formal compliance with LLC formation requirements. Practitioners should ensure clients understand that informal partnership arrangements, even with significant contributions and reliance, cannot substitute for proper statutory compliance. The timing of membership acknowledgment is particularly crucial—it must occur at formation, not through subsequent conduct or negotiations.