ARIZONA'S NEW Limited liability Company LAW

New Limited Liability Company Law

Laws applicable to LLCs in the state of Arizona changed significantly when the new Arizona Limited Liability Company Act (ALLCA) went into full effect September 1, 2020. The new act repealed Arizona's 1992 LLC law and replaced it with a comprehensive collection of default provisions.

These changes can affect the way your LLC functions and is governed in the absence of a properly worded operating agreement. This can pose significant consequences for LLCs and its members that now have inadequate operating agreements or none at all.

If your LLC does not have an operating agreement, and you have taken no corrective steps, ALLCA's default provisions will now apply to your LLC. This inaction creates a de facto operating agreement that will likely conflict with how your LLC is currently managed, operated and governed.

If your LLC has an operating agreement but it fails to address any ALLCA provision, the new law will fill in the blanks quite possibly in ways that may differ from your intended and/or established policies, procedures, and practices.

There are two particularly important points for LLC owners and members to keep in mind:

Ensure that your business continues to run smoothly despite the significant changes in the legal rules that apply to your operations. The Act became fully effective on September 1, 2020.
Create or amend your operating agreement to minimize the impact of the ALLCA on your business.

What We Do

To ensure your LLC is in compliance with the new Arizona law SmithEdition will provide you the experience and expertise that will create an operating agreement that complies with ALLCA requirements. We will evaluate your current operating agreement provisions or prepare one for you if you do not already have one.

Phone or email us today to discuss your LLC needs and requirements.

Brian E. Smith, Esq. - 602-570-6900

Brian.Smith@SmithEdition.com

To update your current LLC operating agreement or if you need one prepared, please submit preliminary information here.

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What Action Should I Take?

Review your existing LLC documents. Due to the repeal of the entire 1992 law and its replacement with the new ALLCA, LLC members and/or managers should carefully review their LLC documents, most specifically the operating agreement. This is necessary to ensure LLCs are ALLCA compliant and, of greater import, to avoid the application of any unwanted default provisions (partial list provided below) ALLCA automatically imposed on LLCs on September 1, 2020.

A thorough evaluation of your LLC should be performed with specific attention directed to your membership, business plan and structure, and operating agreement, if you have one. If you do not have an operating agreement, the review should focus on the creation of a compliant operating agreement that satisfies ALLCA as well as supports your business objectives.

It should be noted that, under the new Act, an operating agreement does not have to exactly mirror the ALLCA provisions. Rather, it should identify subjects in those provisions relevant to your business and define them in ways that are appropriate for your LLC. A thoughtfully created and well-drafted operating agreement that supports the goals and intentions of the members as well as business aims can be a significant asset to your LLC.

Significant Default Provisions of ALLCA

Creation of Fiduciary Duties. The new law imposes fiduciary duties on LLC members and managers, consistent with a 2019 Arizona Supreme Court ruling. Absent an agreement with provisions to the contrary, members and managers can be held to a duty of loyalty and a duty of care to each other which could promote otherwise unnecessary and avoidable litigation.
Contributions. A member's obligation to contribute to the LLC is not enforceable under ALLCA unless it is in writing which makes it difficult to enforce a prior commitment of funding from a member, even to the detriment of other members of the LLC.
Distributions Before Dissolution. ALLCA requires that all distributions made before an LLC can dissolve and wind up must be "equal among all members," regardless of ownership percentages. Failure to adequately address and correct that provision could result in major financial and tax consequences, artificially favorable or unfavorable, for LLC members.
Other ALLCA provisions that impose changes on many Arizona LLCs include, without limitation, (i) records and records inspection, (ii) agency liability, (iii) personal liability, and (iv) appraisal rights.

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What You Need to Know About ALLCA

ALLCA is based on the Revised Uniform Limited Liability Act, a uniform law now being adopted by an increasing number of states, and made numerous changes to the old Arizona LLC law which had been in effect since 1992.
ALLCA applies to ALL Arizona LLCs, whenever formed, as of September 1, 2020.
All LLCs, including multi-member, need an Operating Agreement that: (i) contains language that complies with the new law and (ii) eliminates the many liability creating provisions contained in ALLCA.

Why Are These Changes Important?

An operating agreement benefits how the LLC is operated.
For the first time ALLCA levies fiduciary duties on members and managers of Arizona LLCs. New duties mean new grounds on which members can sue each other and sue managers. ALLCA creates many new ways that members and managers can be sued and become liable for money damages.
Almost all new duties imposed on members and managers personally can be eliminated with a current and proper ALLCA compliant Operating Agreement.,

What is an Operating Agreement?

It is a record of the rights and obligations of the members of the LLC.
It is a framework for how the LLC will operate by outlining how the business is owned, run, and operated.
It establishes the rights, powers, duties, liabilities, and obligations of all members, from membership rules to financial administration.

Great writing comes in the edit and rewrite.