ARIZONA Limited Liability Company Act

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Arizona’s 1992 LLC law did not require an LLC to have an operating agreement. As a result, many LLCs operate without one.

If you do not have an operating agreement for your LLC, the provisions of the new ALLCA effectively impose an operating agreement on your business. By default, the ALLCA rules apply to your business.

The only way to negate the rights and liabilities specified in the ALLCA is to create your own operating agreement and establish the legal rights and obligations of members and managers of the LLC.

A.R.S. § 29-3105 governs the scope, function, and limitations of an LLC’s operating agreement. The section provides in general that: To the extent that, at law or in equity, a member or manager or other person has duties, including the duty of care, the duty of loyalty and any other fiduciary duty. The member's, manager's or other person's duties may be expanded, limited, or eliminated by the operating agreement with certain exceptions.

An operating agreement may provide for the limitation or elimination of any or all liabilities for breach of the operating agreement or breach of duties, including the duty of care, the duty of loyalty and any other fiduciary duty, as expanded, limited or eliminated in the operating agreement, of a member, manager or other person to a company or to another member or manager or another person that is a party to or is otherwise bound by the operating agreement.

In other words, Section 3105 permits LLCs to avoid application of many of the new rules by establishing an operating agreement that defines the rights, duties, and obligations of the LLC members. However, some provisions cannot be eliminated, including liability for violating the duty of good faith and fair dealing or the duty to refrain from willful or intentional misconduct, which are imposed on members and managers by the law.

If you already have an operating agreement that does not address all the legal issues raised by the new statute, the rules in the Act apply by default. LLCs should review the current operating agreement with legal counsel and make changes as necessary to bring the agreement into conformity with as well as address issues created by the ALLCA.

There are additional new provisions that apply to LLCs in several other areas, including:

• Record keeping and inspection
• Community property rights
• Personal liability
• Agency liability
• Indemnification
• Contributions and distributions
• Appraisal rights
• Professional Liability Limited Companies (PLLCs)

The only way for an LLC owner or member to understand the full effect of the law on business operations is to consult with a knowledgeable attorney. LLCs can minimize the impact of the ALLCA with a properly drawn operating agreement or amendments to an existing operating agreement.