Is Your LLC Operating Agreement Past Its Prime?

Q: If you have a Limited Liability Company (LLC) in Arizona, when’s the last time you took a look at your LLC Operating Agreement?

A: If you answered “What Operating Agreement?” or “It’s been a few years,” then you should read on.

What Happened?
In 2018, an updated law governing Arizona LLC’s – the Arizona Limited Liability Company Act (“ALLCA”) Arizona Revised Statutes Title 29, Chapter 7, was passed to bring Arizona law more into harmony with the Revised Uniform Limited Liability Company Act (“RULLCA”) (2006). On September 1, 2020, ALLCA became applicable to all Arizona LLC’s, despite the date of their formation. Not only that, Arizona’s previous LLC statutes (circa 1992) were repealed.

Why Is It Important?
ALLCA made some significant changes that apply to both domestic and foreign LLC’s. And, these changes aren’t just applicable to newly formed LLC’s, either. ALLCA’s provisions apply retroactively and, unless addressed in the operating agreement, become the new way your company does business whether you like it or not.

What Changed?
Prior to ALLCA, operating agreements, while recommended, weren’t required. Now, under ALLCA, whatever statutory provisions that aren’t addressed in an operating agreement are governed by ALLCA. Also, if there is a discrepancy, the provisions of ALLCA govern. Therefore, an up to date operating agreement is more important than ever. Some of the new defaults are:

• Fiduciary Duties: Managers and members (in member managed LLC’s) are now subject to fiduciary level duties to the LLC and other members. This could raise significant liability issues, and may be different than how you currently operate.
• Contributions: Members obligations to make contributions are not enforceable unless they’re in writing.
• Distributions Before Dissolution: Distributions before dissolution are now divided equally among members, regardless of percentage of ownership or initial contribution.

There are also changes regarding records and inspections, agency liability, personal liability and appraisal rights that should be reviewed.

What Can You Do?
Luckily, ALLCA allows operating agreements to draft around a number of its default provisions and the statutes include lists of what can and cannot be changed. An operating agreement can modify fiduciary duty provisions, the manner of member voting, and how distributions are calculated. However, they cannot eliminate or draft around the obligation of good faith and fair dealing or the duty to refrain from conduct involving willful or intentional misconduct.

What Should You Do?
Unless you’re a single member LLC (and maybe even then), it’s imperative to have an operating agreement that complies with and addresses ALLCA. If you have an operating agreement that was written after 2019, you should check and make sure it was drafted with the new statutory requirements in mind. If it pre-dates 2018, you need to review it and ask yourself some questions, such as:

• Does the agreement cover the default provisions of the ALLCA?
• Are the roles, duties, and responsibilities of members and managers clearly delineated?
• Are final distributions per capita or some other arrangement?
• How are records handled?
• Does it address transfer rights and restrictions for members?

Remember, if the Operating Agreement is silent on any of the provisions contained the ALLCA, then the defaults apply, even if they are contrary to your desires. If you would like to create an LLC, review, or amend your Operating Agreement, we can help. We can be reached at at (480) 833-1113.