Going Into the Unknown is a Bad Idea, or Why Operating Agreements are Necessary.
Two neighbor children decided to open a lemonade stand to earn some extra spending money. They agreed that one would provide the lemonade and cups, while the other would provide cookies. After a successful afternoon of selling their refreshments, the partners counted up their money and tried to determine how to share it. The first child said all of the money should be divided equally. However, the second child, the one who provided the cookies, which were much more expensive than the lemonade, said she should get more money because her contribution was greater. After much arguing, and with the help of a parent, they finally settled on a compromise.
Just like these children, adults sometimes go into business together without planning ahead for all of the questions that may arise and then end up in a dispute later on. Recently, a new law went into effect in Arizona (A.R.S. § 29-3101 – 29-4202) which governs Limited Liability Companies (“LLCs”) and provides answers for how some of these disputes will be answered when the owners (members) do not have their own agreement in place. As of now, the new law, called the Arizona Limited Liability Company Act, applies to all LLCs formed on or after September 1, 2019. Beginning on September 1, 2020, the law applies to all LLCs, regardless of when they were formed. Among other things, the law contains provisions related to:
- When a member may be obligated to make contributions to the LLC;
- A requirement that distributions to members “must be in equal shares”
- Certain legal duties of members and managers of the LLC not contained in the previous law
Many of the default provisions under the new law may be altered by the members with an operating agreement that governs the rights and duties of the members. If partners do not carefully plan ahead with a compliant operating agreement, however, they may end up with little say regarding some of their key rights with respect to the LLC.
If you are considering forming an LLC, we strongly encourage you to meet with an attorney who can help you prepare an appropriate operating agreement. If you already have an operating agreement for an existing LLC, we also encourage you to have your operating agreement reviewed by a qualified attorney to determine whether changes should be made in light of the new law.
We would be happy to meet with you to discuss your case. We can be reached at at (480) 833-1113.
Attorney Profile: Nathaniel H. Wadsworth,