When Does Your Arizona LLC Need An Operating Agreement?

An operating agreement is an internal agreement between all the members (or owners) of an LLC which governs the rules and ownership of a company. The operating agreement can and should include a wide range of information, including but not limited to, the rights and obligations of the members, the control and management of the LLC, voting rights, and capital contributions. The operating agreement cannot contain any provision that is contrary to Arizona law (e.g., cannot say the LLC is only subject to the laws of another state – Arizona LLCs must comply with Arizona law).

In Arizona, LLCs are governed by the Arizona Limited Liability Company Act (A.R.S. §§ 29-3101-29-4202) (the “AZ LLC Act”). Arizona LLCs are not required to have an operating agreement to be considered valid. If an LLC does not have an operating agreement (or if the LLC’s operating agreement is silent on an issue), then the provisions of the AZ LLC Act will control. However, if there is a conflict between the operating agreement and the AZ LLC Act, the operating agreement will still control the governance of the LLC (with some exceptions that cannot be changed under the statutes).

For most single member or married couple LLCs, an operating agreement is not necessary. However, there could be situations where a lender or bank or some other third party wants to see an operating agreement to confirm the validity of the LLC and to confirm who has authority to bind the LLC.

For other LLCs, people should review the AZ LLC Act to see if the provisions contained within are sufficient for their purposes or if they need an operating agreement. Even if everyone involved in the LLC is amicable and getting along, it is not a bad idea to just have one set up in case something happens. The operating agreement can lay out the procedure for members leaving, what happens if a member dies, who is entitled to distributions first, tax issues, and voting procedures, among other things.

Anytime the members of the LLC want to deviate from the default rules in the AZ LLC Act, they should get an operating agreement. For example:

• Under the AZ LLC Act, every member owes a fiduciary duty of loyalty, duty of care, and duty of good faith and fair dealing to each other and the LLC. Members of an LLC cannot compete with that LLC or have a conflict of interest with that LLC under the AZ LLC Act. Sometimes, people want the flexibility to be involved with multiple LLCs that may end up crossing this line, so in that case, there will need to be an operating agreement with a specific provision that the members are allowed to be engaged in similar business.
• Under the AZ LLC Act, every member has one vote, regardless of their membership interest. In a three person LLC, the three members would each have a vote by default. If one member owns a 60% membership interest, then they will want to have 60% of the total voting power, not just one-third. This can be changed in the operating agreement instead of using the default rules under the statutes.

In conclusion, an operating agreement is a crucial document for any LLC operating in Arizona. While it may seem like a daunting task to draft such a comprehensive contract, seeking legal counsel can help ensure that your operating agreement meets all legal requirements and provides the necessary protection and guidance for your business. A comprehensive operating agreement put in place at the start of a business can save the members from potential disputes and legal complications in the future. Remember, investing time and effort in creating a solid operating agreement today can save you from potential disputes and legal complications in the future, making it a wise step toward the success of your Arizona-based LLC.