Top Five Things to Look for With the Arizona Limited Liability Company Act

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The Arizona Limited Liability Company Act (ALLCA), which applies to all existing LLCs as of Sept. 1, 2020, implements several important changes to Arizona’s previous (and now repealed) LLC law enacted in 1992. Those who are thinking about forming an LLC and members of existing LLCs should pay careful attention to the law’s provisions when drafting or reviewing their companies’ operating agreements.

This will prevent the law’s default provisions from having unintended effects on business operations if a company does not have an operating agreement, or if its operating agreement fails to specifically address certain areas.

Below are the top five things to look for with the ALLCA.

1)  The ALLCA Applies When an Operating Agreement is Silent

Under the ALLCA, an LLC formed on or after Sept. 1, 2019, is required to have an operating agreement, which may be written or oral, or a combination of the two. The operating agreement states how the company will be run, specifying critical information such as how members relate to one another, the rights and responsibilities of a manager (if any), how the LLC conducts business, how new members are admitted, how and when important company decisions are made, and how profits and losses are distributed. 

Under the ALLCA, an LLC’s operating agreement governs unless it is silent on an issue, in which case the ALLCA’s default provision(s) in that area apply. Because the statute’s default provisions may not be in accordance with members’ intent, they should draft a thorough operating agreement in advance that covers all important aspects of how the company conducts business. 

2) Members and Managers Owe Fiduciary Duties

In In re Sky Harbor Hotel Properties, LLC v. Patel Properties, LLC, 443 P.3d 21 (Ariz., June 25, 2019), the Arizona Supreme Court held that LLC members and managers have fiduciary duties to the LLC when they are serving as its agents unless the company’s operating agreement provides otherwise. In addition, A.R.S. § 29-3105 states:

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.

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.

According to the statute, if an LLC does not have an operating agreement or its operating agreement does not specify members’ and managers’ duties, these individuals automatically owe fiduciary duties of care and loyalty to the company and its members. In other words, in the absence of an operating agreement with contrary provisions, members must put the LLC’s interests above their own when it comes to issues within the scope of the business relationship. This could present a conflict of interest for individuals who are members of more than one LLC in the same industry.

The only way to limit or eliminate this fiduciary duty is to expressly do so in the operating agreement. Regardless, the Arizona Supreme Court held that an operating agreement cannot eliminate members’ duties of good faith and fair dealing or their duty to avoid willful misconduct.

3) Distributions Must Be Made Equally to All LLC Members

The ALLCA provides that distributions from an LLC, other than final distributions, must be made equally to all members unless the operating agreement states otherwise. For example, if one member of a two-member LLC owns 65 percent of the company, that member would only receive 50 percent of company distributions but would be allocated and taxed on 65 percent of the company’s income. If the LLC’s members do not want this result, they should explicitly provide for a different method of allocating distributions in the operating agreement. 

4) The ALLCA Imposes Record-Keeping Requirements

Under the statute, an LLC must keep certain records. These include, among others:

– A list of members and managers;

– A copy of the articles of organization;

– A copy of the operating agreement, if any;

– A record of members’ obligations to make contributions to the LLC;

– Tax returns and financial statements from the previous three years.

The ALLCA states that any member or manager can examine an LLC’s records if he or she asks to see them, has a proper purpose for doing so, and only asks to examine records related to that purpose.

5) The ALLCA Sets Out Conditions for Dissolution 

The ALLCA provides that an LLC will be dissolved under certain conditions, including:

– Events or circumstances that lead to dissolution, as specified in the operating agreement or articles of organization;

– Consent to dissolution by the requisite number of members, as stated in the operating agreement;

– Dissolution by a judicial or administrative proceeding 180 days after the LLC ceases to have members.

Contact Counxel Legal Firm

These are just a few of the important provisions of the ALLCA. If you would like to understand the full effect of the statute or draft or modify an operating agreement in light of its provisions, contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.

*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!

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