What is an Arizona LLC Operating Agreement?

LLC operating agreement Arizona refers to the legal document which sets forth the internal workings of a limited liability company in Arizona. In Arizona, the operating agreement addresses any concern one may have in becoming a financial asset to the LLC, as well as addressing membership and management obligations, company regulations and rules, and what the percentage and interests of ownership will be. It is, in short, the LLC’s equivalent to a corporation’s stockholder agreement or a partnership agreement for a partnership.

More specifically, some of the important features of the Arizona operating agreement include:

  • Establishing the separation of the member's personal assets from the LLC’s in the event of a lawsuit against the LLC.
  • Determining how losses and profits will be distributed to members.
  • Determining how decisions pertaining to the LLC’s operation will be made.
  • Determining proper action if a member decides to leave the LLC.

Yet despite the importance of such stipulations and the operating agreement in general, it is not required by Arizona law, although it is highly recommended that you create one.

If you do not create an operating agreement, then your LLC will be governed by the state’s default rules, which will not address the specific circumstances of your company and thus will likely not be as beneficial to your company as an operating agreement would be. These rules are provided by the Arizona Limited Liability Company Act, which will act as the final authority on the member’s and manager’s rights. Some of the rules you will be bound to if you go default include:

  • That profits and losses will be allocated proportionally in regards to the financial contributions of each member to the LLC.
  • That each member has the power to bind the LLC or complete contracts in the LLC’s name.
  • That each member will have equal weight in voting, even if their contribution is not equal.
  • That a member can transfer their interest in the company to another with solely their own authority.
  • That anyone who receives a member’s interest in the company while that member is still alive is considered an assignee, and at most only has the right to the LLC’s distributions.
  • That the LLC is not required to compensate a member who withdraws from the LLC with their interest in the LLC.

On the other hand, a properly drawn up operating agreement can allow you to avoid or modify these and other default stipulations. Additionally, an operating agreement can address issues not covered in the Arizona Limited Liability Company Act. These include:

  • Setting rules for newly admitted members.
  • Setting first refusal right for transfers of interests.
  • Setting the right to purchase a member’s interest.
  • Setting the rules for the allocation of losses and profits.
  • Setting the rules for the distribution of money.
  • Setting up company governance rules.
  • Restricting the rights of members or managers to contract with the LLC.
  • Obligating members to pay the LLC money.
  • Restricting the LLC’s right to loan and borrow money.
  • Setting up the right to end a member’s interest in the LLC.
  • Restricting the members’ rights to leave the company.

Beyond just crafting a set of rules that will work best for your company, an operating agreement can help you avoid future disputes by setting out exactly what actions should be taken for a variety of different circumstances. According to Arizona law, such an agreement can be made orally between members, but this is far from recommended, as doing so makes it very difficult to prove the conditions and terms of the agreement, especially in a court of law.

Rather, it is advised that one draw up such an agreement in writing. Creating such a document will be a complex undertaking, however, so it is recommended that you seek the services of an attorney experienced in these matters to do so. They can tailor the document specifically for your size (single-member or multi-member) and needs, and although this will cost more than going it alone, it could save you a tremendous amount of money, time, and difficulties in the long run.

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