Suppose you’re starting a business and forming a limited liability company (LLC ) in Arizona. In that case, you’re not required to have an operating agreement, but it’s a good idea to have one in your records.
An operating agreement is particularly important if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities.
Why You Need an Operating Agreement
A smartly drafted operating agreement can help you in many situations, such as when your LLC merges with another business or a member is no longer capable of working.
The operating agreement establishes each member’s ownership share in the LLC, profit and loss distribution percentages, and how proceeds will be divided if the business is sold. An operating agreement also defines how decisions will be made and how member disputes will be resolved.
It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations.
Arizona laws will apply by default without an operating agreement, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Arizona Operating Agreement Include?
The Arizona Operating Agreement serves as a crucial blueprint for managing your LLC’s internal operations. Understanding what to include in this document is vital to ensure smooth governance and conflict resolution within your Arizona-based company.
- Each member’s rights and responsibilities: In Arizona, the rights and responsibilities of each member can be customized in the operating agreement to fit the specific needs of the LLC.
- Capital contribution requirements for each member: Clearly denote the monetary or non-monetary (like services or property) contributions each member is providing. This helps in determining ownership percentage and distribution rights.
- Procedures for adding and removing members: Specify the process, whether it requires unanimous consent, a majority vote, or another mechanism.
- What happens when a member sells their interest, becomes disabled, or dies: Include buy-sell provisions, defining the rights of remaining members to purchase the outgoing member’s interest.
- Conditions under which a member might become bankrupt or insolvent: Consider automatic dissociation provisions or buy-out rights in such cases.
Management and Voting:
- Management structure and roles of members: Arizona allows both member-managed and manager-managed structures. Define the specific roles and duties for each.
- Voting rights of each member: Voting rights can be based on ownership percentages or another structure defined by the members.
- Rules for meetings and voting: Include details like quorum requirements, notice provisions for meetings, and how often regular meetings will occur.
- Rules for managing potential conflicts of interest among members: Create guidelines to ensure transparency and fair dealings among members.
- Allocation of profits, losses, and distributions: Typically based on ownership percentage, but members can choose a different allocation method.
- Provision for periodic financial audits or reviews: Mention frequency and who will conduct them.
- Tax treatment of the LLC: By default, an LLC has pass-through taxation in Arizona, but members can elect for a different tax status if desired.
Changes and Amendments:
- Process for amending the operating agreement: Define how and when the operating agreement can be changed, such as by a supermajority vote.
- Guidelines for company management during transition events: Outline procedures for scenarios like bringing in a new CEO or changing the business direction.
- Conditions under which the LLC might be sold or merged: Provide specifics for how decisions regarding sales or mergers are made.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Arizona LLCs can benefit from predefined alternative dispute resolution methods, which can be quicker and less expensive than traditional litigation.
- Guidelines for non-compete and confidentiality agreements: Given the enforceability nuances in Arizona, clearly outline the scope, duration, and geographical limitations.
- Provision for indemnification and limitation of liability: Protect members and managers from certain liabilities associated with their role in the LLC.
Record Keeping and Communication:
- Details about record keeping requirements: Specify the kinds of records that need to be maintained (financial, minutes of meetings, member info) and where they’ll be stored.
- Guidelines for how company-related decisions will be documented or communicated: Detail communication channels and how important decisions are documented.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While Arizona doesn’t require a highly detailed business purpose, having one helps with clarity and direction.
- Identification of the statutory agent and office: Every Arizona LLC requires a statutory agent in the state for official correspondence.
- Procedures for dissolving the LLC: Define the process in accordance with Arizona state law, including settling debts and member distributions.
- Procedures for winding down or liquidating the company’s assets: Explain the order in which debts will be settled and assets distributed among members upon dissolution.
How to Draft an Arizona Operating Agreement
You can find operating agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.
If your business has multiple members, you should consider having an attorney draw up your operating agreement. An attorney will ensure that all bases are covered, and all members’ rights are protected. They can also include language that is specific to Arizona laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Articles of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s articles of organization. The articles of organization officially form your LLC with the state and include no information about member roles or financial interests.
Also, the articles of organization are filed with the state and part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Keep Your Arizona Operating Agreement Up to Date
It’s a good idea to review your operating agreement periodically. Circumstances change, and the safest approach is to ensure your operating agreement is fully up to date. Generally, your operating agreement will state that members have to vote to approve amendments to the operating agreement.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in Arizona, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change.
You don’t want to end up in a bitter court battle because you pushed off creating an operating agreement. It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.
Does an LLC operating agreement need to be notarized in Arizona?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if an Arizona LLC does not have an operating agreement?
Arizona default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.