Introduction

Arizona recently completed a comprehensive update to its Limited Liability Company Act (“Act”), bringing changes that will affect most, if not all, Arizona limited liability companies (“LLC”). These changes are applicable to LLCs formed on or after September 1, 2019. For LLCs formed prior to that date, the provisions became effective on September 1, 2020. Below are some things to consider as a result of the changes.

 

Operating Agreement and Default Provisions

Unlike the prior LLC Act, the new Act does not mandate a valid operating agreement for each Arizona LLC. However, it does impose default provisions if:

 

1.    The LLC doesn't have a valid operating agreement; or

2.    The existing operating agreement fails to address provisions outlined in the Act.

 

This issue is that these default provisions may not align with your expectations or the ongoing operations of your LLC. Therefore, it is recommended that LLC members and managers review their existing operating agreement or, for those without one, create and execute an operating agreement that accurately reflects their wishes and expectations.

 

Key Changes to the Act

The new Act introduces several significant changes that LLC members and managers should be aware of:

 

1.        Liability for LLC Contributions

Written agreements are now required to enforce a person's obligation to contribute to the LLC. Further, contributions cannot be excused due to circumstances like death, disability, termination, or inability to perform personally.

 

2.        Fiduciary Duties

The Act establishes statutory fiduciary duties for LLC members and managers, including the duty of loyalty, duty of care (in certain situations), and the contractual obligation of good faith and fair dealing.

 

3.        Improper Distributions

If an individual receives a distribution in violation of the Act, they are personally liable to the LLC for any amount exceeding what could have been properly paid under the Act.

 

4.        Dissolution Distributions

The new Act mandates equal distributions to LLC members, regardless of ownership percentages, before an LLC can dissolve.

 

Seek Legal Guidance

Whether you are a member or manager of an existing Arizona LLC or considering forming one, it is crucial to consult with a business attorney. They can help you understand these changes and assess their potential impact on your LLC. By ensuring that the legal mechanisms in your operating agreement align with your company vision, you can navigate the new Act successfully and protect your business interests.

 

Consult with a Glide Legal business attorney by booking a session on our website today.

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Alex Karam