The largely preferred legal entity in Arizona is the limited liability company (LLC), and it became a legal option for Arizona entrepreneurs back in 1992 when the initial Arizona LLC Act came into existence. Since then, there have been minor tweaks and changes along the way, but nothing compared to what is in store for later this year: the Arizona Limited Liability Act (ALLCA). This bill will completely replace the existing laws for all LLCs in Arizona with many structural changes, with multi-member LLCs feeling the greatest impact. Single-member LLCs could be adversely affected by this new act, as well, and all LLC owners and members should be aware of the ALLCA sooner rather than later.
Back on April 10, 2018, the act was officially passed when Governor Ducey signed Senate Bill 1353 into law. In short, it’s for the repeal of the current LLC Act and for the new ALLCA to entirely take its place. Much of the substance of this new act will be carried over from the old 1992 statutes. The ALLCA statutes are effective starting September 1, 2019, for Arizona LLCs created after August 31, 2019. Arizona’s current LLC Act will be officially repealed for all on September 1, 2020, also making all preexisting (before August 31, 2019) LLCs liable at that time.
After this new act takes place, an Arizona LLC will still be operating as a partnership with an operating agreement to govern the managers and members, but now with some differences that are essential to understand. Components such as the operating agreement compliant language (and the requirement to have one) and member/manager duties will be revised, and some components will not change, such as the taxation and liability laws. Default provisions will be imposed and a de facto operating agreement will be in place if no action is taken to create or update existing LLC operating agreements (although creating one if one is absent will be required).
Some examples of what to expect with the ALLCA provisional changes are:
- Members and managers are bound by a duty of loyalty, and are prohibited from competing directly with the company, and must disclose any conflicts of interest to the other members.
- An operating agreement cannot restrict transferability of membership interests.
- The duties and responsibilities of each member must be addressed in the operating agreement, otherwise the ALLCA laws will spell out these duties by default.
Other areas that will be affected by the ALLCA include:
- Contributions and distributions
- Record keeping
- Personal liability
This reasoning behind the creation of the new act is due to issues of inconsistency with the LLC laws of other states and the issues that it creates within the court system, as well as a need for a resolution. The ALLCA helps resolve this by being more consistent with the Revised Uniform Limited Liability Company Act (a revised governance of LLCs), which is being embraced by a skyrocketing number of states.
Arizona LLC members and managers are strongly advised to reevaluate their operating agreements for their LLCs, ideally with their attorney. The 1992 law generally does not require any LLC to have an operating agreement, and if that is the case for your LLC and no operating agreement is in place, it will be required to adopt one. Avoid using boilerplate language from preexisting operating agreements, since it most likely will not properly address the specific and individual needs of your LLC, nor will it hit on all the new subjects and provisions that will be necessary to address, which will end up being ruled by the default LLC provisions of the ALLCA. These default provisions may not be to your liking. It should be noted that the operating agreement that you will need to create does not need to mirror the ALLCA’s provisions—it should address the provisional subjects in the way you see fit for your LLC.