Arizona LLC Operating Agreement

Why should an Arizona LLC have an operating agreement?

An Arizona LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.

A good operating agreement is important for any Arizona LLC because it creates an agreed-upon framework for the structure of your LLC. In Arizona, an operating agreement may be verbal, but it’s best to have yours written down. Here’s why:

1. Your operating agreement proves you own your LLC.

In Arizona, LLCs generally have to include the names of members and managers in their Articles of Organization. Members with less than 20% membership interest in the company can leave their names off the articles. An operating agreement will include the names of all members, which means it can be used to show proof of ownership for all members.

The bank will likely ask to see your operating agreement before you open a business bank account. Other third parties, like potential landlords or investors, may also want to see it.

2. An operating agreement can help reinforce your limited liability status.

To benefit from limited liability status, you must be able to show that your LLC is legally separate from its members. You can do this by opening a separate bank account for your business and following your LLC’s operating agreement.

A written operating agreement is a legally binding document, which means you can use it in court, should you ever need to fight a lawsuit. (A verbal agreement carries less weight and is difficult to prove.)

3. An operating agreement can help prevent misunderstandings.

Unfortunately, people don’t always agree. (Annoying, isn’t it?) Your operating agreement can help to ensure your business stays on course, even in the midst of disagreements or misunderstandings.

4. An operating agreement can override Arizona’s default laws.

Without an operating agreement, your LLC will automatically be governed by the the Arizona Limited Liability Company Act (ALLCA). The default rules stipulated under ALLCA may not be a great fit for your company, so it’s a good idea to create an operating agreement that suits the needs of your LLC.

Arizona Case Law

We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*

“Consider the case of Ramsey v Huang, where the failure to actually adopt and maintain an operating agreement led to disputes among the members resulting extensive and expensive litigation. When the LLC experienced financial hardship, the lack of an operating agreement opened the door for mishandling of LLC assets and funds. While such mishandling is against the statutes, the members did not have an internal governing document to resolve disputes.

“So when the dispute inevitably occurred, litigation promptly ensued. Had the members of the LLC taken the time to plan ahead, discuss potential pain points, and distill their collective understanding into an operating agreement, such valuable resources could have been preserved for more fulfilling commercial purposes.”

What is included in an Arizona operating agreement?

According to A.R.S § 29-3105, an Arizona operating agreement must abide by some specific requirements, like describing the rights of members and managers. But—so long as you don’t subvert the law—you can add more to your operating agreement than the basic requirements.

An Arizona operating agreement should include the following information:

• Relations among members, as well as members’ relations to the LLC
• The rights and duties of a manager
• The activities and affairs of the company
• How and why one might amend the agreement
• Transfer of membership interest
• Voting rights and decision-making powers
• Initial contributions
• Profits, losses, and distributions
• Compensation
• Bookkeeping procedures
• Dissolution