Arizona’s New LLC Law Poses Traps for Unwary Members
If your LLC does not have an operating agreement,
or if your operating agreement does not address certain issues, the 2018 Arizona
Limited Liability Company Act imposes default provisions that may not be to your
David A. Fitzgibbons III
This spring, the Arizona legislature approved, and
Governor Ducey signed into law, wholesale changes to the essential structure of
Arizona limited liability companies (LLCs). As a result, the relatively settled
law concerning the treatment of LLCs in Arizona now becomes unsettled, and dark
clouds lurk on the horizon.
By way of history, Arizona legislation that was passed in 1992 allowed for the
creation of LLCs in our state. With minor changes, the law has served to govern
Arizona LLCs fairly consistently for the last 25 years. The 2018 law calls for
the eventual repeal of the 1992 law and replacing it with an entirely new
Arizona Limited Liability Company Act (ALLCA). A number of states have adopted
the Revised Uniform Limited Liability Company Act and, by enacting the ALLCA, Arizona
joins the growing trend.
The new law imposes two important deadlines on Arizona LLCs to be
• All LLCs formed in Arizona on or after September 1, 2019, must comply with the
• On September 1, 2020, the 1992 law will expire, and
all Arizona LLCs,
regardless of their date of formation, must be ALLCA compliant.
Because of the wholesale repeal of the 1992 law and its replacement with the
2018 law, LLC members and managers are strongly urged to initiate a review of
their LLC – specifically, its operating agreement – to verify that the LLC is
ALLCA compliant and will avoid any unwanted default provisions that the ALLCA
will automatically impose come September 1, 2020.
A full discussion of the significant changes is not covered here. Out of
necessity, a proper analysis of your LLC will be fact-specific and focus on the
particular provisions of your operating agreement, if it exists. The 1992 law
generally does not require LLCs to have an operating agreement; if your LLC does
not have an operating agreement, the 2018 law effectively imposes one on your
LLC, and the default provisions may not be to your liking.
It is important to note that, under the new law, your operating agreement does
not have to mirror the ALLCA’s provisions. Rather, your agreement should address
the subjects of those provisions and define them in ways that are appropriate
for your LLC.
For general discussion purposes, it is helpful to highlight a few of
the significant ALLCA changes affecting Arizona LLCs:
• Contributions. Under ALLCA, a person’s obligation to make a contribution to
the LLC is not enforceable unless it is in writing, and it is not excused by
death, disability or termination. See
A.R.S. § 29-3403.
• Fiduciary Duties. The current law does not impose fiduciary duties on LLC
members and managers. Under the ALLCA, a member of a member-managed LLC will owe
the company and other members a duty of loyalty and should act in a manner
consistent with a contractual obligation of good faith and fair dealing.
Similarly, the manager of a manager-managed LLC will owe the company and its
members a duty of loyalty and must discharge his duties and obligations under
the ALLCA with a contractual obligation of good faith and fair dealing. See
A.R.S. § 29-3409.
• Distributions Before Dissolution. The ALLCA provides a new requirement that
all distributions made before an LLC can dissolve and wind up must be “equal
among members,” regardless of ownership percentages. This particular provision
could have significant financial and tax ramifications to members, especially
majority members. See A.R.S. § 29-3404.
Other ALLCA provisions that impose changes to the way Arizona LLCs transact
• records and records inspection,
• agency liability,
• personal liability,
• appraisal rights, and
• professional limited liability companies.
The silver lining to these dark clouds is an ALLCA provision that
allows an LLC’s operating agreement to contain provisions that allow it to avoid
the ALLCA’s harsh effects. As a result, a review of your LLC operating agreement
warrants your prompt attention.
To schedule a review of your LLC's operating agreement and other governing
documents, contact David
Fitzgibbons or Tina Vannucci at