Blog Post

Arizona’s New LLC Law Poses Traps for Unwary Members and Managers

David Fitzgibbons • Sep 01, 2020
David Fitzgibbons

Passed in 2018, the Arizona Limited Liability Company Act went into full effect September 1, 2020.


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 liking.


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 phased-in 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 joined the growing trend.
Operating Agreement Review

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 provisions that the ALLCA automatically imposes.

The new law primarily affects LLCs with multiple members. However, in some circumstances, a single-member LLC could also be adversely impacted.

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.

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.

Highlights

For general discussion purposes, it is helpful to highlight a few of the significant ALLCA changes affecting Arizona LLCs:
  • Contributions. Under the 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. § 520-426-3824.
  • Fiduciary Duties. Under the ALLCA, a member of a member-managed LLC owes 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 owes 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. § 520-426-3824. (In June 2019, the Arizona Supreme Court ruled, in In re Sky Harbor Properties, LLC v. Patel Properties, LLC, that a fiduciary duty already existed in Arizona LLCs.)
  • 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. § 520-426-3824.
Other ALLCA provisions that impose changes to the way Arizona LLCs transact business include:
  • records and records inspection,
  • agency liability,
  • personal liability,
  • appraisal rights, and
  • professional limited liability companies.
Silver Lining

The silver lining to these dark clouds is that the ALLCA allows an LLC’s operating agreement to contain provisions that allow it to avoid the ALLCA’s potentially 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 520-426-3824.


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