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With A September 1, 2020 Deadline Looming, Now Is The Time To Review Your LLC's Operating Agreement

Arizona’s previous LLC law expires on September 1, 2020. On that date all Arizona LLCs, regardless of their date of formation, will be governed by provisions contained in the new Act.

Wright Law Firm Update

In 2018 Governor Ducey signed into law changes to the essential structure of Arizona limited liability companies (LLCs). We’ve written more in depth articles and urge you to review them. [See Related Content]

By way of summary, Arizona LLC legislation was passed in 1992. It allowed for the creation of LLCs in our state. With minor changes, the law governed Arizona LLCs fairly consistently for 25 years. However the new 2018 LLC statutes created significant changes. The 2018 law calls for the phased-in repeal of the 1992 law and replaces it with an entirely new Arizona Limited Liability Company Act.

Key Dates

The new law imposed two important deadlines on Arizona LLCs to be ALLCA compliant:

  • All LLCs formed in Arizona on or after September 1, 2019, must comply now with the new LLC act.
  • On September 1, 2020, the 1992 law will expire, and all Arizona LLCs, regardless of their date of formation, must be ALLCA compliant.

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 you may not like.

Because of the wholesale repeal of the 1992 law and its replacement with the 2018 law, we strongly encourage LLC members and managers to review their LLC, and especially their operating agreements. You want to verify that the LLC complies with the new law. You also want to avoid any unwanted default provisions that the new law will automatically impose on September 1, 2020.

This review is particularly important for LLCs with multiple members. However, in some circumstances, single-member LLC’s could also be adversely impacted by the new law.

This is just an alert. 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 right for your LLC.

It is important to note that, under the new law, your operating agreement does not have to mirror the new act’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 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.
  • Fiduciary Duties. The current law does not impose fiduciary duties on LLC members and managers. Under the new act, 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. (In June 2019, the Arizona Supreme Court ruled, in In re Sky Harbor Properties, LLC v. Patel Properties, LLC, that a fiduciary duty already exists in Arizona LLCs.)
  • Distributions Before Dissolution. The new act 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.

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

Positives

The upside to these dark clouds is a provision in the new Act that allows an LLC’s operating agreement to contain provisions that allow it to avoid the potentially harsh effects of the default provisions. As a result, a review of your LLC operating agreement should receive your prompt attention.

DisclaimerWhile this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop over time. Accordingly, caution should be taken before relying upon this article, and you should verify that the law described herein has not changed.

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