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New LLC Act Creates Urgency in Operating Agreement Review

Stephen Aron Benson   Matt Winter  

Steve Benson

 

Matt Winter

 

For most multi-member LLCs, the new law’s impact is significant and its consequences potentially harmful.

Arizona law governing limited liability companies has been replaced by the new Arizona Limited Liability Company Act, which is a complete overhaul of the previous LLC law.

The new Act is modeled after the Revised Uniform Limited Liability Company Act (RULLCA), which Arizona has adopted with the purpose of harmonizing Arizona's LLC statute with LLC laws of other states. Arizona's previous LLC statute, enacted in 1992, had not kept up with the advances in LLC legal theory, practice, and development.

The new Act can benefit Arizona LLCs by providing updated rules and procedures, along with nationwide legal precedent that will help guide Arizona judges and lawyers when issues arise. Many of the changes to the law concern provisions that will automatically apply in cases where the operating agreement - the contract among the entity's owners - is silent on a particular issue.

Single-Member LLCs. Because many single-member LLCs operate only with articles of organization (i.e., without an operating agreement), many LLCs may not need much attention, provided the member understands the new statute's requirements. Nevertheless, single members should contact their attorney to confirm whether changes to their legal documents should be made.

Multi-Member LLCs. The new statute imposes on LLC members and managers certain duties - in particular, fiduciary duties - that were not automatically imposed under the prior statute (fiduciary duties in an LLC were confirmed in 2019 by the Arizona Supreme Court). As a consequence, to avoid problems in the future you should revisit the decision to forego an operating agreement for an LLC.

For an existing LLC that has an operating agreement, you can presume that the new act will have certain results which you may not desire, especially in the case of a multi-member LLC and the duties owed between members. Those operating agreements will need to be reviewed carefully to determine if revisions are required or new provisions need to be added. It is important to recognize that the new statute will govern with respect to any issues that are not expressly covered in the operating agreement.

Default Provisions

Following are some of the new Act's important provisions that are noteworthy for Arizona business owners. The new Act:

  • provides centralized statutory lists of what the operating agreement may and may not do;

  • provides substantial power to allow the operating agreement to reshape fiduciary duties, including the duty of loyalty and duty of care, which are clarified and can be expanded, limited or eliminated from the operating agreement (however, the contractual obligation of good faith and fair dealing cannot be modified or eliminated, and the lessening of the duty of care cannot fall below willful or intentional misconduct);

  • provides that a person's obligation to make a contribution to the LLC is not enforceable unless it is in writing;

  • permits a court to award reasonable attorneys' fees and costs concerning disputes over rights to obtain information, and on restrictions imposed by the LLC on access to or use of the information;

  • provides default rules for expulsion of members for wrongful conduct; and

  • expands dissolution procedures, including events that cause dissolution, and procedures for winding up.

For existing Arizona LLCs, the company documents may need to be reviewed and updated to comply with the new Act.

If you have any questions about your LLC documents, please call Steve Benson or Matt Winter at 480-425-2600. We can assist with operating agreement reviews and amendments, to prevent conflict or unforeseen consequences with the new Act, and of course draft new limited liability company agreements.