August 2018 Updated
New LLC Act Creates Urgency in Operating Agreement
For most multi-member LLCs, the new laws 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been replaced by the new Arizona Limited Liability Company Act, which is a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
Single-Member LLCs. Because many
single-member LLCs operate only with articles of organization (i.e., without an
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.
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.