by Arizona LLC attorneys Richard Keyt and his son Richard C. Keyt who have prepared 8,600+ LLC Operating Agreements and have 296 five star online reviews.
This article explains how owners of Arizona LLCs can be harmed if they don’t sign an Operating Agreement. Arizona LLCs are not required to have an Operating Agreement, but the Keyts recommend that ALL Arizona companies adopt an Operating Agreement that eliminates problems described below.
We want to prepare a custom Operating Agreement for your company for $297 (single member and married couple LLCs) or $497 (multi-member LLCs). For an additional $97 DocuSign will send all members a pdf copy of the Operating Agreement for their digital signatures. To hire us complete our online Operating Agreement questionnaire.
What is an LLC Operating Agreement?
An LLC Operating Agreement is a contract between the LLC and all of its owners (called members) and managers (if the LLC is manager managed) that names all members and managers, the percentage of the LLC that each member owns, if a member is required to contribute money or property to the LLC, how meetings are called and when action cannot be taken without the approval of a majority or a super majority of the members or all of the members. The Operating Agreement sets the rules for governing the LLC.
Problems Eliminated by an Operating Agreement
Problems 1 – 6 apply to all LLCs, but 7 – 11 apply only to multi-member LLCs other than a married couple owned LLC.
1. Proving who owns the LLC. Arizona LLC law does not require that LLC’s Articles of Organization name all the members or their percentage ownership of the company so the only way to prove who owns the LLC is by an Operating Agreement signed by all of the members/owners. Operating Agreements are required by: (1) some banks to open a bank account, (2) lenders before making a loan, (3) title insurance companies when LLCs buy or sell land, (4) third parties before entering into a substantial contract with the LLC, and (5) courts when the members litigate.
2. A married couple who are Arizona residents wants to own the LLC as community property with right of survivorship (“CPWROS”) so that if a spouse dies the surviving spouse automatically inherits the interest of the deceased spouse without the need for an expensive probate. Arizona Revised Statutes Section 29-3401.G states “An estate in community property with right of survivorship is created when a written operating agreement expressly declares that a married couple holds a transferable interest as community property with right of survivorship.” If the couple does not sign an Operating Agreement with the required language they will own the LLC as community property, not CPWROS, which means that if a spouse dies an expensive probate may be necessary to transfer ownership of the LLC to the surviving spouse and the surviving spouse may not inherit the interest of the deceased spouse if the deceased spouse has any children who are not also children of the surviving spouse.
3. A married Arizona resident wants to own the LLC as his or her separate property rather than as community property with the spouse. Arizona Revised Statutes Section 25-211.A provides that married Arizona residents automatically own LLCs created while they are married as community property of both spouses (not the separate property of one spouse) even if one of the spouses is not named in the LLC’s Articles of Organization filed with the Arizona Corporation Commission. If you are a married Arizona resident and you want to own your interest in the LLC as your separate property and you don’t want your spouse to own it with you as community property you must have your spouse sign an Operating Agreement that contains disclaimer language by which the non-owner spouse disclaims any interest in the owner spouse’s LLC interest.
4. You and your significant other want the survivor to inherit the LLC if one of you dies. If you have a significant other and you die your significant other will not inherit your interest in the LLC unless you have a last will and testament that gives it to him or her. If each of you owns the LLC as joint tenants with right of survivorship (“JTWROS”) and one of you dies the other will automatically inherit the interest of the deceased person without the need for an expensive probate. Arizona Revised Statutes Section 29-3401.F states “A joint tenancy with right of survivorship is created when a written operating agreement expressly declares that two or more natural persons hold a transferable interest as joint tenants with right of survivorship.”
5. You want your manager managed LLC have one or more managers. Arizona Revised Statutes Section 29-3102.13 states: “’Manager’ means a person that under the Operating Agreement of a manager-managed limited liability company is responsible, alone or in concert with others, for performing the management functions.” If your LLC is manager managed it does not have a manager unless the manager is named in an Operating Agreement signed by all the members.
6. You want your member managed LLC to be able to pay money to a member in exchange for services. Arizona Revised Statutes Section 29-3407.G states: “A member is not entitled to remuneration for services performed for a member-managed limited liability company.” If you want your member managed LLC to pay you for services you must sign an Operating Agreement that authorizes the LLC to pay you for services.
7. You want one or more members of your multi-member LLC to be legally obligated to contribute money or property or provide services to the LLC. Arizona Revised Statutes Section 29-3403.A states “A person’s obligation to make a contribution to a limited liability company is not enforceable unless the obligation is set forth in a record signed by the person.” If you want a member to be legally obligated to contribute money, property or services to your LLC that member must sign a “record” such as an Operating Agreement in which the obligation to contribute is stated.
8. To prevent a member of a multi-member LLC from claiming the members agreed on an oral contract that has provisions that harm you. If the members don’t sign an Operating Agreement that states there is no oral Operating Agreement one or more members may claim there is an oral Operating Agreement, which leads to he said she said disputes.
9. You don’t want distributions of money to members from your multi-member LLC to be equal. Arizona Revised Statutes Section 29-3404.A states: “Any distribution made by a limited liability company . . . must be in equal shares among Members.” If Ned Flanders contributed $90,000 to the LLC and Homer and Marge Simpson contributed $10,000 there are three members so all distributions of money to the members must be 1/3 to Ned, 1/3 to Homer and 1/3 to Marge.
10. You don’t want profits of your multi-member LLC to be allocated equally to the members. Arizona Revised Statutes Section 29-3102.12 states: “’Members’ respective interests in the Company’s profits are in proportion to their rights to share distributions.” Arizona Revised Statutes Section 29-3404.A requires that distributions to members be equal. If the LLC’s members are Ned Flanders, Homer Simpson and Marge Simpson and it has a profit of $90,000 then $30,000 each will be allocated to Ned, Homer and Marge.
11, You want voting rights of members of a multi-member LLC to be equal to ownership percentage, not one vote for each member. Arizona Revised Statutes Section 29-3102.12 states: “‘Majority in Interest of the Members’ means . . . one or more Members that hold in the aggregate a majority of the interests in the limited liability company’s profits.” Because Ned Flanders, Homer Simpson and Marge Simpson are the three members the profits are allocated one third to Ned, one third to Homer and one third to Marge Simpson. This means the Simpsons get two votes and Ned gets one vote. The Simpsons have voting control of the LLC despite contributing $10,000 to the LLC versus Ned Flanders’ contribution of $90,000.
Table of Contents of Our Two Operating Agreements
How to Hire Us to Draft a Custom Operating Agreement
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