by Arizona LLC attorneys Richard Keyt and his son Richard C. Keyt who have prepared 8,800+ LLC Operating Agreements and have 212 five star Google reviews and 338 five star online reviews.

This article explains how owners of Arizona LLCs are harmed if they don’t sign a well written Operating Agreement.  Arizona LLC law does not require Arizona LLCs or PLLCs to have an Operating Agreement, but these two Arizona LLC attorneys recommend that the members of ALL Arizona companies sign an Operating Agreement that eliminates the harms described below.

We want to prepare a custom Operating Agreement for your company for $297 (single member and married couple LLCs) or $797 (multi-member LLCs).  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 for All AZ LLCs with No Operating Agreement

If you buy our Operating Agreement you can eliminate all of the problems described below.

Click on a + symbol or blue text to open the text box and read the info inside the text box.

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 owners who Arizona LLC law refers to as members.  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.

There are three ways a married Arizona resident can own his or her interest in an Arizona LLC.  If you are a married Arizona resident and you want the LLC membership interest of the first spouse to die to transfer automatically to the surviving spouse without the need for an expensive and time-consuming Superior Court probate then you need to own the LLC as community property with right of survivor ship.  This also has a tax benefit for the survivor spouse who gets to increase the tax basis of the LLC interest to its fair market value on the date of the deceased spouse’s death.

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.

The three ways married Arizona residents can own their LLC are:

  • Community property. This is the default ownership when a married Arizona resident forms an LLC. Arizona law provides that when a married Arizona resident forms an Arizona LLC or PLLC both spouses automatically own the entity as community property. When a married couple owns their entity as community property and one spouse dies the interest of the deceased spouse may not automatically pass to the surviving spouse and may have to go through an expensive and time-consuming Superior Court probate. Also, the surviving spouse may not inherit the interest of the deceased spouse. See the Warning below.
  • Community Property with Right of Survivorship. When a married couple are residents of Arizona and they own their LLC or PLLC as community property with right of survivorship (CPWROS) then if one spouse dies the surviving spouse automatically becomes the owner of the membership interest of the deceased spouse without the need for a probate. If you are a married Arizona resident and want the surviving spouse to automatically inherit the membership interest of the deceased spouse then both of you must own your membership interest as CPWROS, not as community property.
  • Separate Property. This is property owned 100% by one spouse and 0% by the other spouse. Separate property is created when a married Arizona resident receives the property as a gift or from an inheritance. It is also created when one spouse signs a disclaimer in which the signer admits that the other spouse owns all of the asset. If you are an Arizona resident who formed an while married your spouse automatically owns 1/2 of your interest with you as community property unless you get your spouse to sign a Disclaimer. Purchase our editable Disclaimer form for $47.

Warning for Arizona Residents

The State of Arizona has a law that determines who inherits the assets of people who die without a will or a trust. This law may cause your assets to be inherited by the wrong person or people. To learn who will inherit your assets if you lack a will or trust see my article called Who Inherits Your Property If You Die without a Will or a Trust and take my short online quiz called Who Inherits Your Property. If the wrong person or people would inherit your assets the solution is for you to hire us to prepare a will or a trust that leaves your assets to the person or people you want to inherit the assets.

Arizona Revised Statutes Section 25-211.A provides that married Arizona residents automatically own LLCs created while they are married as the 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.

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.”  If you hire us to prepare your Operating Agreement if will contain the language the causes you and your significant other to own your shares of the LLC as JTWROS.

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 legally have a manager unless the manager is named in an Operating Agreement signed by all the members.

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.

Problems for All Multi-Member AZ LLCs with no Operating Agreement

If you buy our Operating Agreement you can eliminate all of the problems described below.

Click on a + symbol or blue text to open the text box and read the info inside the text box.

When an Arizona LLC is formed Arizona LLC law does not require the LLC’s Articles of Organization to state the percentage of the company owned by each member.  The only way to prove the percentage owned by each member is by an Operating Agreement signed by all of the members.

You are a member of a five member LLC that is member managed.  Homer Simpson is another member.  Without the knowledge or consent of the other members Homer causes the LLC to enter into a $100,000 employment agreement with Homer’s son-in-law Bob.  If Homer is the manager of the LLC he can do the same thing.  Members of a member managed LLC and managers of a manager managed LLC have virtually no limitations on what they can do on behalf of the LLC.  Your multi-member LLC must have language in its Operating Agreement that states what members and managers can do without member approval and what they can do only after getting member approval.

Arizona Revised Statute Section 29-3407 states “In a member-managed limited liability company . . . each member has the right to manage and conduct the company’s activities and affairs.”  It also states “In a manager-managed limited liability company . . . the right to manage the company is vested in the manager or managers.”  This statute does require the approval of members or managers with respect to some matters, but it does not require member approval with respect to any actions that are within the scope of the company’s purpose.

One of the most important reasons for the members to sign an Operating Agreement is to limit the ability of members and managers to take major actions without the prior approval of the members.  Homer should not be able to enter in the $100,000 employment agreement unless the members vote to authorize the agreement.  Do not let members or managers of your LLC have virtually unlimited power.

Ned Flanders contributed $90,000 to the LLC and Homer and Marge Simpson contributed $10,000.  Ned incorrectly assumes that if the LLC distributes $10,000 then he will get 90% ($9,000) and the Simpsons will get 10% ($1,000).  Wrong!

Arizona Revised Statutes Section 29-3404.A states: “Any distribution made by a limited liability company . . . must be in equal shares among Members.”  There are three members so each gets one third of the distributions.  This means that Ned gets $3,333 and the Simpsons get $6,667.

If you don’t want your LLC to make equal distributions to the members then the members must sign an Operating Agreement that states how distributions will be allocated among the members.  Ned needs to strong arm the Simpsons into signing an Operating Agreement that says he gets 90% of the distributions and the Simpsons get 10%.

Ned Flanders contributed $90,000 to the LLC and Homer and Marge Simpson contributed $10,000.  Ned incorrectly assumes that the LLC’s profits will be allocated 90% to him and 10% to the Simpsons.  Ned thinks that if the LLC has profits of $10,000 he will be allocated $9,000 and the Simpsons will be allocated $1,000.  Wrong Again!  

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 Ned Flanders owns 90% of the LLC and Homer and Marge Simpson own 10% they will share the profits equally unless they have an Operating Agreement that provides Ned gets 90% of the profits and the Simpsons get 10%.  Without an Operating Agreement then if the LLC has a profit of $90,000 then $30,000 each will be allocated to Ned, Homer and Marge.  If you don’t want your LLC to allocate its profits to the members equally the members must sign an Operating Agreement that states how profits will be allocated.

If you don’t want your LLC to allocate it profits equally to the members then the members must sign an Operating Agreement that states how profits will be allocated among the members.  Ned needs to strong arm the Simpsons into signing an Operating Agreement that says he gets 90% of the profits and the Simpsons get 10%.

Ned Flanders, Homer Simpson and Marge Simpson are the three members of an Arizona LLC.  Because they did not sign an Operating Agreement the LLC’s profits are allocated one third to Ned, one third to Homer Simpson and one third to Marge Simpson.  See harm 9 above.

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.”

This means each member gets one vote because the profits are allocated equally.  Thus the Simpsons have two votes and Ned has one vote.  The Simpsons have voting control of the LLC despite contributing $10,000 to the LLC versus Ned Flanders’ contribution of $90,000.

If you don’t want the votes in your LLC to be allocated based on how the profits are allocated equally among the members you must have the members sign an Operating Agreement that states how many votes each member gets.

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.

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 and expensive litigation.  My first year contracts professor said and it is true today: “If it isn’t in writing, its like it never happened.”

You and Homer Simpson are the only two members of an Arizona LLC.  Homer calls you and says he transferred his entire interest in the LLC to Ned Flanders, a man you can’t get along with.  Because the LLC does not have an Operating Agreement Homer is stuck and is now “partners” with a man he can’t stand.  If you don’t have a well written Operating Agreement that prohibits transfers without approval of the members then any member can transfer all or part of their membership interest to any third party.

Arizona Revised Statutes Section 29-3502.A states “A transfer, in whole or in part, of a transferable interest . . . is permissible.”  Our Operating Agreements require the prior approval of the members to transfer all or part of a membership interest.  Approved transfers also require that other conditions must be met such as the new member must sign the LLC’s Operating Agreement and reimburse the LLC for any expenses it incurs because of the transfer.

If you are the sole manager of your manager managed LLC and you die or become mentally incompetent your company does not have a manager who can run the company.  This could harm the company until a replacement manager is appointed by the members.  Our Operating Agreement can provide that if your manager dies or becomes mentally incompetent the person or people designated in the Operating Agreement as replacement manager(s) automatically become the manager(s).  The replacement manager can immediately file an amendment to the LLC’s Articles of Organization with the Arizona Corporation Commission to name the new manager.

A federal law called the Corporate Transparency Act (CTA) became effective on January 1, 2022.  The CTA requires every “reporting company” (almost all LLCs, for profit corporations and similar entities are reporting companies) to file a report with the U.S. Financial Crimes Enforcement Network (FinCen).  Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports.  Reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.  Companies that do not file a timely report are subject to a $500/day fine.

Reporting companies must disclose to FinCEN the required information about each beneficial owner.  A beneficial owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.  See the definition of beneficial owner.

The following is the required information about each beneficial owner that the reporting company must disclose to FinCEN: (i) full legal name, (ii) date of birth, (iii) the beneficial owner’s residential or business street address as of the date the report is delivered to FinCEN; and (iv) the unique identifying number from the beneficial owner’s acceptable identification document or the beneficial owner’s FinCEN identifier number.  See the definition of beneficial owner.

Your LLC’s Operating Agreement must have language that requires members to disclose the above information to the company and provide that members who fail to file the required information will reimburse the LLC for any fines it may suffer because of the failure to provide the information.  Our Operating Agreements have this language.

Hire Us to Prepare Your Custom Operating Agreement

Step 1:  Get answers to your Operating Agreement questions by calling or scheduling a call or office meeting with one of the following Arizona LLC attorneys or call and give them the information they need to prepare your custom Operating Agreement:

Step 2:  Submit our online Operating Agreement questionnaire.

Operating Agreement Table of Contents

Buy a Custom Operating Agreement

Step 1:  Get answers to your Operating Agreement questions by calling or scheduling a call or office meeting with one of the following Arizona LLC attorneys or call and give them the information they need to prepare your custom Operating Agreement:

Step 2:  Submit our online Operating Agreement questionnaire.