Is Your LLC Ready for the New Arizona LLC Act?

arizona-new-llc-act

On September 1, 2020, Arizona’s adoption of the Uniform Revised Limited Liability Company Act takes full effect in the form of the “Arizona Limited Liability Company Act” (ALLCA), which was signed into law by Governor Ducey last year.

The Arizona Limited Liability Company Act

ALLCA repeals Arizona’s previous Limited Liability Company Act (in place since 1992) and introduces a number of default provisions that, if you and your fellow LLC members do not have a written operating agreement in place, could alter the way your LLC is managed and operates.

There are two important dates current and potential LLC members should keep in mind for ALLCA:

  • As of September 1, 2019, all LLCs formed in Arizona on or after that date must be compliant with ALLCA.
  • As of September 1, 2020, all Arizona LLCs, regardless of when they were formed, will have to be compliant with ALLCA.

Basically, if your LLC does not currently have an operating agreement, the ALLC will impose certain default provisions in the operation and management of your LLC, which may or may not be contrary to what you and your fellow LLC members would want.

Even if your company has an operating agreement, and that operating agreement does not cover certain key provisions enacted in the ALLCA, the provisions of this new law will control in those missing areas, which may or may not be in-line with what you and your fellow members wanted.

Examples of some new ALLCA default provisions

Some of the more interesting default provisions of the ALLCA include:

  • Capital Contributions – Under ALLCA, unless such obligation is in writing, a member may not be compelled to meet capital calls or make other contributions to the LLC. In other words, if you do not address this in your operating agreement, you could find it difficult to enforce your fellow member’s promises to contribute financially, even if you and your other members put in your share.
  • Fiduciary Duties – In addition to imposing certain fiduciary duties upon LLC members by default (which the current Act, bizarrely enough, did not), ALLCA additionally allows an operating agreement to incorporate the fiduciary duties of a corporate director, officer, or shareholder in Arizona and adopt the rules of evidence and evidentiary presumptions that apply to the fiduciary duties of a director or shareholder of a corporation in Arizona.
  • “Majority In Interest” Voting – Currently if you and a paner formed an LLC in Arizona and did not happen to have an operating agreement (it’s more common than you might think), and you contributed $15,000 to the initial capitalization of the LLC, while your partner contributed $5,000, you and your fellow member’s voting power would be determined “per capita” or divided between the two of you evenly. This is not such a big deal if this is the way you both wanted it, however it can come as a nasty surprise if you anticipated you would always have majority control of the company. The ALLCA dispenses with this “per capita” default structure in favor of voting based on the manner in which the members share profits, which the drafters of the law believed would better reflect how most parties’ understanding and expectations as to how they would choose to make decisions.
  • Company Information – ALLCA prohibits the operating agreement from unreasonably restricting the duties and rights of members and managers to obtain information about the LLC (although reasonable restrictions are permissible).

Current and future Arizona LLCs should start preparing now

Because ALLCA repeals Arizona’s quarter century old Act and replaces it entirely, the time period before the September 1, 2020 deadline represents an opportunity for you and your fellow LLC members and managers to carefully review of your LLC operating agreement for ALLCA compliance and to reduce the possibility of being subject ALLCA provisions which you and your fellow partners may not want to be subject to after September 1, 2020.

On the other side of the spectrum, for startups and entrepreneurs planning to form an LLC in the near future, the time between now and the September 1, 2019 deadline should be spent critically reviewing your venture’s business plan and inter-member relationships and roles to make sure that your initial operating agreement not only fits well your company’s specific situation but is also ALLCA ready from the get-go.

Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a Phoenix business and technology law firm working with start-up companies, creative intellectual property, Internet and digital media matters, and complex corporate M&A and technology transactions.  Ben can be reached at (602) 222-5542 or by e-mail at bbhand@bhandlaw.com