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Beginning a limited liability company (LLC) in the state of Arizona can be daunting and exciting. However, it’s important to have an operating agreement, which gives you control over how you want to run your business, instead of the state dictating how it should be handled. 

Learn about the valuable elements to include in your Operating Agreement to give your business stability through clear direction. This guide will show you why your new LLC should have an Operating Agreement and how to approach the updating and revision process to maintain operations. Later on, we’ll answer additional questions to navigate this exciting new endeavor.

Draft an encompassing Arizona LLC Operating Agreement now to fulfill your business goals based on a solid foundation.

What is an Arizona LLC Operating Agreement?

An Arizona LLC Operating Agreement provides the opportunity to generate a document that customizes the terms of an LLC according to detailed owner preferences. It is your chance to develop an operating structure and define business functions and decision-making in a structured manner. 

Rights and obligations in terms of the company are clarified in this agreement by describing relationships between owners (members), the company, and its managers. The LLC agreement must contain provisions that align with Arizona law and relate directly to business operations. 

Should you intend to start a business in Arizona, make the wise choice to draft an Operating Agreement. 

Arizona’s regulations do not state that an official Operating Agreement is necessary, but it can be beneficial if the business is forced into litigation. In the absence of an Operating Agreement, any disputes or other issues will default to being settled by applicable state laws, which might not be your preference. 

Once the Operating Agreement has been created, it can be kept safe on the business premises with other important records. It’s not necessary to file the Operating Agreement with the Arizona Corporation Commission (ACC) Corporations Division. 

Creating a comprehensive Operating Agreement provides business credibility and peace of mind. Find out more below about how to draft your Arizona Operating Agreement.

Why do I need an LLC Operating Agreement in Arizona?

An Arizona LLC Operating Agreement defines and solidifies official company relationships. Business revolves around building relationships and maintaining those in a credible manner. As a best business practice, Arizona recommends generating a formal record to document relationships and responsibilities. 

Legal and business relationships depend on clarity. Capturing best business practices in a formal record before startup simplifies individual roles. Whether your new business is a single-owner venture or is made up of family, friends, or other professionals, an Operating Agreement signifies the start of a vital new chapter that will hold greater value if formalized.

Here are a few other reasons having an Arizona LLC Operating Agreement is significant:

• Affirming the business’s limited liability status: Generating an LLC Operating Agreement adds additional support for separating business assets from personal ones. Protection of the limited liability status is necessary, especially if the business attracts a lawsuit. Members will have the security of knowing their personal wealth has some additional protection if involved in a lawsuit, as company and owner assets are noted in writing as separate. 
• Formalization of owner agreements: Verbal discussions of who will be responsible for what activities and personal contributions are valuable. The problem is that so many verbal discussions are made before an LLC’s start that details can become confused or forgotten. Detailing discussions for approval in a written agreement creates a referral mechanism to prevent future misunderstandings. Create a professional document from the start to help maintain relationships — and importantly — ongoing business operations that won’t be disrupted by disputes.
• Control over Operating Agreement content: New laws define the fiduciary duties of the company and its members, which defer to state laws in the absence of clarification of these duties. If individuals are members of one or more LLCs, their fiduciary responsibility to the company and loyalty must be defined. Fail to include these details, and state law will take precedence over the agreement. 
• Compliance with recent Arizona laws: Financial distributions will be made in equal proportions to members before the dissolution of the LLC when an Operating Agreement is absent. In other words, the state has created a default law to manage the dissolution of the LLC when members have not stated their wishes in a written agreement. According to the Arizona Limited Liability Company Act Revised Statutes, when an Operating Agreement contains details of owner contributions, distributions are made in line with the agreement while the LLC still exists or before its dissolution. Specify the structure of ownership and distributions in the agreement to avoid the state controlling how your business is managed. 
• Business flexibility: An LLC is viewed as a highly flexible business tool. Flexibility can be captured in the Operating Agreement to determine the management structure and operating procedures. Voting and dissolution procedures can be specified in the agreement with conditions related to mergers and acquisitions. Changes and amendments can be made when needed, demonstrating the flexibility of this type of business agreement.
• Legitimization for third parties: Banks and other third parties are more likely to see your business as credible when a formal Operating Agreement is present. Financial institutions value this demonstration of business operations and procedures when a bank account is needed. Investors often ask to view this document for additional assurance when considering the business as a trustworthy recipient of funding. A credible Operating Agreement achieves these aims.

What do I include in my Arizona LLC Operating Agreement?

Operating Agreements will differ based on individual business goals. Individual aspirations and intentions require unique content to record these aims. The U.S. Small Business Administration (SBA) recommends including certain content to cover basic foundational values, which can be increased for better clarity. The following section describes how to draft an Arizona Operating Agreement.

Items to benefit your Arizona LLC Operating Agreement include:

1. LLC Name

Once the ACC has accepted your business name, this should be included in the Operating Agreement. Minimum requirements for acceptance of the name include that it be different from any other Arizona business name and that it be followed by the words “Limited Liability Company” or “Limited Company” or the abbreviations “L.L.C.,” “L.C.,” “LLC,” or “LC.” The name should also not include “Association,” “Corporation,” “Incorporated,” or an abbreviation of these words.

2. Identifying Information

Including identifying information in the Operating Agreement provides credibility to the business. Make sure that the same information is included in the Operating Agreement that appears in the  Articles of Organization submitted to the ACC. If you have owned an LLC for a while, and official details have changed, ensure that the new information included in your Articles of Amendment appears in the Operating Agreement. 

3. Ownership

Indicating ownership interest protects members if a disagreement occurs. Members typically state a percentage of possession based on financial investment or investment of expertise. 

An example of capital contributions can be that one member invests $2,000, and another contributes expertise to the same value if unable to make a financial contribution. Equal ownership is then present.

Alternatively, one member may contribute $2,000, and the other $1,000, which could mean ownership of two-thirds and one-third of the company. But the ownership percentage doesn’t have to match capital contributions.

A sole owner will own 100% of the company.

4. Management Structure

LLCs are most often managed by their members; these are referred to as member-managed LLCs, and the members are also typically involved in the daily operations of the business. Manager-managed LLCs are run by one or more managers with or without any stake in ownership. These managers could be selected members of the LLC, managers hired from outside the LLC, or a combination.   

5. Duties of Members and Managers

Ownership and management come with responsibilities. Complete this section by providing details of the exact duties, rights, and obligations of LLC members and managers. Who is responsible for performing specific duties? Who has the right to act on the company’s behalf? What may or may not be done by each member and manager?

6. Voting Rights and Responsibilities

LLC members should be entitled to vote on important decisions that will influence business operations. Transfer of interests, adding a new member, the distribution of profits, the termination of a member’s interests, and restrictions on borrowing money will all affect operations. Withdrawal of money and the right to contract with third parties should be other considerations that are restricted to protect the rights of all members.

Specify voting rights on these and other issues in relation to ownership levels. Also, stipulate how voting rights and responsibilities will be resolved when no clear voting outcome is achieved. Ownership percentages can help resolve this issue by granting two votes to a member with two-thirds ownership, for example.

7. Distributions

Profits need to be distributed among members. State how distributions are to be made among members in line with contribution percentages or as agreed. Members have the right to make distributions as preferred, but describing how this task will be carried out will help to avoid unnecessary conflict.

Record how and when to make distributions, such as directly into bank accounts at the end of each fiscal year, for example. Also, members are responsible for paying their own taxes on profits while observing any other legal requirements.

8. Holding Meetings

As tempting as it might be to avoid this task, LLC members will benefit from having regular meetings to keep their business operations on track. Also, meetings make voting and keeping an internal record of votes that much easier. Meetings are recommended to record votes and changes to the Operating Agreement.

Placing this obligation in writing eliminates the pressure of persuading recalcitrant members to take their obligations seriously. Record meetings as a responsibility so that members can be voted out if they repeatedly fail to attend meetings. 

9. Buyout and Buy-Sell Rules

Members can decide whether to remain LLC members or leave the company. New members may need to be brought in as the business expands. Detailing how new members will be accepted into the LLC (whether based on votes, financial contributions, or some other means) will streamline business processes. 

Create a written record of how to officially recognize new members, their contributions, and their roles and responsibilities. Consider how existing member roles will be terminated. Provide guidelines as to how voting rights will be implemented. 

If a member with two votes and two-thirds ownership of the company leaves, how will this impact a remaining member with one-third ownership, for example? Also, when a member leaves, should existing members have first rights to the purchase of their portion of the company?

10. Succession Planning

Though it’s unpleasant to consider, you have to be prepared should a member of the LLC die. A succession plan written into your agreement can help with this by providing clear guidelines to address that member’s portion of the LLC.

Will existing members have the first option to purchase that member’s percentage of the LLC, or will the deceased member’s family/heirs be allowed acceptance into the business as members? On what basis will the deceased member’s percentage of the company be valued, sold, and/or distributed? 

11. Dissolution

LLC members must officially dissolve the business if they decide to discontinue operations completely. Determine the circumstances that may bring about dissolution and place this in writing. Poor financial performance, age, ill health, conflict, and other reasons may encourage members to shut down operations.

Detail the process if members want to follow this route. Include voting rights and responsibilities as an element. Final distributions of profits, the filing of taxes, and the filing of the Articles of Termination with the ACC can be part of that process.

12. Operating Agreement Amendments

LLCs are living entities. Fluctuations in the business environment are constant and promote changes to the Operating Agreement. New members, retiring members, and voting rights all influence daily operations. Changes in the LLC should be recorded in writing.

Choose who will oversee making amendments, have voting rights, and will approve final amendments. Selecting a member to control this aspect simplifies the process for future variations.

13. Sole-Member LLC Status

Legally, Arizona LLC laws will take precedence if you do not record specific details in the Operating Agreement. Generate an Operating Agreement that clearly states that you have a 100% claim to the company. Also, note that you have full rights to act on the LLC’s behalf.

Maintain credibility with a legal document to avoid third-party claims or disputes against the company. Keep business dealings separate from your personal life to avoid potential disputes. 

14. Severability Provision

The severability provision is a standard clause in many different contracts. Essentially, it states that if one portion of the Operating Agreement becomes invalid, the rest of the content will not be impacted. For example, if you make an error in one part of the Operating Agreement, the rest of the document will remain lawful.

Updating and Revising Your Arizona LLC Operating Agreement

LLCs are designed to be flexible, which means that it is simple to keep the Operating Agreement updated. Making changes to the document ensures that the Operating Agreement remains current and reflects the votes of its members. Changes can be made as these take place. 

Attending meetings and taking minutes will help to record what amendments have been voted on. If the document has not been revised in a year, consider holding a special meeting to review the agreement. Alternatively, add a review to the meeting agenda. If no formal records are kept of meetings, bring changes to members’ attention to keep the document current.

There is no formal requirement to file the Operating Agreement in Arkansas. As a result, there is no legal formality involved in amendments, so owners can make amendments, get signed approval from all members, and file this document in-house.

Amendments are recommended following a change in ownership or ownership investment. Profit distributions may be altered, or succession planning can promote change. Members can also decide if they want to change the structure, such as from a manager-managed business to a member-managed LLC. Financial changes should also be reviewed and amended when needed. 

Do an annual review even when no major changes have taken place. The business environment may have changed, even if internal operations have remained stable. A regular review can be achieved in three steps:

1. Hold a meeting to review the Operating Agreement. Refresh your memory on how changes should be made in line with the original document. 
2. Vote on changes to improve or update the document in writing.
3. Get all members to sign the approval of the amendments made.

If changes are approved that affect the Articles of Organization, you’ll need to file Articles of Amendment with the ACC. The Articles of Amendment may be filed online or by mail.

Partner With ZenBusiness for Professional Assistance

Completing a meaningful Operating Agreement takes care and effort. Pay attention to the main recommendations provided to avoid feeling overcome by the weight of the task. Legal help or assistance from an appropriate agent will help guide you through the basic inclusions. Depending on the arrangement, further clauses may be suggested to suit the specific business. Pay attention to expert advice to protect your new enterprise.

ZenBusiness provides a customizable template to help you draft your Operating Agreement and further protect your LLC, business interests, and private assets.