Does Your Arizona LLC Need an Operating Agreement?
David Fitzgibbons, Esq., Tiffany and Bosco and Keyt Law, November 2018
If you hold your investment properties in an Arizona Limited Liability Company (LLC) there are changes coming to the documentation. Many people set up an LLC and never create an Operating Agreement. This is no longer allowed. This article includes a link to the law. LLC members would be well advised to consult with their legal professional to review their current operating agreement to make sure it is in compliance or create one if none exists. It is important to note that, under the new law, your operating agreement does not have to mirror the ALLCA’s provisions. Rather, your agreement should address the subjects of those provisions and define them in ways that are appropriate for your LLC. If your LLC does not have an operating agreement, the 2018 law effectively imposes one on your LLC, and the default provisions may not be to your liking.
(Note: Landlords should put rentals into separate LLC’s to protect their other investments and personal assets. What happens if a tenant falls due to inadequate lighting or an uneven curb, fire destroys the structure and the tenant is injured or killed? In our litigious society a lawsuit could result in the landlord losing their entire estate including the house they live in! Example-Faulty electrical wiring results in a fire where one of the tenants is killed. The family sues, the jury finds for the family and awards several million dollars-an amount far above the property insurance limit. The family seizes the landlord’s 5 rental properties (worth $1,500,000), personal residence ($900,000) plus the bank accounts ($500,000). If the landlord had formed a Limited Liability Company or LLC for each rental property the only asset at risk would be the building where the tenant lived. Each property should have its own LLC. The cost per LLC varies from $700-1400. You should also consult with an estate attorney to discuss the benefits of placing your personal assets into a revocable living trust.)
By way of history, Arizona legislation that was passed in 1992 allowed for the creation of LLCs in our state. With minor changes, the law has served to govern Arizona LLCs fairly consistently for the last 25 years. The 2018 law calls for the eventual repeal of the 1992 law and replacing it with an entirely new Arizona Limited Liability Company Act (ALLCA). A number of states have adopted the Revised Uniform Limited Liability Company Act and, by enacting the ALLCA, Arizona joins the growing trend.
Key Dates
This spring, the Arizona legislature approved, and Governor Ducey signed into law, wholesale changes to the essential structure of Arizona limited liability companies (LLCs). As a result, the relatively settled law concerning the treatment of LLCs in Arizona now becomes unsettled, and dark clouds lurk on the horizon.
The new law imposes two important deadlines on Arizona LLCs to be ALLCA compliant:
• All LLCs formed in Arizona on or after September 1, 2019, must comply with the ALLCA.
• On September 1, 2020, the 1992 law will expire, and all Arizona LLCs, regardless of their date of formation, must be ALLCA compliant.
What You Need to Know About Arizona’s New LLC Law
- ALLCA applies to all Arizona LLCs created after August 31, 2019.
- ALLCA applies to ALL Arizona LLCs after August 31, 2020, when existing Arizona LLC law is repealed.
- All LLCs need an Operating Agreement that: (i) contains language that complies with the new law, and (ii) eliminates the many liability creating provisions contained in ALLCA.
- If you form an LLC before September 1, 2019, its Operating Agreement needs to have language that complies with current Arizona LLC law and that automatically complies with new LLC law after August 31, 2020.
- If you have a multi-member LLC it is imperative that the members of the LLC adopt an ALLCA compliant Operating Agreement to eliminate the many liability creating provisions in ALLCA. See the articles below to learn about why I call ALLCA the liability company act and how a good Operating Agreement can change ALLCA back to the limited liability company act.
Warning: For the first time ALLCA levies fiduciary duties on members and managers of Arizona LLCs. New duties means new grounds on which members can sue each other and sue managers. My nickname for ALLCA is the Arizona liability company act because ALLCA creates many new ways that members and managers can be sued and become liable for money damages. Almost all of the new duties on members and managers can be eliminated with a good ALLCA compliant Operating Agreement.
Bottom line: If you have an existing Arizona LLC or will form an Arizona LLC in the future your LLC needs an Operating Agreement drafted to comply with ALLCA by modifying some problem provisions and eliminate entirely other problem provisions. If you need help contact your attorney