New Arizona Limited Liability Company Act Impacts New and Existing LLCs

Arizona laws applicable to limited liability companies (LLCs) in the state change substantially beginning in 2019. The Arizona Limited Liability Company Act (ALLCA), enacted in 2018, affects all current and new LLCs. If you own or are a member of an LLC or contemplate creating one, it is critical that you know about these significant changes.

In our business law practice at Peterson Law Offices, PLLC, we stand ready to assist clients with all the steps necessary to address the changes implemented in the ALLCA. We help businesses of all sizes and types in Queen Creek, San Tan Valley, Gilbert, Mesa, Chandler, and throughout the East Valley.

Important Effective Dates of the ALLCA

The legislation provides for delayed effective dates, to allow time for existing LLCs to become familiar with the new law and take necessary steps to account for the changes in the law. Here are the key dates business owners need to know:

• The ALLCA applies to any new LLC created on or after September 1, 2019.
• Effective September 1, 2020, the ALLCA applies to all existing LLCs, including those formed prior to passage of the law, effectively totally repealing the prior Arizona law.

While these dates may seem far in the future, business owners should not delay in learning about the substantial changes of the law. Current LLC owners need to take affirmative steps to address provisions of the new Act. The effective dates also may affect the timing of creating an LLC for businesses contemplating formation of an LLC in the near future.

Key Provisions of the New Arizona Limited Liability Company Act

The new Arizona Limited Liability Company Act is consistent with the Revised Uniform Limited Liability Company Act, a uniform model statute adopted by a number of states. Like many comprehensive statutes, the law is long and complex. It makes numerous changes to the current Arizona law, which has been in effect since 1992.

If you own or are a member of an LLC, you should talk with knowledgeable legal counsel about how the changes affect your business. A summary of key provisions follows, but this discussion does not cover all the changes implemented by the new law.

New Fiduciary Duties and Liabilities for LLC Members and Managers

The current law does not impose fiduciary duties on LLC members or managers. The ALLCA does. These provisions are among the most significant changes in the new law.

The relevant section, A.R.S. § 29-3409, sets out a standards of conduct for LLC members and managers. The law imposes a fiduciary duty of loyalty and a specific duty of care on members of a member-managed LLC and on managers of manager-managed LLCs. Members and managers are held to a standard consistent with a contractual obligation of good faith and fair dealing.

The provisions address numerous different situations and transactions governed by the standards of conduct. The law creates legal rights and obligations for LLC members and managers. These changes create a legal basis for lawsuits between LLC members that does not exist under current law.

Critical Importance of an LLC’s Operating Agreement

Arizona’s 1992 LLC law does not require an LLC to have an operating agreement. As a result, many LLCs operate without one.

If you do not have an operating agreement for your LLC, the provisions of the new ALLCA effectively impose an operating agreement on your business. By default, the ALLCA rules apply to your business.

The only way to negate the rights and liabilities specified in the Act is to create your own operating agreement establishing the legal rights and obligations of members and managers of the LLC.

A.R.S. § 29-3105 governs the scope, function and limitations of an LLC’s operating agreement. The section specifically states:

To the extent that, at law or in equity, a member or manager or other person has duties, including the duty of care, the duty of loyalty and any other fiduciary duty, … the member's, manager's or other person's duties may be expanded, limited or eliminated by the operating agreement.

An operating agreement may provide for the limitation or elimination of any or all liabilities for breach of the operating agreement or breach of duties, including the duty of care, the duty of loyalty and any other fiduciary duty, as expanded, limited or eliminated in the operating agreement, of a member, manager or other person to a company or to another member or manager or another person that is a party to or is otherwise bound by the operating agreement.

In other words, Section 3105 permits LLCs to avoid application of many of the new rules by establishing an operating agreement that defines the rights, duties, and obligations of the LLC members. However, some provisions cannot be eliminated, including liability for violating the duty of good faith and fair dealing or the duty to refrain from willful or intentional misconduct, which are imposed on members and managers by the law.

If you already have an operating agreement that does not address all the legal issues raised by the new statute, the rules in the new law apply by default. LLCs must review the current operating agreement with legal counsel and make changes as necessary to bring the agreement into conformity with the new law, as well as address issues created by the ALLCA.

Equal Distribution Requirement

The Act imposes a requirement that all distributions made by an LLC prior to dissolution and winding up must be equal among the members, regardless of the ownership percentages. This provision is another example of an issue that can be avoided if the LLC operating agreement specifically provides otherwise.

Other New Provisions of the ALLCA

There are additional new provisions that apply to LLCs in a number of other areas, including:

• Record keeping and inspection
• Community property rights
• Personal liability
• Agency liability
• Indemnification
• Contributions and distributions
• Appraisal rights
• Professional Liability Limited Companies (PLLCs)

The only way for an LLC owner or member to understand the full effect of the law on business operations is to consult with a knowledgeable attorney before the law goes into effect. LLCs can minimize the impact of the law with a properly drawn operating agreement or amendments to an existing operating agreement.

What Should You Do Now?

There are two very important points for LLC owners and members to keep in mind:

• The delayed implementation gives you time to learn about the new law and address the legal issues it creates for your business.
• Creating or amending your operating agreement can minimize the impact of the new law on your business.

While the legislature provided time for existing LLCs to comply with the new law, waiting until the last minute is not advisable. You want to ensure that your business keeps running smoothly despite the significant changes in the legal rules that will apply to your operations when the law goes into effect.

Schedule a Free Consultation to Talk with an Experienced East Valley Business Law Attorney

At Peterson Law Offices, we provide high-quality business law services at affordable prices. We welcome inquiries from businesses throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.