Arizona’s New LLC Law Poses Traps for Unwary Members and Managers

By David Fitzgibbons, Esq. – Fitzgibbons Law Offices, P.L.C.
Reprinted with permission

If your LLC does not have an operating agreement, or if your operating agreement does not address certain issues, the 2018 Arizona Limited Liability Company Act imposes default provisions that may not be to your liking. – David A. Fitzgibbons III

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.

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

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.

Because of the wholesale repeal of the 1992 law and its replacement with the 2018 law, LLC members and managers are strongly urged to initiate a review of their LLC – specifically, its operating agreement – to verify that the LLC is ALLCA compliant and will avoid any unwanted default provisions that the ALLCA will automatically impose come September 1, 2020.

A full discussion of the significant changes is not covered here. Out of necessity, a proper analysis of your LLC will be fact-specific and focus on the particular provisions of your operating agreement, if it exists. The 1992 law generally does not require LLCs to have an operating agreement; 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.

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.

HIGHLIGHTS

For general discussion purposes, it is helpful to highlight a few of the significant ALLCA changes affecting Arizona LLCs:

  • Contributions. Under ALLCA, a person’s obligation to make a contribution to the LLC is not enforceable unless it is in writing, and it is not excused by death, disability or termination. See A.R.S. § 29-3403.
  • Fiduciary Duties. The current law does not impose fiduciary duties on LLC members and managers. Under the ALLCA, a member of a member-managed LLC will owe the company and other members a duty of loyalty and should act in a manner consistent with a contractual obligation of good faith and fair dealing. Similarly, the manager of a manager-managed LLC will owe the company and its members a duty of loyalty and must discharge his duties and obligations under the ALLCA with a contractual obligation of good faith and fair dealing. See A.R.S. § 29-3409.
  • Distributions Before Dissolution. The ALLCA provides a new requirement that all distributions made before an LLC can dissolve and wind up must be “equal among members,” regardless of ownership percentages. This particular provision could have significant financial and tax ramifications to members, especially majority members. See A.R.S. § 29-3404.

Other ALLCA provisions that impose changes to the way Arizona LLCs transact business include:

  • records and records inspection,
  • agency liability,
  • personal liability,
  • appraisal rights, and
  • professional limited liability companies.

SILVER LINING

The silver lining to these dark clouds is an ALLCA provision that allows an LLC’s operating agreement to contain provisions that allow it to avoid the ALLCA’s harsh effects. As a result, a review of your LLC operating agreement warrants your prompt attention.

To schedule a review of your LLC’s operating agreement, contact David Fitzgibbons or at 520.426.3824.

Tags: , , , , , , , ,