Arizona has over 800,000 Limited Liability Companies (LLCs) with thousands formed each year. LLCs are very popular for their ease of formation and maintenance and taxation flexibility compared to other entities like Corporations & Partnerships.
The new Arizona Limited Liability Company Act (ALLCA) was signed into law in April 2018 and replaces our LLC laws in place for the last 27 years. LLCs established after August 31, 2019 will be immediately affected and ALL Arizona LLCs, regardless of when formed, are subject to the new law on September 1, 2020.
A quick reminder on some LLC terminology:
Manager – Executive authority for the company. Like a CEO of a Corporation
Member – Owner or equity-holder of the company. Like a “shareholder” or “stockholder” of a Corporation. Members have certain rights to company profits.
Operating Agreement – A contract between Managers & Members establishing legal rules for the LLC. For example, it can define what happens when an owner becomes disabled, dies, gets divorced, or wants to retire (to name just a few)
Some of the changes to LLCs that you should be aware of are:
No Arizona Street Address Required
The new law no longer requires that you have an Arizona place of business. Rather, you can list your address out of state, and it can be a PO Box! You still need an AZ-based Statutory Agent to receive legal notices for the company. Relaxing the address requirement gives owners more flexibility and reflects the increasingly virtual nature of commerce.
Default Provisions vs Operating Agreement
You should have (or get) an Operating Agreement for your LLC. If not, the ALLCA will impose rules and obligations on managers and owners (“members”) that may be considered harsh and inflexible. Many of the harsh rules can be avoided by adopting an Operating Agreement that opts-out of the default requirements.
Additional Duties for Managers & Members
Default rules impose stricter duties (“fiduciary” duties) on owners and managers that did not exist before. This creates added liability and risk for managers and owners. These added duties create legal grounds for member vs. member or manager vs. member lawsuits that don’t exist under the current law. Under ALLCA, those fiduciary duties will be created if you don’t have an Operating Agreement or your Operating Agreement does not address these issues.
Unfair Distributions when Shutting Down the Company?
When a company winds-down and dissolves, distributions paid out to members do not have to match their ownership percentage. The 10%-owner may receive the same as the 90%-owner, unless the Operating Agreement says otherwise. (See A.R.S. 29-3404(A))
Many Features Preserved with ALLCA
Personally, individual members are still protected an are not liable for paying the debts of the company. Also, if a member is personally liable for a debt and has a court judgment against them, their ownership in the company is not directly at risk of being taken by the creditor. A “judgment creditor” can only get what is called a “charging order” against the LLC member to get repaid. This charging order allows the creditor to get the distributions that the member would normally get. The Operating Agreement can give the Manager the ability to control such distributions and make the creditor wait indefinitely before getting any of the member’s profits.
Be Aware and Update your Operating Agreement
Other areas of change include indemnification, personal liability, and record keeping requirements. It is important that if you are involved with a LLC that you make sure that either you adopt an Operating Agreement before the changes to the law takes place, or that you update your existing Operating Agreement to conform with the ALLCA. By doing so you will…
Leave a Legacy! Not a Burden.