How to Draft an Operating Agreement for Your Arizona LLC

An operating agreement isn’t required in Arizona, but it’s a smart move for any LLC. It outlines ownership, management, and protects your business from internal disputes. Here’s what to know.

Should your Arizona limited liability company have an operating agreement? The short answer: yes, it should. While it’s not required by the state, an operating agreement makes it clear how an LLC will operate. If you’re creating an LLC in Arizona, this document helps dictate how the LLC will be managed and how disagreements will be settled. Without an operating agreement, there may be no valid way to resolve disputes between LLC members. In fact, even a single-member LLC is wise to have an operating agreement.

Read on to learn what an LLC operating agreement is in Arizona, why your company needs one, what should be included in it, and how to create and maintain your operating agreement.

What is an LLC operating agreement?

An LLC operating agreement is a legally binding document that lays out the management of a limited liability company and specifies how the LLC will be managed.

It states who the members are and what each one’s ownership percentage is. It lays out their roles, rights, and responsibilities. It documents whether and how new members can be added and what takes place if an existing one leaves. It states the circumstances under which the LLC will be dissolved, and it says how that will happen. The operating agreement protects each member’s interests if there is malfeasance.

It validates that the company is a legitimate LLC and has the right to the associated taxation and liability benefits. It provides evidence that the LLC is a legitimate, serious, bona fide business. It’s typical for banks to require an operating agreement before they will issue loans or even open a business account.

Why is an operating agreement important for Arizona LLCs?

Arizona does not require that LLCs have an operating agreement, but it’s risky to operate without one. Not having an operating agreement may limit what you’re able to do. Many banks will not recognize an LLC as a serious business if they don’t see an operating agreement. They may refuse to lend money or open business accounts. An operating agreement demonstrates that you are a valid LLC. It can be important in asserting your right to claim the taxation and liability benefits that come with LLC formation.

Arizona encourages LLCs to have an operating agreement. If a company has no agreement, and disputes wind up in court, they will be resolved in accordance with Arizona state law, even if the result is not what any of the members wanted. If the dispute results in the dissolution of the company, the state of Arizona will decide how assets will be allocated and proceeds distributed. Any informal agreement members might have had will not carry weight. If there is an operating agreement, Arizona courts will look to the agreement and use its terms to settle any disputes.

A single-member LLC should have an agreement as well. You’ve already seen that you may need it to open a business bank account or obtain a loan. You may need it if your LLC purchases real estate. It also helps establish the distinction between your personal finances and that of your limited liability company. If there is legal action against your LLC, it provides evidence that your company is a separate legal entity and that you are shielded from personal liability.

Key components of an Arizona LLC operating agreement

Since the LLC operating agreement is not required, there’s no definitive list of what it must contain. However, the contents should start with the LLC name, the member names, and the capital contributions that each member has made. The complete agreement can contain anything you deem necessary or useful. Here are some components you should consider.

Basic company details

These basic details include the LLC name and the fact that the company is an Arizona LLC. In addition, you should document the business purpose, the business address, the names of all the members, the date of LLC formation, and the expected duration of the LLC.

Capital contributions

You should document each member’s membership interest, which is determined by the capital contributions that they made at formation, be it money or other assets. This interest is generally stated as a percentage. You might also document the method by which members can make additional contributions.

Distributions

It’s important to specify how and when profits will be distributed. After all, that’s what you’re in business for. In most cases, profits are allocated based on membership interest.

Management

The agreement should state how the business will be operated and how decisions will be made. This includes what officers the LLC will have, how they will be selected, and what roles and responsibilities they will have. The operating agreement should define voting rights. It might state how company accounting will be done. It should define processes for settling disputes and conflicts. Additionally, it may provide legal indemnification to protect members when they are acting in good faith.

Change in membership

Multi-member LLCs don’t stay together forever, and one or more members may wish to transfer their interest and leave the company. In most cases, the remaining members will have “first dibs” to buy the leaving member’s share. The operating agreement should spell out how the value of the interest will be determined and paid.

The agreement may also specify the circumstances under which a new member can join the LLC. Most agreements will require a unanimous vote ot the current membership.

Dissolution

Even the most successful LLC will reach the end of its life some day and wind up its business. The operating agreement should include the circumstances under which the company will dissolve as well as the approval process and the steps to accomplish the dissolution.

Amendments

You can choose to make the operating agreement amendable and lay out the amendment process. Of course, the members can change the operating agreement at any time by writing and signing a superseding agreement.

Certification

All members must sign and date the agreement for it to be legally binding.

How to create an LLC operating agreement in Arizona

It’s simple to create an Arizona LLC operating agreement: if you write one and sign it, you have a legally binding document. However, most LLC owners will want to make sure they have thought of everything. Fortunately, there are quite a few vendors that offer templates. You start with their standard language and fill in the details that apply to your LLC.

Some LLCs choose to hire a business lawyer to craft the agreement. This isn’t required in Arizona, but there’s a certain peace of mind in having a legal expert write a legal document. Even LLCs that write their own agreements might find comfort in having an attorney review them.

Final thoughts & next steps

If you form an LLC in Arizona, you should have an operating agreement, even though the law doesn’t require it. It establishes your legitimacy with the state and with bankers and lenders. It states how the company will be operated and how disputes will be resolved. It ensures that, if disagreements go to court, they’ll be resolved as the members intended and not according to the defaults specified by the laws of Arizona.

If you’re not sure how to get started with your operating agreement, consider using an online LLC formation service. These services will not only guide you through the agreement but also help with other formation processes like filing articles of organization and establishing a registered agent. Many offer continuing services like required state reporting. A formation service can ensure that you don’t leave out any vital steps.

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