You’re preparing to start a small business in Arizona. You’ve decided against incorporation because a Limited Liability Company (LLC) offers more control and pass-through taxation. Your challenge is that you need a way to affirm your control over your business formation so that you don’t have to rely on default state law to solve issues.
That’s where an Arizona LLC operating agreement comes in. Your operating agreement sets the guidelines you and your members follow in your LLC.
Key Takeaways
Your LLC can create an Arizona LLC operating agreement, but the document isn’t legally required.
An operating agreement allows you to create rules and processes for your small business.
LLC operating agreements override Arizona’s state default rules in most cases.
What Is an LLC Operating Agreement?
An LLC operating agreement is a legal document that defines processes for your business and solidifies the personal asset protection an LLC offers its members.
It’s not a required part of LLC formation, unlike your Articles of Organization, but it’s a way to set the standards for how your LLC operates.[1] For instance, you’ll use your operating agreement to assign responsibilities to members.
An LLC operating agreement also ensures you’re not subject to Arizona’s state laws when conflict or legal issues arise. Some state laws override the rules you create in your operating agreement, but you get more control over what happens to your business.
State Requirements
According to Arizona law, an LLC isn’t required to have an operating agreement to transact in the state of Arizona. The Arizona Corporation Commission (ACC) makes that clear in its instructions for completing your Articles of Organization.[2] So, if you don’t want an operating agreement, you don’t need one.
However, a lack of an internal operating agreement means you’re subject to the Arizona Limited Liability Company Act when dealing with disputes.
An example of how this manifests in practice comes from the provision of voting rights. If you have an operating agreement, you can define who gets what rights based on their contributions and ownership percentages. Without one, each member gets one vote, regardless of contributions.[2]
You must draft your Arizona operating agreement to exert more control in these areas.
LLC Operating Agreement Benefits
Arizona law says you don’t need an operating agreement for your LLC to transact in the state. So why create an operating agreement for your business entity in the first place?
The answer is simple. Like a business plan, an operating agreement has several benefits beyond legal requirements, including the following three.
1. Confirm Your Limited Liability Status
Asset protection is one of the biggest advantages of having an LLC, especially when compared to a partnership or sole proprietorship. Any issues that the business encounters can’t come back to you in a personal liability sense.
An Arizona LLC operating agreement allows you to solidify that liability protection by defining who has it. In other words, you list the LLC members, meaning you have a legal document proving that the LLC business structure protects you.
Beyond acting as evidence of your membership, the agreement makes seeking legal advice for such issues easier. You can show that you have liability protection, allowing your legal team to focus on confronting the problem from a business-focused perspective.
2. Set Rules for How Your Business Runs
Who operates your business bank account? Which LLC member or manager is responsible for the day-to-day running of your LLC? You’ll want to answer these questions as quickly as possible, and you can create those answers within your operating agreement.
In some ways, an operating agreement is like a checklist of what needs to happen and who needs to make it happen to keep your business running. You’ll define processes and set rules. When the time comes to put those procedures into practice, you have a legal document to which you can refer, leading to fewer internal conflicts.
3. Prevent Members From Claiming Oral Agreements
Disputes can happen between members of an LLC just as they can happen between the LLC and third parties. Sometimes, those disputes involve members claiming that the LLC owner made an oral agreement with them, leading to a tangled, legal mess.
By having a written operating agreement, you have a document that takes precedence over any claims of oral agreements. If it’s not in the operating agreement, it’s generally not something a member can dispute. Members also get peace of mind because you document agreements with them.
Who Needs an Operating Agreement?
The simple answer is that every LLC in Arizona needs to have an operating agreement, regardless of whether it’s a domestic or foreign LLC. While the agreement isn’t required by state law, the protection it offers business owners makes it an essential document.
Specifically, you need to make creating an operating agreement a priority in business formation if you’re concerned about any of the following issues:
Ensuring it’s clear that your LLC isn’t a sole proprietorship and that you’re entitled to liability protection
Confirming your place of business
Ensuring you don’t have to abide by state default rules in cases of disputes
Laying the groundwork for future incorporation or transferral to S corporation (S corp) tax status
Setting rules by which all members of your LLC must abide
Drafting Your Arizona LLC Operating Agreement
You might assume that creating an operating agreement is as simple as following an LLC operating agreement template and sending the document to the Secretary of State in Phoenix, along with a filing fee.
However, you don’t need to send an operating agreement anywhere, and a template may not cover everything your business needs.
To draft a more comprehensive written operating agreement, follow these steps.
Step 1: Provide Business Information
The first step is the easiest: provide the basic information about what your LLC does. This information may include:
LLC name, as well as any “doing business as” (DBA) business name you use
Address of your place of business
Details about what you do and which industry you serve
Much of what goes here can come straight from your Articles of Organization. You can even include information about your registered agent, also called a statutory agent, such as their name and address. Your operating agreement is also an excellent place to keep your Statutory Agent Acceptance form.[3]
Step 2: List LLC Members
Next comes securing the personal liability protection that limited liability status offers your members. You want to create a list that includes each member’s name and address, along with details about the following:
Member voting rights or voting power
Ownership percentages or membership interest for each member
Entitlements to distributions based on member contributions
Disclaimers that apply to the entitlements outlined in the list
For a multi-member LLC, each member needs confirmed protection and a way to determine their rights within the business. But don’t make the mistake of not creating this list if you’re the sole member of a single-member LLC.
Even as a sole member, your list offers the same benefits as the list in a multi-member LLC operating agreement. You ensure you receive the protections of the LLC structure. Plus, business owners can set the stage for bringing in new members by having the start of a list ready to go.
Step 3: Decide Member-Managed vs Manager-Managed
With your members defined, it’s on to creating a management structure for handling the day-to-day oversight of your LLC. You can choose to be a member-managed or manager-managed LLC
In member-managed LLCs, a business member is responsible for LLC management. This format works well in a single-member LLC where there’s a sole member responsible for keeping the company going. Multi-member LLCs can also use it if they have members they can trust to be impartial when dealing with issues.
If impartiality is a problem, or you simply want independent oversight, a manager-managed LLC may be the better choice. You assign an outside party to tackle the day-to-day management of your company, leaving you and your members to focus on your customers.
Step 4: Layout Administrative Operations
Once you have your management structure in place, you’ll dig deeper into the day-to-day management of your LLC by setting administrative operations. This section defines the specific processes you’ll follow inside your business.
You have complete freedom to lay out as many or as few administrative operations as you need to keep the company running. However, the following are some of the most common ones to add to an operating agreement:
Process for determining the voting rights of new and existing members
Allocation of roles and responsibilities, such as the management of your business bank account and Employer Identification Number
Tax clarification related to your business and its dealings with the Internal Revenue Service (IRS)
Information about how you handle capital contributions, distributions, and your dealings with financial institutions
Any operations that meet the specific needs of your business
Process for calling and operating member meetings
Again, the operating agreement is an internal document you can customize to suit your needs. Focus on this section. You don’t want to miss a process you’d later need to rely on if a dispute arises.
Step 5: Add and Remove LLC Members
What happens if you invite new members to your LLC? What about if there’s a buyout or if the owner wants to pass down ownership to the remaining members? You’ll answer these questions in the final part of your operating agreement.
Every addition or subtraction of a member affects the other members’ voting rights, ownership percentages, and membership interests. Use this section to define those effects and how they’re implemented. You’ll avoid voting power-related conflicts because you have processes in place.
Don’t assume you can avoid creating these processes if you have a single-member LLC. You may not foresee adding new members soon, but it may happen eventually. Or, you may want to pass the business down to a family member when you retire. Your operating agreement is an internal document allowing you to control these processes.
Create Your Operating Agreement Through a Filing Service
Though Arizona law doesn’t compel you to create an Arizona LLC operating agreement, it’s good for any small business. It ensures you don’t default to state law when conflicts arise and lays the groundwork for the management structure you implement in your new LLC.
Our team can handle everything aspect of the LLC formation process, from filing your Articles of Organization to creating your operating agreement. We can even provide a statutory agent to handle the service of process on your behalf.
If you’d like to find out more, get in touch with our team. We’ve helped over 600,000 businesses with their filing needs.
FAQs
Is an LLC operating agreement required in Arizona?
No, Arizona has no legal requirements for creating a written operating agreement for your LLC.
How does an LLC operating agreement help protect my assets?
Your operating agreement confirms that you’re an owner or member of your LLC, ensuring there’s no question over whether you’re entitled to personal asset protection.
Who needs access to an operating agreement once it’s drafted?
Your members and any external managers you bring on board need access to your operating agreement. You may also need to show the document to legal or financial institutions.
How do I edit information on an operating agreement if membership changes?
You define the process for amending an operating agreement within the document. Most choose a vote, with each member having the chance to decide whether they approve the proposed change.
What other legal documents need to be drafted for my Arizona LLC?
You have to file your Articles of Organization with the Arizona Corporation Commission.
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Bibliography
Arizona Corporation Commission. “Articles of Organization.” Accessed June 28, 2023.
Arizona Corporation Commission. “Articles of Organization – Instructions.” Accessed June 28, 2023.
Arizona Corporation Commission. “Statutory Agent Acceptance.” Accessed June 28, 2023.
