In April 2018, Arizona Governor Doug Ducey signed Senate Bill 1353, adopting the Revised Uniform Limited Liability Company Act into law (Title 29, Chapter 7) effective September 1st, 2019.
If you have an existing Arizona limited liability company (LLC) or are considering forming or qualifying an LLC in Arizona, it may be helpful to revisit the provisions of Senate Bill 1353 (hereinafter “the new Act”) to understand how this new law could impact your entities. Along with new mandatory provisions, the new Act features different default provisions that LLCs will be subject to if their operating agreements do not specify otherwise.
We’ve highlighted some key changes below.
A Note on Effective Dates
From now until September 1st, 2020, the new Act only applies to:
- LLCs formed, converted or domesticated on or after September 1st, 2019.
- Foreign LLCs registered in Arizona on or after September 1st, 2019.
- LLCs formed, converted or domesticated before September 1st, 2019 that elect to be subject to the new Act via the operating agreement or amendments thereto.
On September 1st, 2020, Arizona’s previous LLC statutes will be repealed and the new Act will apply to all domestic and foreign LLCs.
Under both Arizona’s old and new LLC acts, management of an LLC is reserved to its members, unless the Articles of Organization provide that the company is managed by one or more managers. The new Act states that a member of a member-managed LLC and the manager of a manager-managed LLC owe a fiduciary duty of loyalty and a duty of care to the company and its members and specifies the duties where this fiduciary standard applies.
The new Act also states that a member or manager must discharge the duties and obligations under the Act or under the operating agreement and exercise any right consistently with the contractual obligation of good faith and fair dealing. It provides that an operating agreement may expand, limit or eliminate certain duties of members or managers. However, it also provides, among other things, that an operating agreement may not eliminate the contractual obligation of good faith and fair dealing or the duty to refrain from willful or intentional misconduct under standards set by the Act.
New LLC Operating Agreement Requirements
In Arizona’s previous LLC law, an operating agreement was defined as any written or oral agreement among all members concerning the affairs of an LLC or the conduct of its business. The new Act defines an operating agreement as the agreement of all the members of an LLC (including a sole member) concerning the matters described by law, whether or not referred to as an operating agreement and whether oral, implied, in a record or in any combination thereof. This also includes the agreement as amended or restated.
Notably, creation of operating agreements will now be mandatory under the new Act. Not only is this a requirement for LLCs formed on or after September 1, 2019, but if your Arizona LLC was formed prior to September 1st, 2019, you may need to create or modify an existing operating agreement in light of these and other provisions in the new Act.
Both the old and new LLC law provide that the operating agreement governs:
- The relations among the members as members, and between the members and the LLC.
- The rights and duties under the Act of a person in the capacity of manager.
The new Act provides that the operating agreement also governs:
- The activities and affairs of the company, and the conduct of those activities and affairs.
- The means and conditions of amending the agreement.
Beyond these requirements, operating agreements may contain any provision which governs, so long as it is not contrary to law.
For matters left unspecified by the LLC’s operating agreement, the new Act will govern as the default. Thus, it is important to review the act in its entirety to determine which mandatory provisions apply and which default provisions will apply unless appropriate steps are taken to opt out.
These are but a few highlights of changes under the new Act. For more information, read the full text of Arizona’s new Limited Liability Company Act.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.