A Limited Liability Company operating agreement outlines the member duties and ownership specifications of your LLC. This agreement gives you a chance to define the working relations and financial concerns among the members (business owners) and between managers and owners.
In Arizona, an operating agreement can include any legally sound provision that relates to operation of the LLC and involves its employees or members. While Arizona law doesn’t require that you create an operating agreement (unlike some other states) in writing, it’s still important to make one since proving unwritten terms and conditions can be difficult.
What to Keep in Mind About Arizona Operating Agreements
- Arizona law doesn’t require you to create an operating agreement, but it’s still advisable to make one
- An operating agreement will lay out what to do in case of future conflict and how to handle important business decisions
- This document can help prevent conflict between members of the LLC by finding solutions to potential issues ahead of time
- Working with a lawyer to draft your operating agreement is a good way to ensure that it’s legally sound and fulfills its purpose
What if I don’t create an operating agreement?
Without an operating agreement, your LLC will be governed by the Arizona Limited Liability Company Act’s laws. These laws cover issues such as members leaving or joining the group and how you should handle profits and losses. The rules outlined in the Arizona Limited Liability Company Act may not perfectly align with your members’ ideals, which is why creating your own operating agreement is the better option.
What You Should Include in the Operating Agreement
Your operating agreement should cover any issues you and the other members wish to address. Here are some examples:
You can use the operating agreement to lay out how profits should be split up between group members. For example, if one of your members contributes more financially, you could include in the operating agreement that they receive more of the business profits.
Rules for Decision-Making
You can also cover rules for how the company will make decisions and use the agreement to restrict members from transferring their interest in the business.
Dissolving the Business
It’s best to include information in your operating agreement about how the company should be dissolved. Some choose a specific date for the business to end, while others leave the date open. The agreement can include a voting procedure for handling conflicts such as settling creditor claims, liquidating assets, or asset distribution. You can also include a procedure for dissolving the business according to vote.
Planning for State Laws
The operating agreement is also a chance to set up rules for what should happen according to state laws. For example, if one of the members in the group is going through a divorce, the community property laws in Arizona could cause their interest in the company to transfer to their spouse.
Since this might compromise or change the LLC in unwanted ways, you can create a clause in your operating agreement requiring the divorcing member to sell his interest to the rest of the group.
Do I Still Need a Business Plan?
If you create an operating agreement, you should still make a business plan. The documents may cover information that overlaps, but they ultimately serve different needs. An operating agreement outlines how your company should be run, while a business plan includes an executive summary and communicates financial plans and market research.
How Working With an Attorney Can Help
A business attorney can help you ensure that you’ve completed a legally sound operating agreement and that your concerns related to the company are covered. While you will save money initially by choosing not to hire legal assistance, you risk having to pay more later when unforeseen complications arise.
Seeking legal counsel is the best way to make sure you fully understand the law and are setting up your LLC correctly, so you don’t have to make corrections later.
Frequently Asked Questions on LLCs
Below are some commonly asked questions related to forming an LLC:
Q: What are the steps for forming an LLC?
To form an LLC, you must choose the state to open it in, then submit Articles of Organization to establish the business as a valid limited liability company. Name the LLC and pick a Registered Agent (also called a Statutory Agent), then file the LLC with the state, create an operating agreement for the business, and get an EIN.
Q: Is a lawyer required to start an LLC in Arizona?
No, you don’t technically need a lawyer to create an LLC in this state. However, if you’re intimidated by the process, need help checking your documents, or have any legal questions, an attorney’s assistance can be an invaluable asset.
Q: How does a partnership differ from an LLC?
While daily business activities are similar for each, partnerships don’t provide liability protection. Partnership owners must personally address business debt and may be affected by their partner’s actions. If you decide to run a business with other members, incorporating and making a formal plan for the company is a good way to protect yourself in the future.
Q: Does an LLC operating agreement have to be notarized?
Arizona law doesn’t require you to have your operating agreement notarized to make it enforceable and valid. However, some people choose to do so anyway.
What to Do if You Need Help
You can think of your LLC operating agreement as a prenuptial agreement for the company. It provides members a thorough framework for how to handle functional issues related to the business and can minimize conflict in the future. As mentioned, you don’t have to get legal assistance to make an operating agreement, but many choose to do so anyway for the peace of mind.
By working with an experienced business attorney to create an operating agreement, you’ll save a lot of extra stress and hassle in the future and protect your company.
Call JacksonWhite’s Small Business Law Team at (480) 464-1111 to discuss your case today.