The New LLC Laws in Arizona and the Effect on Member-Managed LLCs

Are you currently a member of an Arizona limited liability Company (“LLC”) or intend to create your own LLC in the near future? If so, you should be mindful of the new Arizona LLC law that will go into effect in the near future.

In the beginning of 2018, Governor Ducey signed into law the new Arizona Limited Liability Company Act. The new law completely replaces the current Arizona Limited Liability Act and although there are still some similarities, the new law includes substantial changes with regard to the rights and obligations of its members. The new Arizona Limited Liability Company Act will affect all LLCs that are created on and after September 1, 2019. On August 21, 2020, the new law will affect all existing and operating LLCs in the State of Arizona regardless of when it was formed.

One of the most significant changes in the new Limited Liability Company Act are the duties that it places on members in LLCs that are member-managed by more than one person. Prior to the enactment of the new LLC law, Arizona law generally allowed the members of the LLC to decide what duties the members owed to fellow members, and the LLC as a whole, by incorporating it into the Operating Agreement. When the new law goes into effect, Arizona statute will define the duties of the members by default.

First, it is important to know what an operating agreement is. An operating agreement is a contract between the members that governs the relations among the members and the managers, and between the members and managers and the limited liability company. Although it is always wise to have an operating agreement, many Arizona LLCs chose not to have one because Arizona law did not require it. Prior to the enactment of the new law, the operating agreement (if the LLC had one) was the primary source in defining the duties of the LLCs members.

Under the new LLC law, Arizona statute will define the duties each member in a member-managed LLC owes to the LLC. However, the new LLC law will also allow members to define their duties in the operating agreement that will supersede the default duties. In A.R.S. §29-3105, the new statute that will govern operating agreements, it states, “The Operating Agreement may without affecting the ability to eliminate or limit the contractual obligation of good faith and fair dealing or willful or intentional misconduct may expand, limit, or eliminate in the Operating Agreement a Member or a Manager’s duty of care, the duty of loyalty, and any other fiduciary duty, to an LLC, Member or Manager or to any other party that is bound by the Operating Agreement” Although the new law provides the default fiduciary duties of the members, the members are free to limit or eliminate the duties in the operating agreement.

If having an operating agreement was not already important, having one that accurately reflects the member’s desired duties is now. Every LLC is unique and in most cases, it is better to have the members decide the member’s duties to the LLC rather than Arizona lawmakers.

If you are part of an LLC or intend to create one in the near future and have questions about the new Arizona LLC law, do not hesitate to contact our office and speak to one of our attorneys.