Top 10 Things You Need to Know About Arizona’s New LLC Act
In Arizona, the Limited Liability Company Act was recently updated (“New Act”). Especially for LLC’s with multiple members (other than married couples), I recommend that LLC owners meet with an attorney to discuss possible updates to their LLC documents. Here are the top 10 things to keep in mind about the New Act:
- When does it apply? The New Act applies to all new LLC’s formed on or after September 1, 2019. If the LLC was formed prior to September 1, 2019 and its operating agreement was in place prior to September 1, 2019, it will be governed by the Old LLC Act (“Old Act”) until its operating agreement is amended. If an operating agreement is silent on a particular issue, then, after September 1, 2020, the New Act will fill in the gaps for old operating agreements. Essentially, all owners of existing LLC’s have until September 1, 2020 to decide whether or not the New Act will fill in the gaps for any issues not covered clearly in old operating agreements.
- Operating Agreements now have certain mandatory rules. Operating agreements are the key documents that govern the agreements between managers and members of an LLC. The New Act provides certain rules that may not be changed by agreement of the members. These rules are set forth in A.R.S. §29-3105. All other rules in the operating agreement may be changed by the members. If there is a conflict between the New Act and the operating agreement, the operating agreement controls. The New Act does not invalidate an operating agreement that was valid at the time of its adoption, but, after September 1, 2020, the New Act does fill in the gaps with certain default rules if the operating agreement is silent on a particular issue.
- The transparency rules are still the same. In Arizona, LLC’s must disclose the names and addresses of the managers and the names and addresses of the members with a 20% or more interest in the LLC. In addition, there are no annual reports or periodic filings for an LLC. These rules did not change under the New Act.
- The New Act clarifies the fiduciary duties owed by members and managers. This is the most significant change in the New Act. These fiduciary duties were not addressed under the Old Act and were essentially left to common law. The New Act is designed to increase certainty about these fiduciary duties and to avoid litigation caused by inconsistent case law. Under the New Act, the following persons have fiduciary duties: (a) managers; (b) managing members in a member-managed structure; (c) members with managerial authority; and (d) all members with respect to the duty of good faith and fair dealing toward each other regardless of their managerial duties. The fiduciary duties include the following: (a) the duty of loyalty; (b) the duty of care; and (c) the duty of good faith and fair dealing. The New Act provides that an act that would violate one of these duties can be authorized or ratified as long as there is a method for approving such act in the operating agreement. In addition, the New Act can provide for the operating agreement to include the corporate “business judgment rule”.
- The New Act clarifies the indemnification rules for an LLC. Under the New Act, with some exceptions, the LLC is generally required to indemnify a manager or member for claims or liability against them by virtue of their capacity as a member or manager. In addition, by unanimous consent of the members, the LLC can indemnify for acts not permitted by statute.
- The New Act defines the term “Majority in Interest” to govern the default rules. In general, under the Old Act, unless stated otherwise in the operating agreement, the default rules provided that each member (regardless of the amount of his/her ownership) was entitled to one vote for all LLC matters. The New Act changes the default vote to be made by those members with a majority-in-interest, meaning that voting rights are determined by those who own a majority of the ownership interests in the LLC. However, all voting rules may be changed by the operating agreement.
- The New Act defines several new terms for use in operating agreements. “Disassociation” is the new term of “withdrawal”. “Transferee” is the new term for “assignee”. Transferable interest” is the new term for “member’s interest”. And “distribution” includes the concept of “redemption”.
- Members can now be expelled for wrongful conduct. Although many operating agreements included expulsion provisions for members in certain situations, the New Act also includes a section to address expulsion in the default provisions if it is not covered in the operating agreement.
- A Notice of Winding Up can now be filed during dissolution to limit the statute of limitations of creditors. Under the New Act, the default rules will now include a procedure for filing a “Notice of Winding Up” in order to limit the statute of limitations for creditors.
- The New Act provides more detailed rules for derivation actions. A derivative action is an action by a member of an LLC when the LLC will not bring such action on its own. The New Act provides a statutory framework for such actions and specifically provides a more comprehensive coverage of three key issues in derivative actions on behalf of limited liability companies: (1) the demand requirements on plaintiffs; (2) the use of special litigation committees; and (3) the availability of flexible equitable remedies to the court.
Recommendations for Existing LLC’s
In general, the provisions of the New Act may be helpful in addressing several key issues that were not covered as clearly under the Old Act. As a result, I recommend that all owners of multiple member LLC’s have their operating agreements reviewed by an experienced attorney in order to see if their operating agreement should be updated based on the New Act.
Need help? Please call me today – 602.663.9263
Our firm has helped hundreds of families just like yours handle a wide variety of estate planning, business planning, probate, trust, and elder law issues. When families or business owners are not getting along, we can also handle any disputes and litigation related to their businesses, wills, trusts, guardianships, or conservatorships. Please give me a call, so that I can help you work through these difficult issues with confidence.