State Legislative Updates

Arizona’s New LLC Law Brings Significant Changes

Arizona’s New LLC Law Brings Significant Changes

On September 1, 2019, a new limited liability company law goes into effect in Arizona. The new LLC Act is based on the Revised Uniform Limited Liability Company Act—a uniform law being adopted by an increasing number of states.

The new LLC Act governs all LLCs formed in Arizona on or after September 1, 2019. It will govern LLCs that existed before then on September 1, 2020—at which time the old LLC law, which was originally enacted in 1992, is repealed.

The 2019 law represents a significant change from the 1992 law. Below are some of the provisions of the new law that may be of interest to anyone thinking of forming an LLC in Arizona, or who is a member, manager, or legal adviser to an existing LLC.

Formation

An Arizona LLC is formed under the new law by filing Articles of Organization with the Corporations Commission. Among other information required to be set forth are the names and addresses of all members, if member-managed or the names and addresses of all managers and members owning 20% or more of the capital or profits if the LLC is manager-managed. Amendments to the articles are required upon a change in this information.

Name

The LLC’s name must contain “limited liability company”, “limited company” or an abbreviation thereof and must be distinguishable on the Commission’s records from the names of other domestic and foreign business entities and reserved and registered names. Names may be reserved for a 120 day period.

Statutory Agent

Every LLC must designate and maintain a statutory agent with a place of business or residence in the state whose duty is to forward any process, notice or demand pertaining to the LLC that it receives or that is served on it. An LLC’s failure to comply with the statutory agent requirement is grounds for administrative dissolution.

Operating Agreement

Under the new law the operating agreement may be oral, implied, or in a “record”. (The new law uses the term “in a record” rather than “in writing”.) A record is defined as information that is inscribed on a tangible medium or stored in an electronic or other media that is retrievable in a perceivable form.

The operating agreement governs relations among members and a member and the LLC, the rights and duties of anyone in the capacity of a manager, the activities and affairs of the LLC and the conduct of their activities and affairs. In the event of a conflict between the operating agreement and the LLC Act the operating agreement governs. As to a matter not provided for in the operating agreement the LLC Act governs.

The operating agreement takes on added significance under the new law. The 2019 law contains more and in some cases different default provisions than the previous law. The LLC will be governed by these default provisions unless the operating agreement provides otherwise.

Management

Management is reserved to the members unless the articles of organization provide for management by managers.

Members of member-managed LLCs and managers of manager-managed LLCs owe the LLC and members fiduciary duties of care and loyalty. The operating agreement may provide for the limitation or elimination of fiduciary and certain other duties owed by members or managers.

Sharing of Distributions

Any distribution made by an LLC before its dissolution must be in equal shares among the members. This is a default rule and LLCs may provide otherwise in the operating agreement.

Recordkeeping

An LLC is required to keep various records including a list of members and managers, a copy of the articles of organization and operating agreement, a record of obligations to make contributions and tax returns and financial statements for the previous three years. Members and managers have a right to inspect an LLC’s records if they make a demand, have a proper purpose, and the records are related to the purpose, as those requirements are detailed in the statute.

Mergers and Conversions

Domestic LLCs may enter into mergers and conversions (as well as interest exchanges and domestications). These transactions are governed by the Arizona Entity Restructuring Act rather than the LLC Act.

Dissolution

Events that will cause an LLC to be dissolved, and its activities and affairs wound up, include an event or circumstance that the operating agreement or articles of organization state causes dissolution, consent to dissolution by the number of members specified in the operating agreement or, if none as provided by the Act, or 180 days after the LLC has no members. Judicial dissolution and administrative dissolution are also provided for.

Conclusion

This article has summarized just a few of the provisions that newly formed Arizona LLCs will be subject to on September 1, 2019, and pre-existing LLCs on September 1, 2020. Members, managers, and legal advisers involved with or interested in Arizona LLCs may wish to review the entire Act, which is codified at Sec. 29-3101 et seq. of the Arizona Revised Statutes to, among other things, make sure the LLC and its governing documents are compliant with the new law and reflect the members’ intentions and best interests.

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