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Articles on
LLC Formation
Arizona
Law
Arizona
LLC Library
Sign
an Operating AgreementWhy All Members of an Arizona LLC Should Sign an Operating Agreement
by Richard Keyt, Arizona business attorney
Every Arizona limited liability company should have a written agreement (an "Operating Agreement") signed by all of its members that governs how the members will deal with their LLC ownership interests and other important company matters. Even single member LLCs should have a written Operating Agreement.
Some banks now require, as a condition to opening a bank account for an LLC or making a loan to an LLC, that the LLC, including single member LLC, submit a copy of the company's Operating Agreement. If your company will be buying or selling real estate, escrow companies will require a copy of its Operating Agreement. Banks, escrow companies and other interested parties demand to see copies of Operating Agreements because the document is the primary method to determine who the owners of a limited liability company and what powers, if any, are granted to the members and managers to act on behalf of the company.
When a company is owned by more than one member, it is especially important that the members enter into a written Operating Agreement. A good Operating Agreement typically covers the following types of issues:
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Requiring super majority approval or unanimous approval of members for major company decisions such as borrowing large amounts of money, entering into major contracts, amending the Articles of Organization, changing the capital structure of the company, hiring or firing people related to members and managers, setting compensation of key employees, and entering into contracts with related parties or companies affiliated with members or managers. |
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Restricting members from selling, encumbering or transferring their interests in the LLC without first giving the company and other members a right of first refusal to acquire the membership interest. |
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Setting the company's and members rights following a member's death, disability, divorce or incapacity. The agreement can obligate the company to purchase the interest of a deceased member or give the company and other members options to purchase the interest of a deceased member. |
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Acquiring life insurance to fund the purchase of the interest of a deceased member. |
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Fixing the value of membership interests in certain situations such as the purchase by the company of the interest of a deceased member. |
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Requiring minority members to sell their interests when the majority of the members want to sell the company |
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Requiring members to cooperate if the company makes a public offering of securities. |
| Providing for "shot-gun" buy-out procedures that can be used to facilitate a "divorce" when members can no longer get along or work together or want to go their separate ways. |
The best and easiest time to adopt an Operating Agreement is when the company is formed. I have seen too many sad member disputes that could have been avoided with a good Operating Agreement. An Operating Agreement is like insurance, i.e., if you never need it, you don't miss it, but if you need it and don't have it, you may suffer greatly.
Caution: If the members of an Arizona limited liability company do not adopt a written comprehensive Operating Agreement, their rights and obligations with respect to each other and the company will be as provided by the default provisions of Arizona law. Trusting Arizona law to govern your limited liability company can have substantial unintended and adverse consequences. For example, Arizona law provides that absent a written agreement to the contrary, all distributions of money and property from the company to the members must be made first in proportion to the amount of members' unreturned capital contributions and then equally to the members. See A.R.S. § 29-703.B.
Example of Unintended Consequences: John and Mary form an Arizona LLC. John contributes $10,000 to the capital of the company and Mary contributes nothing. They agree orally that the will split the profits and distributions 75% to John and 25% to Mary. If John and Mary do not document their agreement in writing, Arizona law provides that the members rights with respect to allocation of profits and distributions are as follows:
| John and Mary are each entitled to 50% of the profits. |
| John gets all distributions of money and property from the company until he gets his $10,000 back. |
| When John gets all of his money back, all future distributions of money and property must be split equally among the two members. |
| Until John gets all of his money back, Mary will be allocated 50% of the profits for federal income tax purposes and be liable to pay taxes on any profits allocated to her each year, but not be entitled to any distributions of money from the company. |
For reasons the why I strongly urge multi-member Arizona limited liability companies to put their agreements in writing and adopt a comprehensive Operating Agreement, see my article entitled "Arizona Limited Liability Company Operating Agreement FAQ."
KEYTLaw Operating Agreement Preparation Service
If you form your own LLC, your company should also have an Operating Agreement signed by all of the members. Here's the litmus test for determining if your company needs an Operating Agreement: How can a third party like a bank or title insurance company determine the identity of the members and their percentage ownership of the company? Without a written Operating Agreement, a bank or title insurance company will not accept the word of a member as to who the owners are and how much they own.
Let KEYTLaw prepare your company's Operating Agreement. Don't risk a future expensive dispute among owners by operating your company without a written agreement between the members that covers basic rights and obligations of the members. In 2003, the members of an LLC I formed in 1994 found themselves in Maricopa County Superior Court litigating over, among other things, exactly who the owners were and what percentage of the company they owned. Although I prepared an Operating Agreement for them in 1994, they never signed it.
KEYTLaw offers two LLC Operating Agreements, a 30+ page charging order enhancedtm standard Operating Agreement and an 80+ page charging order enhancedtm comprehensive Operating Agreement with buy-sell provisions. The 30+ page standard agreement is intended for single member companies and husband and wife owned companies. Members of multiple member owned companies, especially companies not owned entirely by one family, should purchase KEYTLaw's 80+ page comprehensive Operating Agreement with buy-sell provisions, which is designed for the more complex scenarios that typically involve multi-member non-family owned LLCs.
Contents of KEYTLaw's 30+ Page Operating Agreement
Every KEYTLaw prepared Operating Agreement contains the following provisions:
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names of the members,
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percentage of the company owned by each member,
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initial and future capital contributions, if any, required from each member,
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limitations on withdrawal of capital contributions,
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allocation of profits and losses among members,
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powers of and limits on managers (for manager managed companies),
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recordkeeping obligations and rights of members to inspect and obtain copies of records and financial information,
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procedures applicable to calling meetings of members and voting on issues affecting the company and its management (such as the percentage of members needed to hold a valid meeting of members, how members can grant proxies to vote for them and how to approve action without a formal meeting of members),
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restriction preventing members from unilaterally withdrawing from the company,
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prohibition on admission of new members without the consent of existing members,
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how to dissolve the company and liquidate its assets,
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how to give legal notice to members, and
- a disclaimer for a spouse to sign when the other spouse is to own his or her interest in the company as separate property
Separate Property v. Community Property Caution
Arizona is a community property state. A married Arizona resident owns two types of property: separate property and community property. Separate property is property that is owned only by one spouse and in which the second spouse has no interest. Community property is property that is owned jointly by both spouses and in which they each own an undivided fifty percent interest.
Arizona community property law provides that all property acquired by a spouse residing in Arizona during marriage is community property, except property acquired by gift or inheritance. The legal significance of this fact is that if a married member (who resides in Arizona) of an Arizona LLC intends to own his or her interest in the company as separate property, the married member must obtain his or her spouse's signature on a disclaimer by which the other spouse acknowledges that the member owns the interest in the LLC as separate property.
If any member of your LLC intends to own his or her interest in the company as separate property, it is imperative for that member to obtain a written disclaimer of interest from his or her spouse to obtain clear title to the interest. The spousal disclaimer is included in both of KEYTLaw's Operating Agreements.
Contents of KEYTLaw's 80+ Page Comprehensive Operating Agreement
In addition to the provisions contained in the 30+ page standard form Operating Agreement, KEYTLaw's 80+ page comprehensive Operating Agreement contains the following additional provisions:
- remedies if a member defaults and fails to pay a required capital contribution (Option 1: other members can make up the difference by loaning funds to the company or the defaulting member with repayments charged to the defaulting member; or Option 2: other members can purchase the interest of the defaulting member),
- loans by members to the company
- capital accounts
- ability to make special allocations of profits, loses and distributions, e.g., allocate profits to a member who contributed all the capital until the member gets all capital back before splitting the profits equally;
- much more extensive limitations on manager's powers;
- specific events that require the prior approval of a majority or super majority of the members or unanimous consent of all members,
- prohibition on payment of compensation to a manager without members' approval,
- indemnification of manager,
- resignation and removal of managers and replacing a manager,
- rights and obligations of members,
- obligation to maintain confidentiality of company matters,
- requirement that minority members agree to sell their interests if the majority desires to sell all of the company,
- intellectual property created by members in connection with the business of the company belongs to the company (optional provision),
- covenant not to compete (optional provision),
- restrictions on transfer or encumbrance of membership interests,
- right of first refusal to company and the other members if a member intends to transfer the member's interest in the company,
- requirements for a transferee of a membership interest to become a member of the company, including the requirement the transferee sign the Operating Agreement,
- rights of the company and members to purchase the interest of a member who defaults under any provision of the Operating Agreement or a debtor in bankruptcy,
- right of the company to purchase the interest of a deceased member,
- deferred payment terms on the purchase of a membership interest,
- insurance clause that allows the company to purchase life insurance on the lives of members to fund the purchase of the interest of a deceased member,
- sample promissory note for member loans and purchases of membership interests, and
- sample membership pledge agreement to secure a member loan or note for the deferred balance owed from the purchase of a member's interest in the company
Fee for KEYTLaw Prepared Operating Agreements
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Type of Operating Agreement |
Fixed Legal Fee |
| 30+ page standard form | $199 |
| 80+ page comprehensive | $695 |
Don't operate your Arizona LLC without an Operating Agreement. Let KEYTLaw prepare an Operating Agreement for you and have piece of mind knowing that you will have the basic terms and conditions of membership set forth in a legally binding written agreement.
Because the Operating Agreement is the most important agreement among the members of a multi-member LLCs, it should not be a fill-in-the-blanks form taken off the internet or from a commercial legal form software package or be a document prepared by anyone other than an experienced business and tax lawyer. See Headings of KEYTLaw's Comprehensive Operating Agreement to get an idea of the issues covered by our 65 page Operating Agreement with buy-sell provisions.
KEYTLaw prepares comprehensive Operating Agreements for Arizona limited liability companies for a fixed fee of $695. Our Operating Agreement preparation service includes initial consultations to determine members' desires and answer questions, preparation of a 80+ page Operating Agreement with buy-sell provisions and, after delivery of the agreement, up to two hours of additional services in connection with answering questions about the agreement and modifying it as requested by the members.
Our comprehensive Operating Agreement is not a form document grabbed from the internet or a form book. It is the product of Richard Keyt's 27+ years of experience as a business lawyer attending seminars, reading treatises, drafting hundreds of partnership agreements and operating agreements, and advising partnerships and limited liability companies
How to Order Your Operating Agreement
To order an Arizona attorney prepared Operating Agreement now for your AZ LLC, click on the OA Questionnaire link
About the Author
Richard Keyt, J.D., LL.M. (income taxation New York University Law School) is a business, real estate, transactions, contracts and estate planning attorney licensed to practice law in Arizona. He has formed over 1,500+ Arizona limited liability companies in the last few years because his low cost high quality LLC package is second to none and it only costs $599 for everything. Rick has practiced law in Arizona since 1980. Rick can be reached by telephone at 602-906-4953, ext. 101. Email at rickkeyt@keytlaw.com and fax at 602-297-6890. Rick's web site located at www.keytlaw.com had over 1,000,000 visitors in 2006 and 2007. Rick does not accept matters involving landlord / tenant disputes or litigation of any kind (other than tax lien foreclosures). Communicating with Richard Keyt via email or otherwise does not cause you to become a client or cause your communications to be confidential or subject to the attorney client privilege.
All Documents Attorney Prepared - not Paralegal or Document Preparer Prepared
Click here for information about KEYTLaw's fixed fee Operating Agreement preparation service.
To order an Arizona attorney prepared Operating Agreement for your AZ LLC, click on the OA Questionnaire link
If You Do Not Hire KEYTLaw to Form Your AZ LLC, Give Yourself Peace of Mind and Purchase Our Quick Start Guide - Only Available from KEYTLaw.com
What you don't know about operating your Arizona LLC could cost you thousands of dollars or possibly risk a court "piercing the veil" and holding the members of the LLC liable for its debts. Arizona business attorney Richard Keyt's in depth, Arizona specific 100+ page Arizona LLC Quick Start Guide is the Holy Grail about operating Arizona LLCs. Merriam-Webster's dictionary defines "Holy Grail" as "an object that is sought after for its great significance," a term that aptly describes the AZ LLC Quick Start Guide.
How to Purchase the QSG
This owner's manual for operating an Arizona LLC explains 75+ critical topics that affect Arizona LLCs. See the five page Table of Contents and you will be amazed that so many important topics are explained in one convenient source. Click here to purchase the Quick Start Guide now from our internet store for the incredibly low price of $99. Ignorance of Arizona LLC law and how to operate your Arizona LLC could be very costly.
This page was last modified on April 10, 2008.
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