19 Arizona LLC Operating
Agreement FAQs
By Richard Keyt (480-664-7478 & [email protected]) and his son Richard C. Keyt (480-664-7472 & [email protected]) Book a free meeting.
FAQ Summary
Arizona law does not require an LLC or PLLC to have an Operating Agreement, but going without one is a costly mistake. When an Arizona LLC has no signed Operating Agreement, Arizona's default statutes take over — and those defaults split distributions and profits equally instead of by ownership percentage, give every member just one vote regardless of how much they own, leave you with no signed proof of who owns the company, block automatic transfer of a deceased spouse's interest, forfeit a valuable step-up in tax basis, and let a single member bind the LLC to major contracts without anyone's consent.
This FAQ from Arizona LLC attorneys Richard Keyt and his son former CPA Richard C. Keyt — who have drafted more than 10,000 Arizona LLC Operating Agreements — explains 19 specific ways the absence of an Operating Agreement can harm you, your co-members, and your business, and how a properly drafted agreement (with the governing A.R.S. statute cited for each) fixes every one. Read on to protect your LLC, or call Rick at 480-664-7478.
Last Updated: July 5, 2026
See our 36 LLC Frequently Asked Questions.
Arizona LLC Operating Agreement
Frequently Asked Question
Each harm below is explained in detail in the FAQ that follows.
| # | What Goes Wrong Without an Operating Agreement |
|---|---|
| 1 | Distributions are split equally — not by ownership percentage |
| 2 | Profits are allocated equally — not by ownership percentage |
| 3 | Every member gets one vote — even a 90% owner |
| 4 | No signed document proves who owns the company |
| 5 | No signed document proves each member's ownership percentage |
| 6 | A deceased spouse's interest may not pass automatically to the survivor |
| 7 | Surviving spouse loses a full step-up in tax basis on the LLC |
| 8 | A spouse is omitted from the Articles of Organization despite co-owning the LLC |
| 9 | A married member cannot own the LLC as separate property |
| 10 | An unmarried partner cannot automatically inherit your LLC interest |
| 11 | A manager-managed LLC has no legal manager |
| 12 | Any member or manager can bind the LLC to major obligations without consent |
| 13 | The IRS — not the members — picks the LLC's partnership representative in an audit |
| 14 | You are stuck with a thieving member permanently |
| 15 | Any member can transfer their interest to a stranger without member approval |
| 16 | An oral promise to contribute money to the LLC is unenforceable |
| 17 | Members cannot be paid for services without an authorizing Operating Agreement |
| 18 | Members can claim oral agreements obligate the LLC |
| 19 | The death of a sole manager leaves the LLC without legal management |
Frequently Asked Questions
Q1. What is an Arizona LLC Operating Agreement?
An LLC Operating Agreement is a contract between the LLC and all of its owners (called members) and managers. A well-written Operating Agreement:
- Names all members and managers
- States the percentage of the LLC owned by each member
- Specifies any required capital contributions
- Sets the rules for calling meetings and voting
- Defines what actions require member approval and at what threshold (majority, supermajority, or unanimous consent)
- Establishes how profits and distributions are allocated
In short, the Operating Agreement is the governing document that sets the rules for how the LLC operates and how its members relate to one another and to the company.
Q2. Does Arizona law require an LLC to have an Operating Agreement?
No. Arizona law does not require Arizona LLCs or PLLCs to have an Operating Agreement. However, Arizona LLC attorneys Richard Keyt and Richard C. Keyt strongly recommend that the members of every Arizona LLC sign a comprehensive Operating Agreement.
The reason is straightforward: when an Arizona LLC lacks an Operating Agreement, Arizona's LLC statutes fill every gap — and the default rules are often harmful to one or more members. An Operating Agreement lets the members override those defaults and establish rules tailored to their business.
Authority: A.R.S. §29-3105.A.3 — “In the event of a conflict between a provision of the operating agreement and this Chapter, the provision of the operating agreement governs.”
Q3. What happens to distributions if my Arizona LLC has no Operating Agreement?
Without an Operating Agreement, all distributions are split equally among all members — regardless of how much each member contributed.
Example: Ned Flanders contributed $90,000 to the LLC; Homer and Marge Simpson contributed $10,000. Without an Operating Agreement, if the LLC distributes $10,000, each of the three members receives one-third ($3,333). Ned does not receive 90% ($9,000) as he expected.
An Operating Agreement can override this default and allocate distributions in proportion to each member's ownership percentage or any other agreed formula.
Authority: A.R.S. §29-3404.A — “Any distribution made by a limited liability company . . . must be in equal shares among Members.”Q4. How are profits allocated in an Arizona LLC without an Operating Agreement?
Profits are also allocated equally among all members — not in proportion to ownership percentage or capital contributions.
In the same example, if the LLC earns $90,000 in profits, each of three members is allocated $30,000. Ned — who contributed $90,000 — expected to receive $81,000 (90%). He receives only $30,000.
Because profits under Arizona law are proportional to each member's right to share distributions, and because distributions are equal by default, the only way to allocate profits by ownership percentage is through a signed Operating Agreement.
Authority: A.R.S. §29-3102.12 — Members' respective interests in profits are proportional to their rights to share distributions.
Q5. How many votes does each member get without an Operating Agreement?
HARM 3
Each member gets one vote, regardless of ownership percentage. Because profits and distributions are equal by default, each member's voting interest is also equal.
In our example, the Simpsons (two members with a combined 10% contribution) have two votes and control the LLC. Ned (one member with a 90% contribution) has one vote. The majority votes against Ned on every matter.
An Operating Agreement can correct this by stating that each member's number of votes equals his or her ownership percentage — so a 90% member has 90 votes and a 10% member has 10 votes.
Authority: A.R.S. §29-3102.12 — “Majority in Interest” is determined by equal profit allocation absent an Operating Agreement.
Q6. How can I prove who owns my LLC and what percentage each member owns?
You often cannot — without an Operating Agreement. The Arizona Corporation Commission's Articles of Organization do not state each member's ownership percentage. They may not even name all members correctly.
The only reliable way to prove who owns the LLC and in what percentage is through an Operating Agreement signed by all members. Banks, lenders, title insurance companies, and courts routinely require a signed Operating Agreement to verify LLC ownership. Without one, you may be unable to:
- Open a bank account for the LLC
- Obtain a business loan
- Buy or sell real estate through the LLC
- Enter into major contracts with third parties
Q7. What happens to my LLC membership interest when I die if I have no Operating Agreement?
Without an Operating Agreement, married Arizona residents own their LLC interest as community property — not as community property with right of survivorship (CPWROS). This distinction matters enormously at death.
When a spouse dies and the LLC is owned as community property, the deceased spouse's interest does not automatically transfer to the surviving spouse. A Superior Court probate may be required, and the surviving spouse may not even inherit the deceased spouse's interest if the deceased spouse has children who are not also the surviving spouse's children.
The solution is an Operating Agreement that expressly declares the couple holds their interest as community property with right of survivorship. Arizona law requires this declaration to be in writing in an Operating Agreement — no other document can create CPWROS for an LLC interest.
Authority: A.R.S. §29-3401.G — CPWROS “is created when a written operating agreement expressly declares that a married couple holds a transferable interest as community property with right of survivorship.”
Q8. What is the tax benefit of owning my LLC as community property with right of survivorship?
When married Arizona residents own their LLC as community property with right of survivorship (CPWROS) and one spouse dies, two powerful tax events occur:
- The surviving spouse automatically inherits the deceased spouse's interest without probate, and
- The surviving spouse's tax basis in the entire LLC is stepped up to the fair market value of the LLC on the date of death.
Why this matters: Suppose you and your spouse formed an LLC for $10,000 and it is now worth $1,000,000. If you die and your spouse inherits the LLC as CPWROS, her tax basis becomes $1,000,000. If she sells the LLC for $1,000,000, there is no capital gains tax — a savings of $99,000 or more compared to owning the LLC as community property only.
The only way to create CPWROS ownership of an LLC interest is through a written Operating Agreement that expressly states CPWROS.
Authority: A.R.S. §29-3401.G
Q9. What if I am a married Arizona resident and my spouse is not named in the LLC's Articles of Organization?
Under Arizona law, all property acquired by either spouse during marriage is community property except for inherited property or property that is a gift — including an LLC formed during the marriage, even if only one spouse is named as a member in the LLCs' Articles of Organization. The unnamed spouse legally co-owns the LLC interest with his or her spouse.
This creates two problems. First, the Articles of Organization are factually incorrect and the member who signed them has affirmed their accuracy under penalty of perjury. Second, the unnamed spouse's community property interest in the LLC is undocumented, which can create complications with banks, title companies, and courts.
An Operating Agreement clarifies each spouse's interest and brings the LLC's records into compliance with Arizona law. If needed, KEYTLaw can also amend the LLC's Articles of Organization to add a missing spouse for $195 plus a $60 Arizona Corporation Commission filing fee.
Authority: A.R.S. §25-211.A; A.R.S. §29-3205.C
Q10. Can I own my Arizona LLC interest as my separate property even though I am married?
Yes — but only if your spouse signs a written Disclaimer waiving any interest in the LLC. Without a Disclaimer, Arizona law automatically makes the LLC interest community property of both spouses, even if only one spouse is named as a member.
When KEYTLaw prepares an Operating Agreement for a member who wants to own their interest as separate property, it also prepares the required Disclaimer for the non-owner spouse to sign. KEYTLaw also offers a standalone editable Disclaimer form for $47.
Authority: A.R.S. §25-211.A
Q11. Will my unmarried partner inherit my LLC interest if I die?
Not automatically. An unmarried partner will not inherit your LLC interest unless you have a will or trust that transfers it to them, or unless the two of you own the LLC interest as joint tenants with right of survivorship (JTWROS).
JTWROS means that if you die, your partner automatically inherits your interest in the LLC — no probate required. And if your partner dies first, you automatically inherit their interest.
JTWROS ownership of an LLC interest can only be created by a written Operating Agreement that expressly states the members hold their interest as JTWROS.
Authority: A.R.S. §29-3401.F — JTWROS “is created when a written operating agreement expressly declares that two or more natural persons hold a transferable interest as joint tenants with right of survivorship.”
Q12. My LLC's Articles of Organization say it is manager-managed and names a manager. Is the named person legally the manager?
No. This surprises many LLC owners. Under Arizona law, a “manager” is defined as a person who holds management authority under the Operating Agreement of a manager-managed LLC. Naming a manager in the Articles of Organization alone does not create legal management authority.
If your manager-managed LLC has no Operating Agreement that names its managers, the LLC technically has no legally authorized manager — even if a manager is named in the Articles of Organization. This can make it impossible for the purported manager to bind the LLC in contracts, open bank accounts, or take other actions on behalf of the LLC.
All Operating Agreements prepared by KEYTLaw for manager-managed LLCs name the managers who also sign the Operating Agreement.
Authority: A.R.S. §29-3102.13 — “‘Manager' means a person that under the Operating Agreement of a manager-managed LLC is responsible for performing the management functions.”
Q13. Can one member enter into a major contract or take significant action without the other members' consent?
Yes — under Arizona's default rules, any member of a member-managed LLC has the right to manage and conduct the company's activities without limitations. This means a single member could, without the knowledge or consent of other members:
- Sign a $100,000 employment agreement
- Enter into a long-term lease
- Take out a loan in the LLC's name
- Sell LLC assets
A well-written Operating Agreement solves this by listing actions that require majority, supermajority, or unanimous member approval before they can be taken. KEYTLaw's multi-member Operating Agreements contain a comprehensive list of major actions that no single member or manager can take without prior member approval.
Authority: A.R.S. §29-3407 — “In a member-managed LLC . . . each member has the right to manage and conduct the company's activities.”
Q14. What happens if the IRS audits my multi-member LLC and we have no Operating Agreement?
Multi-member LLCs are taxed as partnerships by default. IRS rules require every partnership-taxed entity to designate a partnership representative who has sole authority to:
- Settle a tax audit
- Agree to final partnership tax adjustments
- Make elections regarding how a tax liability is paid
- Agree to extensions of the period for making partnership adjustments
If your LLC has no Operating Agreement designating a partnership representative, the IRS may appoint one — and the IRS-appointed representative is unlikely to act in the LLC's best interests. Whatever the IRS-appointed representative agrees to, including an agreement that the LLC owes $50,000 in back taxes, is binding on the LLC and all of its members.
KEYTLaw's multi-member Operating Agreements designate the LLC's partnership representative and include three pages of provisions governing the representative's obligations to the LLC, including a requirement to obtain member approval before agreeing to any adverse IRS action.
Q15. What can I do if a member of my LLC steals from the company?
Without an Operating Agreement that addresses theft, very little. If the Operating Agreement is silent about what happens when a member steals, you may be stuck as co-owners with the thief indefinitely.
KEYTLaw's Operating Agreements provide that if a member steals money or property from the LLC:
- The thief is in default of the Operating Agreement
- The thief is liable for the greater of actual damages or $10,000 in liquidated damages plus legal fees
- The thief loses all voting rights
- The other members have the right for one year to purchase the thief's entire membership interest for $100
Without these provisions, there is no contractual mechanism to remove a thieving member from your company.
Q16. Is a member's oral promise to contribute money or property to the LLC enforceable?
No. Under Arizona law, a member's obligation to make a capital contribution to the LLC is not enforceable unless it is in writing and signed by the member. If a co-member verbally promised to contribute $50,000 and refuses to follow through, the LLC has no legal remedy to compel the contribution.
All capital contribution obligations — including amounts, timing, and consequences of non-contribution — must be set forth in a signed Operating Agreement or other signed written record.
Authority: A.R.S. §29-3403.A — “A person's obligation to make a contribution to a limited liability company is not enforceable unless the obligation is set forth in a record signed by the person.”
Q17. Can my LLC pay me for the services I perform for it?
Not without an Operating Agreement that authorizes payment. Arizona's default LLC statute prohibits a member-managed LLC from paying a member for services unless the Operating Agreement says otherwise.
This also highlights a related risk: without a written Operating Agreement that disclaims oral agreements, any member can later claim the members orally agreed that the LLC would pay them a salary or perform some other obligation. These “he said, she said” disputes are expensive to litigate and difficult to win.
As any first-year contracts professor will tell you: “If it isn't in writing, it's like it never happened.” Your Operating Agreement should authorize member compensation where appropriate and contain a provision stating that no oral agreements are binding on the LLC.
Authority: A.R.S. §29-3407.G — “A member is not entitled to remuneration for services performed for a member-managed LLC.”
Q18. What happens if the sole manager of my manager-managed LLC dies or becomes incapacitated?'
Without an Operating Agreement naming a successor manager, the LLC is left without any legally authorized manager. Because Arizona law requires managers to be named in an Operating Agreement, the LLC effectively has no manager until the members convene and formally appoint one — a process that may take weeks and can leave the LLC unable to conduct business during that time.
A well-drafted Operating Agreement can name one or more successor managers who automatically assume management authority upon the death or incapacity of the current manager. The replacement manager can then immediately file an amendment to the LLC's Articles of Organization with the Arizona Corporation Commission to update the manager's name on the public record.
This single provision can be the difference between an orderly management transition and a business crisis at the worst possible time..
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Richard Keyt and Richard C. Keyt have drafted more than 10,000 Arizona LLC Operating Agreements. A custom Operating Agreement costs $297 for single-member and married-couple LLCs or $797 for multi-member LLCs. All members sign digitally through DocuSign and receive a fully executed copy by email.
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Call, email or text Richard Keyt, father
Direct phone: 480-664-7478
Email: [email protected]
Call, email or text Richard C. Keyt, son
Direct phone: 480-664-7472
Email: [email protected]