19 Dangers of Not Having an LLC Operating Agreement

If your Arizona limited liability company does not have a well written Operating Agreement signed by all of its members, Arizona's LLC statutes decide how your company is run, who gets paid, who controls the vote, and who inherits your ownership when you die. Many of those default rules produce results LLC owners never expected. Below are 19 ways you can be harmed if your Arizona LLC lacks a comprehensive Operating Agreement.

What Is an LLC Operating Agreement?

An LLC Operating Agreement is a contract between the LLC and all of its owners (called members) and its managers (if the LLC is manager managed). It names all members and managers, states the percentage of the LLC each member owns, states whether a member must contribute money or property to the LLC, explains how meetings are called, and lists the actions that cannot be taken without the approval of a majority, a super majority, or all of the members. The Operating Agreement sets the rules for governing the LLC.

Operating Agreement Tables of Contents

See what our custom Operating Agreements cover:

• Single member Operating Agreement table of contents
• Multi-member Operating Agreement table of contents

19 Ways You Can Be Harmed if Your Arizona LLC Lacks a Well Written Operating Agreement

If an Arizona LLC does not have an Operating Agreement signed by all of its members that alters Arizona LLC law, then Arizona's LLC statutes govern the LLC and its members. The reason you want your Arizona LLC to have a well written Operating Agreement is to eliminate the negative default provisions in Arizona's LLC statutes described in the harms below.

 

A comprehensive Operating Agreement eliminates every harm described below. To hire us to prepare your custom Operating Agreement, complete and submit our online Operating Agreement questionnaire.

Harm 1. Distributions of Money Go Equally to All of the Members

Ned Flanders contributed $90,000 to the LLC and Homer and Marge Simpson contributed $10,000. Ned incorrectly assumes that if the LLC distributes $10,000, he will get 90% ($9,000) and the Simpsons will get 10% ($1,000). However, Arizona Revised Statutes § 29-3404(A) provides that distributions made by a limited liability company must be in equal shares among members. With three members, each gets one third of the distribution, which means Ned gets $3,333 and the Simpsons get $6,667.

 

This default rule can be eliminated by an Operating Agreement that states how distributions are allocated among the members. A.R.S. § 29-3105 provides that if a provision of the Operating Agreement conflicts with Arizona's LLC statutes, the Operating Agreement governs. That gives the members of an Arizona LLC the ability to override Arizona LLC law and allocate distributions as stated in the Operating Agreement rather than equally.

 

If you don't want your LLC to make equal distributions to the members, the members must sign an Operating Agreement that states how distributions will be allocated.

Harm 2. Profits Are Allocated Equally to All of the Members

Using the same facts, without an Operating Agreement Ned Flanders will be allocated one third of the profits and the Simpsons will be allocated two thirds of the profits, even though Ned contributed nine times more capital.

 

A.R.S. § 29-3102.12 states "The members' respective interests in the company's profits are in proportion to their rights to share in distributions . . . ." A.R.S. § 29-3404(A) requires distributions to be equal. If Ned should own 90% of the LLC and the Simpsons 10%, they will still share profits equally unless they sign an Operating Agreement that gives Ned 90% of the distributions and profits and the Simpsons 10%. Under A.R.S. § 29-3105, the Operating Agreement controls over the statute.

Harm 3. Each Member Has One Vote on LLC Actions

Ned Flanders, Homer Simpson and Marge Simpson are the three members of an Arizona LLC. Because they did not sign an Operating Agreement, the LLC's profits are allocated one third to each member.

 

A.R.S. § 29-3102 defines a "majority in interest of the members" as one or more members that hold in the aggregate a majority of the interests in the limited liability company's profits.

 

Because profits are allocated equally, each member effectively gets one vote. The Simpsons have two votes and Ned has one. The Simpsons control the LLC even though they contributed $10,000 and Ned contributed $90,000.

 

If you want members to vote according to their percentage ownership instead of one vote per member, the members must sign an Operating Agreement that states how many votes each member gets.

Harm 4. You Can't Prove Who Owns the Company

A.R.S. § 29-3201 requires the Articles of Organization to name all members of a member managed LLC, or all members who own 20% or more of the capital or profits of a manager managed LLC. It is very common for an LLC's Articles of Organization to omit one or more members because the person who filed them did not know about this requirement.

 

Many people and institutions know that the Articles of Organization may not correctly name all members. The only reliable way to prove who owns the LLC is an Operating Agreement signed by all of the members. Operating Agreements are required by:

1. some banks to open a bank account;
2. lenders before making a loan;
3. title insurance companies when an LLC buys or sells land;
4. third parties before entering into a substantial contract with the LLC; and
5. courts when the members litigate.

Harm 5. You Can't Prove What Percentage of the Company Each Member Owns

The Articles of Organization filed with the Arizona Corporation Commission do not state the percentage of the company owned by each member, and Arizona LLC law does not require it. The only way to prove each member's percentage ownership is an Operating Agreement signed by all of the members.

Harm 6. If You Die, Your Spouse May Not Inherit Your Membership Interest and a Probate May Be Required

If you are a married Arizona resident and you want the LLC membership interest of the first spouse to die to pass automatically to the surviving spouse without an expensive and time-consuming Superior Court probate, you and your spouse must own your membership interest as community property with right of survivorship, not as community property.

 

If you and your spouse own your Arizona LLC as community property (without right of survivorship), the membership interest of a deceased spouse does not automatically transfer to the surviving spouse.

How to Own Your LLC as Community Property with Right of Survivorship

A.R.S. § 29-3401(G) provides that an estate in community property with right of survivorship is created when a written operating agreement expressly declares that a married couple holds a transferable interest as community property with right of survivorship. If married Arizona residents do not sign an Operating Agreement with that language, they own the LLC as community property, not CPWROS. If a spouse dies, an expensive probate may be necessary, and the surviving spouse may not inherit the deceased spouse's interest if the deceased spouse has children who are not also children of the surviving spouse.

 

The three ways married Arizona residents can own their LLC are:

• Community property. This is the default. When a married Arizona resident forms an Arizona LLC or PLLC, both spouses automatically own it as community property. When one spouse dies, the deceased spouse's interest may not pass automatically to the surviving spouse and may have to go through a Superior Court probate. The surviving spouse also may not inherit the deceased spouse's interest.
• Community property with right of survivorship. When married Arizona residents own their LLC or PLLC as community property with right of survivorship (CPWROS) and one spouse dies, the surviving spouse automatically becomes the owner of the deceased spouse's membership interest without a probate.
• Separate property. This is property owned 100% by one spouse. Separate property includes property acquired before marriage and property received during marriage as a gift or inheritance. It is also created when the non-owner spouse signs a disclaimer acknowledging that the other spouse owns all of the asset. If you formed an LLC while married, your spouse automatically owns one half of your interest as community property unless your spouse signs a disclaimer.

Harm 7. If You Die, Your Spouse May Not Get to Increase the Tax Basis of the Entire LLC Interest to Fair Market Value

Sale of the LLC After Death When Owned as Community Property

You and your spouse own 100% of World Wide Widgets, LLC as community property, not community property with right of survivorship. You formed the LLC for $10,000. That is your tax basis, so if you sell the company for $1,000,000 you have a capital gain of $990,000 ($1,000,000 sales price – $10,000 tax basis). For 2026, married couples filing a joint return pay 0% federal long-term capital gains tax if their taxable income is $98,900 or less, 15% if it is $98,901 to $613,700, and 20% if it is above $613,700. At the 20% rate, the tax on a $990,000 gain is $198,000.

 

Using those facts, if you die owning the LLC as community property and your spouse inherits your half interest after a probate, your spouse's tax basis in the LLC is $5,000 + $500,000 = $505,000. Your half interest gets a stepped-up basis equal to its fair market value on your date of death. When your spouse sells the LLC shortly after your death, the capital gain is $1,000,000 – $505,000 = $495,000, and the 20% capital gains tax is $99,000.

Sale of the LLC After Death When Owned as Community Property with Right of Survivorship

Using the same facts, if you die owning the LLC as community property with right of survivorship, two important events occur:

1. Your spouse automatically inherits your half interest in the LLC without a probate; and
2. Your spouse's tax basis in the LLC equals the fair market value of the company on your date of death.

If your spouse then sells the LLC for $1,000,000 with a $1,000,000 tax basis, there is no capital gain, and your spouse saves the $99,000 capital gains tax from the example above.

Harm 8. You Are a Married Arizona Resident Who Failed to Name Your Spouse as a Member in the Articles of Organization

A.R.S. § 25-211(A) provides that all property acquired by either spouse during the marriage is community property, except property acquired by gift, devise or descent. That means if only one spouse is named as a member in the Articles of Organization, that spouse still owns the LLC interest as community property, not separate property.

 

A.R.S. § 29-3205(C) provides that an individual who signs a record filed with the Arizona Corporation Commission, such as Articles of Organization, affirms under penalty of perjury that, to that individual's knowledge, the information in the record is accurate. If you are married and your Articles of Organization do not name both you and your spouse as members, you have this statute hanging over your head.

 

If you need to amend your LLC's Articles of Organization to add a missing spouse, KEYTLaw can prepare and file the amendment for $195 plus the $60 Arizona Corporation Commission filing fee.

Harm 9. You Want to Own the LLC as Your Separate Property, but Arizona Law Makes It Community Property

Under A.R.S. § 25-211(A), a married Arizona resident who forms an LLC owns it as community property with his or her spouse, even if the other spouse is not named as a member in the Articles of Organization filed with the Arizona Corporation Commission.

 

If you are married and want to own your LLC interest as your separate property, your spouse must sign a disclaimer giving up any and all interest in the LLC.

Harm 10. Your Significant Other Will Not Inherit Your Interest in the LLC if You Die

Your unmarried significant other will not inherit your LLC interest unless:

1. you have a last will and testament or a trust that gives it to him or her; or
2. the two of you own the LLC interest as joint tenants with right of survivorship (JTWROS).

If you own your LLC interest with your significant other as JTWROS and you die, your significant other automatically inherits your interest without a probate. If your significant other dies first, you automatically inherit his or her interest.

 

A.R.S. § 29-3401(F) provides that a joint tenancy with right of survivorship 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. If you hire us to prepare your Operating Agreement and want JTWROS ownership with another person, we insert the language required to create it.

Harm 11. Your Manager Managed LLC Does Not Legally Have a Manager

If your Articles of Organization state that the LLC is manager managed and name one or more managers, you may be surprised to learn that none of them is legally a manager unless the LLC has an Operating Agreement that names the manager(s). A.R.S. § 29-3102 defines a "manager" as a person that, under the operating agreement of a manager-managed limited liability company, is responsible, alone or with others, for performing the management functions. Every Operating Agreement we prepare for a manager managed LLC names the manager(s), who also sign it.

Harm 12. Members or Managers of Multi-Member LLCs Have Unlimited Power

You are a member of a five member, member managed LLC. Without the knowledge or consent of the other members, fellow member Homer Simpson causes the LLC to sign a $100,000 employment agreement with his son-in-law, Bob. If Homer were the manager of a manager managed LLC, he could do the same thing. Without an Operating Agreement, members of a member managed LLC and managers of a manager managed LLC have virtually no limits on what they can do on behalf of the LLC.

 

A.R.S. § 29-3407 provides that in a member-managed LLC each member has the right to manage and conduct the company's activities and affairs, and in a manager-managed LLC the right to manage is vested in the manager or managers. The statute requires member approval for only a few matters and does not require member approval for actions within the ordinary course of the company's activities.

 

One of the most important reasons to sign an Operating Agreement is to stop members and managers from taking major actions without the prior approval of the members. Homer should not be able to sign a $100,000 employment agreement with his son-in-law unless the members vote to authorize it. Our multi-member Operating Agreements contain a list of major actions that a member or manager cannot take without approval of a majority, a super majority, or all of the members.

Harm 13. If the IRS Audits Your LLC, the IRS May Pick the Person Who Can Obligate Your LLC to Pay Back Taxes

Under IRS rules, a multi-member LLC is taxed as a partnership unless it elects to be taxed as an S corporation by filing IRS Form 2553 or as a C corporation by filing IRS Form 8832. If your LLC is taxed as a partnership, the members should sign an Operating Agreement that designates a member or a trusted person, such as the LLC's tax accountant, as the LLC's partnership representative under Internal Revenue Code § 6223.

 

The partnership representative has sole authority to deal with the IRS on behalf of the LLC and all of its members, including:

• settling a tax audit;
• agreeing to a final partnership tax adjustment;
• making an IRC § 6226 election to pay a partnership liability at the partner level; and
• agreeing to an IRC § 6235 extension of the period for making partnership adjustments.

If your LLC is taxed as a partnership and does not designate a partnership representative, the IRS may choose one. Do you think the IRS will pick someone who looks out for the members or someone who looks out for the IRS? The partnership representative is the only person the IRS will deal with during an audit. If the IRS says your LLC owes $50,000 in back taxes and an IRS-selected partnership representative agrees, your LLC owes the IRS $50,000 and the members cannot object.

 

Your Operating Agreement should name the partnership representative and require that person to get member approval before agreeing to any IRS action that would adversely affect the members, such as agreeing that back taxes are owed. Operating Agreements prepared by KEYTLaw designate the partnership representative and include three pages that set out the partnership representative's obligations to the LLC.

Harm 14. A Member Steals from Your LLC and You Are Stuck with the Thief Forever

A man once called and said his restaurant's video surveillance system caught one of the LLC's members stealing cash from the register. He asked if the LLC could expel the thief. His LLC had an Operating Agreement, but it said nothing about what happens when a member steals from the company, so he was stuck with the thief.

 

Operating Agreements prepared by KEYTLaw provide that if a member steals money or property from the company:

• the thief is in default of the Operating Agreement;
• the thief is liable to each other member for the greater of that member's actual damages or liquidated damages of $10,000, plus legal fees incurred because of the theft and in collecting the damages;
• the thief cannot vote on any matter on which the other members vote; and
• the other members have the option, for one year after discovering the theft, to buy the thief's entire membership interest for $100.

You do not want to be "partners" indefinitely with a thief. You need an Operating Agreement that lets you buy out a thief for $100 and rid your LLC of the problem.

Harm 15. Members Can Transfer Their Membership Interests to Anybody Without Consent of the Other Members

You and Homer Simpson are the only two members of an Arizona LLC. Homer calls to say he transferred his entire interest in the LLC to Ned Flanders, a man you can't get along with. Because your LLC has no Operating Agreement requiring member consent to transfers, you are now stuck with Ned.

 

A.R.S. § 29-3502(A) provides that a transfer, in whole or in part, of a transferable interest is permissible. Operating Agreements prepared by KEYTLaw require the prior approval of the members to transfer all or part of a membership interest. Approved transfers must also meet other conditions, such as the new member signing the Operating Agreement and reimbursing the LLC for expenses caused by the transfer.

Harm 16. A Member Orally Agreed to Contribute Money or Property but the LLC Can't Enforce It

A.R.S. § 29-3403(A) provides that 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 that person. If you want a member to be legally obligated to contribute money, property or services, that member must sign a record, such as an Operating Agreement, stating the obligation.

 

Operating Agreements prepared by KEYTLaw require members to contribute the money, property or services you specify for each member.

Harm 17. Arizona LLC Law Prohibits Paying a Member for Services Unless the Operating Agreement Allows It

A.R.S. § 29-3407(G) provides that a member is not entitled to remuneration for services performed for a member-managed limited liability company. If you want your member managed LLC to pay you for your services, the members must sign an Operating Agreement that authorizes the payments.

Harm 18. A Member Claims the Members Orally Agreed the LLC Would Pay Him $6,000 a Month

If the members don't sign an Operating Agreement stating that there are no oral agreements between the members and that oral agreements will not be enforced, one or more members may claim the members orally agreed to something. The lack of a written Operating Agreement leads to disputes and expensive litigation. If it isn't in writing, proving it becomes a problem.

Harm 19. If the Sole Manager Dies or Can't Serve, No Replacement Manager Is Automatically Appointed

If you are the sole manager of your manager managed LLC and you die or become mentally incompetent, the company has no manager to run it until the members appoint a replacement, which can harm the business. An Operating Agreement can provide that if the manager dies or becomes incompetent, the person or people named as replacement manager(s) automatically become the manager(s). The replacement manager can then immediately file an amendment to the Articles of Organization with the Arizona Corporation Commission to name the new manager.

Hire Us to Prepare a Custom Arizona LLC Operating Agreement

KEYTLaw prepares custom Operating Agreements for a flat fee of $297 for single member and married couple LLCs, or $797 for multi-member LLCs. To hire us, complete our online Operating Agreement questionnaire. We email the Operating Agreement to all members so each member can sign it digitally using DocuSign. When all members have signed, DocuSign emails the fully signed Operating Agreement to every member.

 

Arizona LLC attorneys Richard Keyt and his son, attorney and former CPA Richard C. Keyt, have formed 10,000+ Arizona LLCs. Questions? Call 480-664-7478 or email rk@keytlaw.com. For more Arizona LLC resources, visit our Arizona LLC Center.

This article provides general information about Arizona law and is not legal or tax advice. Capital gains tax figures are 2026 federal rates for married couples filing jointly. Consult an attorney or tax professional about your specific situation.