Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason # 1
Arizona’s new LLC law called the Arizona Limited Liability Company Act (ALLCA) effective September 1, 2019, contains many traps for members and managers of Arizona LLCs. The only way members and managers of Arizona LLCs can protect themselves against ALLCA traps is by signing an Operating Agreement that eliminates ALLCA’s problem provisions.
One of the most potentially damaging ALLCA provisions is Arizona Revised Statutes Section 29-3404.A. This statute states:
“Any distribution made by a limited liability company before its dissolution and winding up must be in equal shares among Members.”
This statute means that an Arizona LLC taxed as a partnership or S corporation with taxable income of $10,000 in 2021 that is owned 90% by Homer Simpson and 10% by Ned Flanders will:
- Allocate $9,000 of the income to Homer who will pay the tax on that amount.
- Allocate $1,000 of the income to Ned who will pay the tax on that amount.
- Distribute $5,000 to Homer.
- Distribute $5,000 to Ned.
ALLCA Section 29-3404.A causes the $10,000 of income to be distributed equally to each member.
How to Avoid the Section 29-3404.A Problem
Homer and Ned should sign an ALLCA compliant Operating Agreement that eliminates the default problems contained in ALLCA. Their Operating Agreement should have language in it that eliminates Section 29-3404.A .
FYI: All of my Operating Agreements eliminate the Section 29-3404.A problem and are 100% ALLCA compliant. ALLCA compliant means my Operating Agreements are drafted to eliminate many of the inherent problems that ALLCA creates such as Section 29-3404.A .
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How to Hire Richard Keyt to Prepare a Custom Operating Agreement
Option 1: Form a New LLC with a Custom Operating Agreement: When you hire me, Arizona LLC attorney Richard Keyt who has formed 8,400+ and has 287 five star Google & Facebook reviews), to form a new LLC I will prepare a custom Operating Agreement. Complete our online LLC formation questionnaire or call me at 480-664-7478 and give me your information. We form new LLCs and get them approved by the Arizona Corporation Commission the same day we are paid and you approve the LLC formation questionnaire you submit to us. See the “contents of the Bronze ($397), Silver ($597) & Gold ($997) LLC packages.
Option 2: Purchase a Custom Operating Agreement: If your Arizona LLC's Operating Agreement was drafted for the obsolete Arizona LLC law or if it doesn't have an Operating Agreement its members should hire us to draft a custom Operating Agreement by submitting our online Operating Agreement questionnaire.