Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #4

Your Arizona LLC needs an Operating Agreement that eliminates or clarifies new Arizona Revised Statutes Section 29-3407.B that is effective September 1, 2019.  This statute applies to member managed LLCs and states:

In a member-managed limited liability company, the following apply:

1. . . . the management and conduct of the company are vested in the members.

2. within the ordinary course of the company’s activities and affairs, each member has the right to manage and conduct the company’s activities and affairs.

3. . . . a majority in interest of the members shall decide any of the following:

(a) matters that are outside the ordinary course of the company’s activities and affairs but within the company’s purpose.

(b) matters on which there exists a known difference among members.

(c) whether to make an interim distribution before dissolution and winding up.

(d) whether to make an advance to a member or manager under Section 29-3408.C.

The first thing to know about this statute is that without an Operating Agreement that defines how members vote, a majority in interest of the members is determined by counting the number of members (husband and wife are two members) then asking what number is a majority of the total number of members?  See New LLC Law Warning: Beware of Section 29-3404.A, which explains the new law’s definition of majority in interest.  For example, if an Arizona LLC has two members, Homer who owns 90% and Ned & Molly, a married couple, who own 10%, Section 29.3404.A provides that there there are three members so Ned and Molly’s two votes overrule Homer’s one vote.

Subsection 3 of Section 29-3407.B creates a vast amount of uncertainty for the members.  It is a time bomb waiting to explode into litigation.  Here are some of the problems caused by this statute:

  1. What matters are outside the ordinary course of the company’s activities?
  2. What matters are within the company’s purpose?
  3. How does a member know there is a known difference among members?
  4. Who determines the answers to questions 1 – 3?
  5. If this statute is breached, does the company have liability and can it be a defendant in a lawsuit?
  6. What happens with there are an equal number of members and no majority?  Apparently the members are deadlocked indefinitely.

An Arizona LLC that is subject to Section 29-3407.B may want to have a provision in its Operating Agreement that eliminates this statute or modifies it in a way that is understandable and that works in actual practice.

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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.