Arizona LLC Operating Agreement | A Comprehensive Guide

Steve Bennett
Business Formation Expert  |   Fact Checked by Editorial Team
Last updated: 
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Arizona Operating Agreement

When forming a Limited Liability Company (LLC) in Arizona, one of the most critical steps is creating and executing an LLC Operating Agreement. This legally binding document outlines your LLC’s ownership, management, and operational procedures, ensuring that your business runs smoothly and is protected from potential disputes and legal issues. Although only sometimes required by state law, having a well-drafted operating agreement is essential for an LLC. This article will explore the content and importance of an Operating Agreement in Arizona and discuss its key components.

Webinarcare Editorial Team will help you understand the process of having an operating agreement for your Arizona business. You must be guided by all the factors gathered in this article.

What is an Operating Agreement?

An operating agreement is a legally binding document that outlines a limited liability company‘s ownership structure, management, and operational procedures (LLC). It governs the internal workings of the LLC and establishes the rights, responsibilities, and obligations of its members (owners) and managers.

This includes details such as rules, regulations, and provisions related to the operation of the LLC. The Operating Agreement serves as a guide for dealing with disagreements, bringing in new members, and managing various situations that may arise while doing business. It delivers clarity and ensures smooth functioning while providing legal protection to businesses.

Although not always required by state law, having a well-drafted operating agreement is essential for an LLC. It helps prevent potential disputes among members, ensures smoother business operations, and provides a clear framework for making decisions and resolving issues. It also helps to establish limited liability protection for the members by demonstrating that the LLC is a separate legal entity with its own rules and procedures.

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Arizona LLC Operating Agreement Content

An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. It includes forming the LLC, members and ownership, distribution of profit and losses, management structure, meetings and voting procedure, limitation of liability and indemnification, dissolving Arizona business, dispute resolution, and amendments and modification.

Article I: Formation of the LLC

The first step in creating an LLC Operating Agreement is to outline the basic information about your LLC, such as:

  • Name of the LLC: Your LLC’s name must include the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” and comply with the Arizona LLC naming requirements.
  • Principal Office Address: This is where your LLC’s primary business activities will be conducted.
  • Purpose of the LLC: This section should describe the primary purpose of your LLC and the types of business activities it will engage in.
  • Statutory Agent Information: Your Statutory Agent is a person or entity designated to receive legal documents on behalf of your LLC. The Statutory Agent must have a physical street address in Arizona. It’s essential to choose a reliable and responsible Arizona Statutory Agent, as failure to receive and respond to legal documents can have serious consequences for you to start a business in Arizona

You can serve as your Statutory Agent, appoint a friend or family member, or hire the Best Arizona Statutory Agent Services. We reviewed some of the services for you to check out if you still don’t have one.

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Article II: Members and Ownership

This section deals with identifying all the members of the LLC and their ownership percentages. It includes details like names, addresses, and contributions of each member. Details about how increases and decreases in membership are also covered in this section.

  • Initial Members: The names and addresses of each initial member should be listed, along with their respective ownership interests.
  • Ownership Interests: This section should detail each member’s ownership interest percentage.
  • Capital Contributions: Each member’s initial capital contribution to the LLC should be documented, along with any additional contributions that may be required.
  • Additional Members: The agreement should outline the process for admitting new members to the LLC and the rights and responsibilities of these new members.
  • Transfer of Membership Interests: The operating agreement should contain provisions governing the transfer of membership interests, including transfer restrictions and the right of first refusal for existing members.
  • Withdrawal of Members: The process and consequences for members who wish to withdraw from the LLC should be clearly defined. In Arizona, there is a definite guideline on How to Remove a Member from your Arizona LLC. 

Article III: Distribution of Profits and Losses

This article explains how the LLC profits and losses will be distributed among the members. It can be based on the ownership percentages or a different agreement stipulated by the members. It lays out the process for distribution and any restrictions on those distributions.

  • Allocation of Profits and Losses: The agreement should detail how profits and losses will be allocated among the members, typically based on their own interests.
  • Distributions to Members: The process for distributing profits to members should be outlined, including the timing and manner of distributions.

Article IV: Management Structure

Your LLC Operating Agreement should outline the management structure of your business. This includes

Member-Managed vs. Manager-Managed: You must decide whether your LLC will be managed by its members or appointed managers. This decision will impact the roles and responsibilities of each party.

A Member-Managed LLC is a type of limited liability company (LLC) where the management and day-to-day operations of the business are handled by its members (owners) directly. In a Member-Managed LLC, each member has the authority to make decisions and take actions on behalf of the company, such as entering into contracts, hiring employees, and managing the finances.

This management structure contrasts with a Manager-Managed LLC, where the members appoint one or more managers to oversee the business operations. In a Manager-Managed LLC, the appointed managers have the authority to make decisions and act on behalf of the company. In contrast, the members typically have a more passive role, focusing on high-level decision-making and strategic planning.

Roles and Responsibilities of Members/Managers: The agreement should define the roles and responsibilities of each member or manager, including their duties, decision-making authority, and any limitations on their powers.

Article V: Meetings and Voting Procedures

This article outlines the rules for conducting meetings and voting procedures. It specifies the quorum required for decision-making, how votes are counted, and how members are notified about meetings. It also includes information about special meetings and emergency decisions.

  • Voting Rights and Decision-Making Process: The agreement should outline each member or manager’s voting rights and decision-making for various business matters.
  • Meetings and Notice Requirements: The operating agreement should specify the frequency of meetings, the process for calling special meetings, and the notice requirements for each type of meeting.

Article VI: Limitation of Liability and Indemnification

To protect the personal assets of your LLC’s members and managers, your operating agreement in Arizona should address the following:

  • Liability of Members/Managers: The agreement should limit the liability of members and managers for the debts and obligations of the LLC, following Arizona law.
  • Indemnification Provisions: The operating agreement should include provisions for indemnifying members and managers for actions taken on behalf of the LLC, as long as those actions are within the scope of their duties and do not involve gross negligence or willful misconduct.
  • Insurance Requirements: The agreement should specify any insurance requirements for your LLC, such as liability or property insurance. Small business insurance helps safeguard your business from financial losses, legal claims, and other unforeseen events. This protection allows entrepreneurs to focus on growing and sustaining their businesses within the Arizona economy.

You may check out the Best Small Business Insurance in Arizona to learn more about business insurance.

Article VII: Record Keeping and Financial Reporting

This article provides details about the record-keeping and financial auditing procedures. It outlines the importance of keeping accurate and comprehensive records of an LLC’s financial transactions. It also specifies the frequency of financial reporting and distribution to the members.

  • Accounting and Recordkeeping: The operating agreement should outline your Arizona LLC’s accounting methods and recordkeeping requirements. Effective financial management is important for the success of your Arizona LLC. Establish a reliable accounting system to track income, expenses, and tax obligations. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in Arizona.
  • Fiscal Year: The agreement should specify the fiscal year for your LLC, which may be either a calendar year or any 12-month period.
  • Tax Treatment and Filing Requirements: The agreement should specify your LLC’s tax treatment and any required filings with the Arizona tax authorities. You should include the filing of the Arizona Articles of Organization, annual fees, and other associated fees that need to be filed.

For the initial and final cost for forming your Arizona LLC, look up the LLC Cost in Arizona for additional information. 

Article VIII: Dissolution and Winding Up

This section outlines the circumstances under which the LLC may be dissolved, such as a unanimous decision by members, legal issues, bankruptcy, or achieving its purpose. It also includes information about how the LLC’s assets will be liquidated and debts paid upon dissolution.

Events Triggering Dissolution: The agreement should list the events that will trigger the dissolution of your LLC, such as the death or withdrawal of a member, a unanimous vote of the members, or a court order. 

Some common events include:

  • A unanimous vote of the members to dissolve the business.
  • The death, resignation, or withdrawal of a member unless the remaining members agree to continue the business.
  • The expiration of a specified period or the completion of a specific purpose, as outlined in the operating agreement.
  • A court order mandating the dissolution of the LLC.

Winding Up Process: The operating agreement should outline the process for winding up the affairs of the LLC, which typically involves:

  • Settling the company’s outstanding debts and obligations.
  • Liquidating the company’s assets.
  • Resolving any pending legal disputes.
  • Preparing and filing final tax returns.

Distribution of Assets: The operating agreement should specify how the LLC’s remaining assets will be distributed among the members upon dissolution, typically in proportion to their ownership interests.

Certificate of Cancellation: After the winding-up process is completed, the LLC may be required to file a certificate of cancellation or articles of dissolution with the Arizona Secretary of State to dissolve the company and remove it from its records formally. 

Article IX: Dispute Resolution

This article provides the protocol for handling any disputes arising between LLC members. It can include stipulations for mediation or arbitration in case of any conflicts. The agreement should include a process for resolving member disputes, such as mediation or arbitration.

Article X: Amendments and Modifications

Your LLC Operating Agreement in Arizona should include a process for making amendments and modifications, such as:

  • Process for Amending the Operating Agreement: The agreement should outline the process for proposing, considering, and approving amendments to the operating agreement.
  • Required Approval for Amendments: The agreement should specify the percentage of member approval required to amend the operating agreement.

Once your LLC Operating Agreement has been drafted, it should be executed by the initial members or managers and adopted by any additional members who join the LLC.

Role of Statutory Agent in LLC Operating Agreement

A Statutory Agent is a person or entity designated to receive legal documents and official correspondence on behalf of an LLC. While the primary role of a Statutory Agent is to maintain a reliable point of contact for legal matters, some registered agent service providers also offer additional services, such as creating an operating agreement for your LLC. Below are some advantages of having a Statutory Agent create an operating agreement for your business:

  • Expertise: A Statutory Agent specializing in LLC Formation Services often has extensive knowledge and experience drafting operating agreements. They are familiar with the requirements and best practices for creating a comprehensive and legally compliant operating agreement, which can help protect your business interests and minimize potential disputes among members.
  • State-Specific Requirements: A Statutory Agent offering operating agreement services is well-versed in state-specific laws and regulations governing LLCs. They can ensure that your operating agreement complies with the specific requirements of the state in which your LLC is formed, including mandatory provisions and filing requirements.
  • Time-Saving: Drafting an operating agreement in Arizona can be complex and time-consuming, especially for business owners unfamiliar with legal terminology and procedures. By delegating this task to a Statutory Agent, you can save time and focus on other crucial aspects of your business.
  • Customization: A Statutory Agent with experience creating operating agreements can tailor the document to meet your business’s unique needs and circumstances. They can help you address specific management structures, financial arrangements, and other critical aspects of your LLC that may not be covered in a generic operating agreement template.
  • Ongoing Support: The Statutory Agent services provide ongoing support and guidance in maintaining and updating your operating agreement as your business grows and evolves. This can help ensure that your operating agreement remains relevant and compliant with changing laws and regulations.

While there are advantages to having a Statutory Agent create an operating agreement for your LLC, it is essential to carefully review and understand the terms of the agreement before signing. Additionally, it is a good idea to consult with legal and tax professionals to ensure that the operating agreement aligns with your business goals and complies with all applicable laws and regulations.

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FAQs

What is an LLC operating agreement in Arizona?
An LLC operating agreement in Arizona is a legal document that outlines the rules, regulations, and financial structure of an LLC (Limited Liability Company) that operates in Arizona.
Is an operating agreement required in Arizona for an LLC?
No, an operating agreement is not required in Arizona for an LLC, but it is highly recommended to have one to avoid confusion and disputes.
Can we create our own operating agreement in Arizona?
Yes, you can create your own LLC operating agreement in Arizona or hire an attorney to draft one for you.
Are there any specific state laws for operating agreement in Arizona?
No, there are no specific state laws for operating agreement in Arizona, but it must comply with the Arizona Revised Statutes (ARS) and the LLC’s Articles of Organization.
Are operating agreements public record in Arizona?
No, LLC operating agreements are not public record in Arizona and can be kept private among the members.
Is there a difference between an operating agreement and Articles of Organization in Arizona?
Yes, Articles of Organization in Arizona are filed with the Secretary of State and outline basic information of the LLC like its name, address, and members. Operating agreements, on the other hand, are not filed with the state and provide more specific details about the LLC’s structure.
Can the operating agreement be changed in Arizona?
Yes, the operating agreement can be changed in Arizona if all members consent to the changes.
How often should an LLC operating agreement be reviewed in Arizona?
It is suggested to review the operating agreement every year or when major changes occur within the LLC, in Arizona.
Does an LLC operating agreement protect personal assets in Arizona?
Yes, an LLC operating agreement protects personal assets of the members in Arizona as the LLC’s liability is limited to its assets.
How many members can be a part of an LLC in Arizona?
There is no limit on the number of members an LLC can have in Arizona.
Are non-residents allowed to form an LLC in Arizona?
Yes, non-residents are allowed to form an LLC in Arizona.
How much does it cost to form an LLC in Arizona?
The LLC formation fee in Arizona is $50.
Can non-US residents form an LLC in Arizona?
Yes, non-US residents can form an LLC in Arizona if they have a US-based registered agent.
Can an LLC have a foreign address in Arizona?
Yes, an LLC can use a foreign address for mailing purposes but is required to have a physical address in Arizona.
How do I dissolve an LLC in Arizona?
To dissolve an LLC in Arizona, you have to file Articles of Dissolution with the Secretary of State office.
Do I need an operating agreement if I am the only member in an LLC in Arizona?
No, you do not need an operating agreement if you are the only member in an LLC in Arizona, but it is still recommended to have one.
Can an LLC have multiple operating agreements in Arizona?
No, an LLC can only have one operating agreement in Arizona.
How long does it take to form an LLC in Arizona?
It may take, generally, around 1-3 days in Arizona to form an LLC.
Do Arizona LLCs have to pay state taxes?
Yes, they have to pay transaction privilege tax according to business category but, in most cases, it’s just a license cost with no liability as the LLC itself is a pass-through entity in terms of taxes and it’s part of the members’ tax liability.
Can an LLC in Arizona have an unlimited lifespan?
Yes, an LLC in Arizona can have an unlimited lifespan, which can be specified in the operating agreement.
Can an LLC have a registered agent and registered office within Arizona only?
Yes, an LLC Can have a registered agent and registered office in Arizona.
Can an LLC own another LLC in Arizona?
Yes, an LLC can own another LLC in Arizona, called a subsidiary LLC.
What is the difference between a member and a manager in an LLC in Arizona?
Members are the owners of the LLC while the manager is hired to run the operations of the LLC. Members can operate as managers only if permitted by the operating agreement.
What happens if there is no operating agreement in Arizona?
If there is no operating agreement, the LLC is governed by the default rules specified in the Arizona Revised Statutes (ARS).
Do all members of an LLC have equal voting rights in Arizona?
No, members may have equal or unequal voting rights in an LLC as specified in the operating agreement.
Can an LLC be taxed as an S-corp in Arizona?
Yes, an LLC can choose to be taxed as an S-corporation in Arizona by filing Form 2553 with the IRS.
Can someone under 18 form an LLC in Arizona?
No, someone under 18 cannot form an LLC in Arizona as they are not legally capable of entering a contract.
Can an LLC be converted to another type of business entity in Arizona?
Yes, LLCs are allowed to convert to other types of business entities by following the Arizona Revised Statute 10-13414.
Can a foreign LLC do business in Arizona without registering with the state?
No, foreign LLCs must register with the Arizona Secretary of State office before doing business in Arizona.
What is an LLC operating agreement?
An LLC operating agreement is a legal document that outlines the ownership and operating procedures of a limited liability company (LLC).
Is an operating agreement required for forming an LLC in Arizona?
No, an operating agreement is not legally required to form an LLC in Arizona, but it is highly recommended to avoid disputes among the members.
Can you draft your own LLC operating agreement in Arizona?
Yes, you can draft your own LLC operating agreement in Arizona, but it is recommended to have an attorney review it to ensure it complies with state laws.
Does the Arizona state government provide a template for LLC operating agreements?
No, the Arizona state government does not provide a template for LLC operating agreements.
Can an LLC operating agreement be amended in Arizona?
Yes, an LLC operating agreement can be amended in Arizona with the agreement of all members.
How can you dissolve an LLC in Arizona?
To dissolve an LLC in Arizona, you must file a Certificate of Termination with the Arizona Corporation Commission.
What information should be included in an LLC operating agreement?
An LLC operating agreement should include information about each member’s ownership interest, capital contributions, voting rights, as well as rules and procedures for decision-making, profits/loss distribution, buyouts, and dissolution.
Is an LLC operating agreement public record in Arizona?
No, an LLC operating agreement is not a public record in Arizona.
Is it necessary for an LLC operating agreement to be signed by all members in Arizona?
Yes, an LLC operating agreement should be signed by all members in Arizona.
Can an LLC operating agreement be amended or revoked by a court in Arizona?
Yes, a court can amend or revoke an LLC operating agreement in Arizona if it is found to be unlawful or unfair to all members.
Can an LLC operating agreement be enforced in Arizona without a court order?
Yes, an LLC operating agreement can be enforced in Arizona without a court order as long as it does not violate state law.
Should an Arizona LLC operating agreement be notarized?
While not legally required, it is recommended to have an Arizona LLC operating agreement notarized for added protection.
What happens if an LLC operating agreement in Arizona conflicts with state law?
If an LLC operating agreement in Arizona conflicts with state law, state law takes precedence.
What is the tax treatment for LLCs with multiple members in Arizona?
LLCs with multiple members in Arizona are taxed as partnerships, with each member reporting their share of profits/losses on their individual tax returns.
Can an LLC operating agreement limit a member’s liability in Arizona?
Yes, an LLC operating agreement in Arizona can limit a member’s liability to their capital contributions.
Who can draft an LLC operating agreement in Arizona?
Anyone can draft an LLC operating agreement in Arizona, but it is recommended to have an attorney review it.
Can an LLC conversion out of Arizona be done without an operating agreement?
An LLC conversion out of Arizona can be done without an operating agreement, but it may require additional legal documentation.
What happens to an Arizona LLC in the absence of an operating agreement?
In the absence of an operating agreement in Arizona, state laws regarding LLCs will apply.
Is an Arizona LLC operating agreement the same as a business plan?
No, an Arizona LLC operating agreement is not the same as a business plan, although it can include elements such as management structure and decision-making processes.
Can a non-Arizona resident be a member of an Arizona LLC?
Yes, a non-Arizona resident can be a member of an Arizona LLC.
Can an LLC operating agreement in Arizona be written to benefit only one member?
An LLC operating agreement in Arizona can be written to benefit one member, but it must be fair and equitable to all members to avoid legal disputes.
What happens if an LLC operating agreement in Arizona is too vague or ambiguous?
If an LLC operating agreement in Arizona is too vague or ambiguous, a court may need to interpret it, which can be costly and time-consuming.
Can an LLC operating agreement in Arizona be enforced after the LLC has been dissolved?
No, an LLC operating agreement in Arizona cannot be enforced after the LLC has been dissolved.
Can an LLC operating agreement in Arizona require unanimous consent for certain decisions?
Yes, an LLC operating agreement in Arizona can require unanimous consent for certain decisions.
Can an Arizona LLC have an indefinite life span?
Yes, an Arizona LLC can have an indefinite life span as long as it is specified in the operating agreement and complies with state law.
Can an LLC operating agreement in Arizona limit transferability of ownership interests?
Yes, an LLC operating agreement in Arizona can limit the transferability of ownership interests.
Can an Arizona LLC agreement include provisions regarding dispute resolution?
Yes, an Arizona LLC agreement can include provisions regarding dispute resolution, such as alternative dispute resolution (ADR) methods like mediation or arbitration.
How soon after forming an LLC in Arizona should an operating agreement be created?
An LLC operating agreement should be created as soon as possible after forming an LLC in Arizona to avoid potential disputes among members.

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Conclusion

Having a well-drafted LLC Operating Agreement in place is crucial for the success and protection of your Arizona LLC. It provides a clear framework for the ownership, management, and operation of your business, helping to prevent disputes and ensure compliance with state law. It is highly recommended to consult with legal and tax professionals when drafting and executing your operating agreement to ensure it meets your specific needs and complies with all applicable laws and regulations.

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