An Arizona LLC Operating Agreement, at its core, is a specially drawn up plan for your LLC that serves as an unambiguous layout for its management. Imagine it as a tailor-made manual that explains how your enterprise will be conducted, encapsulating elements like ownership distribution, policymaking mechanisms, and plans for future leadership transition.
Adhering to Arizona's LLC statutes, this agreement enables you to put down in writing key facets such as the responsibilities of members, sequences for decision-making, and mechanisms to mend fences - creating a navigation guide that's designed to sidestep potential misinterpretations down your entrepreneurial road.
No, it's not legally required in Arizona under § 29-3105. Single-member LLCs need an operating agreement to preserve their corporate veil and to prove ownership. And multi-member LLCs need one to help provide operating guidance, determine voting rights and contributions.
Read on to learn more about Arizona operating agreements, including:
Here are some key components that are typically included in a Arizona LLC operating agreement:
This guide walks you through standard provisions and provides sample verbiage for each to help guide you.
By this point, your LLC should have a name (the one you used when you registered your LLC formation documents with the state), and you also need to explain the purpose of your LLC. You don't need to get into the nitty-gritty. Going with a generalized statement leaves room for future horizontal expansion without the need for re-registering.
OPERATING AGREEMENT of [COMPANY NAME]
This operating agreement is adopted as of [Date] (the “Effective Date”), by [Member’s Name] , an individual and the sole member (the “Member”) of [Company Name] (the “Company”).
The Member hereby adopts this agreement as the operating agreement of the Company, which agreement sets forth the entire understanding of the Member regarding its subject matter and supersedes all prior understandings and agreements regarding its subject matter.
The purpose of the Company is [ Company Purpose] , and the conduct of other activities as may be necessary or appropriate to promote the stated purposes, and to engage in any other lawful business or activity for which a limited liability company may be organized under the Act.
This section determines if your LLC will be managed by a member(s) or a manager. It further spells out the rights and responsibilities of each member, including capital contributions, voting rights, and the managerial framework. Even if you're the lone member, this section is paramount to formalize your single-member LLC.
The business and affairs of the Company will be managed by the Member. The vote, action, decision, or consent of the Member will constitute a valid decision of the Member and the Company. The Member may appoint one or more officers (including the Member, if the Member is an individual) who will have such powers and authority to act on behalf of the Company granted to them by the Member.
The business and affairs of the Company will be managed by the manager of the Company and any successor thereto appointed by the Member, which manager may also be referred to as the Company’s president (the “Manager”). The initial Manager will be [Manager Name] , who will serve until the Manager’s death, removal by the Member (for any reason or no reason), or resignation. The Manager will have the right and authority to manage the affairs of the Company and make decisions and take action with respect thereto without further approval or consent of any kind by the Member. Except as otherwise required by this agreement and in lieu of any limitations set forth in [State Name] ’s laws for limited liability companies (the “Act”), the Manager will be solely responsible for and is hereby authorized to manage and operate the business of the Company. Except to the extent that the authority of the Manager is expressly limited by the Member, the vote, action, decision, or consent of the Manager will constitute a valid decision of the Manager and the Company.
The registered agent is tasked with receiving and handling essential paperwork for your LLC. While some operating agreements may ask for this, it's not a hard and fast rule since this information is already listed on your formation documents with the state.
The Company’s registered agent in State is: Registered Agent Name , Address . The members may designate other registered agents or offices at any time in this state or, if necessary, in other states.
Look at this as your LLC's potential lifespan. It's the term for which your LLC is intended to exist, as stated in your formation documents. Often business owners form LLCs intending to let them operate indefinitely; however, you also have the choice to specify a definite period or closure date.
The duration of the Company will be perpetual.
Capital contributions refer to the initial investment made to jump-start your LLC. For sole-owner LLCs, the owner could make these contributions directly, which allows you the flexibility to determine the amount and what goes into the business.
Recording these contributions accurately is vital. It gives a clear picture of the financial framework of your LLC and provides vital tax-related data.
The Member’s capital contribution(s) to the capital of the Company for the Member’s membership interest in the Company will be reflected on the books and records of the Company.
The members have made or shall make the contributions of cash, property or services to the LLC as set forth on Exhibit A attached
Indemnification provisions in an LLC's Operating Agreement act as a safety guard protecting the company's members from certain legal costs that can arise from their work for the company. Essentially, the LLC covers any legal cost or damages if a member faces a lawsuit related to their obligations for the LLC.
Outlined in the agreement should be when and under what conditions the LLC will provide such protection. Typically, indemnification doesn't cover deliberate misconduct or gross negligence.
The Member, the Manager, the officers, and the organizer of the Company and their respective affiliates, stockholders, members, managers, directors, officers, partners, employees, agents, trustees, and representatives (individually, an “Indemnitee”) will be indemnified by the Company against any and all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative, or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise by reason of the Indemnitee’s status as any of the foregoing, which relates to or arises out of the Company or its assets, business, or affairs, if in each of the foregoing cases (A) the Indemnitee acted in good faith and in a manner the Indemnitee believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful, and (B) the Indemnitee’s conduct did not constitute gross negligence or willful or wanton misconduct. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, will not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified in clause (A) or (B) above. Any indemnification under this section 5 will be made only out of the assets of the Company, and the Member will not have any personal liability on account thereof.
An Arizona LLC can choose from four tax designations: a sole proprietorship, partnership, S corporation, or C corporation. Your member count and the tax status you elect with the IRS influence your LLC's tax status.
Include a tax-status-related clause in your LLC operating agreement. This clause should address the selected tax status, how to change it, and treating tax returns and allocations (as applicable). That provides a clear route to manage any tax-related situations and safeguards your LLC's financials, including profits, losses, dividends, and taxes.
The Company will be disregarded for federal and state income tax purposes. The admission of one or more additional members, however, will cause the Company to be recognized for tax purposes, and to be taxed, as a partnership.
The Member acknowledges that the Company has elected to be taxed as a corporation for federal tax purposes pursuant to the regulations currently in effect under Section 7701 of the Code, and to be taxed as an electing small business corporation under the provisions of Subchapter S of the Code. Notwithstanding such tax treatment, the Member acknowledges and agrees that the Company will be a limited liability company, for state law purposes, under the provisions of the Act, the Articles of Organization, and this operating agreement.
The Member acknowledges that the Company has filed or will timely file a Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service and that the election made pursuant to the filing is or will be in force and effect covering all periods since the date of this operating agreement. Except as otherwise provided in this operating agreement, during the term of this operating agreement and the continuation of the Company’s “S” corporation election under Section 1362 of the Internal Revenue Code, no Member shall take any action which would cause the revocation or termination of the Company’s “S” election (under Section 1362(a) of the Internal Revenue Code) and any attempt to take such an action will be null and void and without effect. Without limiting the foregoing, and notwithstanding any provision hereof to the contrary, any transfer or attempt to transfer any membership interest to any of the following will be null, void, and without effect:
(a) a person whose ownership thereof would cause the Company to have a number of Members and assignees of membership interests (shareholders of an “S” corporation) greater than the number permitted by Section 1361(b)(1)(A) of the Internal Revenue Code;
(b) an individual who is not a United States citizen or resident;
(c) a trust (or the trustee thereof) which fails to satisfy the requirements of Section 1361(c)(2)(A) or 1361(d) of the Internal Revenue Code;
(d) a corporation; and
(e)any other entity whose ownership would cause the termination or revocation of the Company’s tax status as an “S” corporation.
The operating agreement also directs how you'll distribute the LLC's earnings. For a single-member LLC, this is usually straightforward. But for multi-member LLCs, you should minutely detail when and how distributions occur.
As the sole member of the LLC, the Member is entitled to all profits of the LLC and is responsible for all its losses. Profits and losses shall be determined annually and will be allocated to the Member's capital account. Distributions of cash or other assets will be made at such times and in such amounts as deemed appropriate by the Member.
Business alterations and amendments go hand in hand. If there's a need to modify any terms within your LLC, you'll follow the amending process as outlined in the corresponding clause in your LLC operating agreement. Usually, the process is more straightforward for single-member LLCs, but for multi-member LLCs, consider the voting percentages and requirements to modify the operating agreement.
This agreement and the articles of organization of the Company may not be altered, modified, or changed, and no provision of this agreement may be waived, except by an amendment or waiver, as applicable, approved by the Member.
LLCs, by their nature, aren't generally expected to adhere to corporate formalities—that's more a characteristic of corporations. However, in some cases, neglecting such formalities could pose a threat to your corporate veil. So, including a waiver of all formalities in the operating agreement is beneficial.
The failure of the Company or the Member to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this operating agreement or the laws in the state in which the Company is which govern limited liability companies will not be grounds for imposing personal liability on the Member for liabilities of the Company.
This is like your fail-safe for if things don't go as planned. This section lays out the protocol for properly closing down your LLC and determines who carries decision-making authority in case you exit unexpectedly.
Upon the occurrence of any event which terminates the continued membership of the Member in the Company, the Company will not be dissolved, and the business of the Company will continue. The Member hereby specifically consents to such continuation of the business of the Company upon any such event. The Member’s legal representative, assignee, or successor will automatically become an assignee of the Member’s interest and will automatically become a substitute Member in place of the withdrawn Member.
This signifies when your operating agreement formally comes into effect. You can think of it as your agreement's start date.
Not at all! Unlike your Articles of Organization, your operating agreement is an internal document. All you need to do is sign it, keep a copy, and ensure it's handy when needed.
If your business reaches a growth level beyond your solo capacity, and you must add another member to your LLC, you'll redo the paperwork according to the terms laid out in the new agreement. You'll likely need a new agreement because a multi-member operating agreement is significantly different from a single-member LLC's.
