What Is An LLC Operating Agreement?
An Operating Agreement is an internal document that acts as a handbook for the company. It contains information about the company and its owners, called “members,” and provides guidelines and instructions on how the business will function so it can achieve its goals.
Does Arizona require all LLCs to have an Operating Agreement?
The state of Arizona does not require LLCs to have an Operating Agreement. However, it encourages them to create one as per the “Arizona Limited Liability Company Act.” This is because the document will provide businesses with many important benefits they really wouldn’t want to be without.
What Are The Advantages Of An Operating Agreement In Arizona?
An Operating Agreement gives you and any co-member certain advantages that can help your business. Here’s a quick look at them:
Reinforces your limited liability status
Your Operating Agreement acts as a formal document establishing the separation between your LLC and you as a member. This will help limit your liabilities over your company’s obligations. If your business gets sued for valid reasons and loses, courts cannot pressure you to pay the company’s debts using assets under your name.
Creates order in the business
The guidelines and instructions included in your Operating Agreement create a sense of order in your business operations. They standardize your internal processes and streamline your tasks so that you perform at your best. This results in enhanced efficiency and productivity.
Can help you convince investors to invest
Your Operating Agreement can be used to help convince investors to invest in your company. Investors often look for companies with clear, attainable goals. They also want to invest in businesses with trustworthy accounting and management systems. More importantly, they want to put their resources into a company that has a good return on investments. The details included in your Operating Agreement should prove that your LLC is worth investing in.
Prevents and settles disputes
The guidelines and instructions provided in your Operating Agreement remove any confusion with regard to your company’s details and internal processes, preventing potential disputes and arguments from happening. And if ever some conflict arises, these instructions will also help bring resolution to the problems that appear.
It helps you plan for succession ahead of time
An Operating Agreement helps your company avoid untimely shutdowns by letting you plan for succession early. Your LLC can be dissolved the moment a member passes away. This dissolution can be avoided by setting up guidelines on what to do in case such a situation happens.
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What Are The Limitations Of An Operating Agreement In Arizona?
Operating Agreements bring many benefits to LLCs, but they also have some limitations that members must know so they can better maximize their use of the document. Here are some of them:
They are difficult to create
First of all, an Operating Agreement isn’t easy to make. You’ll have to spend a lot of time learning what to include in the document before you can actually make one for your LLC. And once you’re done, you have to review it to make sure that there aren’t any loopholes or missing details. You might even need a lawyer to review the draft you personally made.
They cannot control everything
Second, an Operating Agreement gives you better control over your business. However, it cannot foresee external factors that may affect your company, such as Arizona weather conditions, the rise and fall of the stock market, and other things that happen outside of your business.
They can still be violated
Third, your Operating Agreement can be used to hold the members of your LLC accountable for their actions. That said, it cannot completely prevent those with malicious intent from intentionally violating the agreement or exploiting the loopholes they find in it. Take extra care to make sure members won’t find vulnerabilities in your Operating Agreement.
They need constant updating to remain useful
Your Operating Agreement grows with your business. This means that as changes happen to your company, your Operating Agreement must be updated to accurately reflect them. If you don’t update the document, it will become outdated and useless to your business.
What Should You Include In An Arizona LLC Operating Agreement?
Your Operating Agreement must contain all kinds of information pertaining to your LLC. It has to cover all the aspects of your business and be useful as a handbook you can run to if there are issues in the company. This means your Operating Agreement has to include information about your LLC and its members, details about its internal processes, and guidelines for everything members need to do inside the company.
How To Form An Operating Agreement
Now, let’s proceed to create your LLC Operating Agreement. The important part is that it has to be customized to meet the specific needs of your company. This means you will need to think of every scenario where the document will become necessary.
Begin by providing information about your LLC, particularly its name and business address. Indicate the name and address of your registered agent as well, since they will be the ones receiving legal documents about your business, not your LLC. This serves as proof that the Operating Agreement is made for your company.
Next, you need to specify the purposes of your business. These will serve as the mission and vision statements of your LLC—the very goals your company strives to achieve. Doing this establishes your direction as a business.
While you didn’t necessarily include the names of all members in your Articles of Incorporation, especially those who gave small contributions to your company, you’ll need to include everyone in your Operating Agreement. You must also specify the capital contributions and interest percentages for every respective member.
Indicate how your LLC will be managed. It can be a member-managed LLC, which is run by the members who play an active role in the business. Or it can be a manager-managed LLC, which is operated and overseen by a person the members appointed for the role. Your management structure determines the responsibilities of each member of your company.
Member roles and responsibilities
After that, specify the roles and responsibilities each member has. This will clearly divide tasks among your members, set expectations, and limit the authority they have over their roles. Doing this also removes any work-related confusion that could lead to disputes.
Limited Liability provisions and indemnification
In this section, you need to provide details limiting members’ liabilities to your LLC. It is imperative that you include this part as it establishes the separation between your company and its members. This reinforces your limited liability status in the eyes of the court.
You also need to include provisions for indemnifying members. This means members who spend personal funds for the company’s needs must be reimbursed for their expenses.
Guidelines for meetings and voting
In this section, include guidelines for scheduling and conducting meetings between members. Meetings need to be held so members can receive updates about the LLC’s progress and so that certain issues can be discussed. Sometimes, members must also exercise their right to contribute to company decisions.
Your Operating Agreement has to contain detailed descriptions of your company’s accounting system. This means providing details about your business’s cash flow monitoring methods, record-keeping, and financial reporting. Also, indicate your company’s tax treatment and fiscal year.
Guidelines for dispute resolution
Provisions for solving disputes also need to be included in your Operating Agreement. You need to provide instructions to members to attempt solving issues among themselves first, then in the presence of other members next. If these have been attempted to no avail, external mediation might be necessary. Your guidelines must discuss these.
Your Arizona LLC is meant to run perpetually unless specified. In the worst-case scenario, your business might even be forced to shut down due to several reasons, including the untimely departure of a member. Your Operating Agreement has to include instructions for settling issues before closing the company and guidelines for handling the dissolution process.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
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How Much Is An Arizona LLC Operating Agreement?
An Operating Agreement in Arizona costs nothing if you create it personally. You also won’t need to pay filing fees for it since the state does not require it. If you hire a lawyer to help you make one for your LLC, however, you might spend up to around $1,000, depending on the task.
Frequently asked questions
Single-member LLCs in Arizona do not need to submit an Operating Agreement to the Secretary of State, but they need the document for their business. Without an Operating Agreement in place, the sole members will have a hard time establishing a reliable management system for the company. Their limited liability status might not be honored as well since LLCs with only one member can look like sole proprietorships.