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Articles on
LLC Formation
Arizona Law Arizona LLC Library Sign an Operating AgreementWhy All Members of an Arizona LLC Should Sign an Operating Agreement
by Richard Keyt, Arizona LLC & business attorney
Every Arizona limited liability company should have a written agreement (an "Operating Agreement") signed by all of its members that governs how the members will deal with their LLC ownership interests and other important company matters. Even single member LLCs should have a written Operating Agreement.
Some banks now require, as a condition to opening a bank account for an LLC or making a loan to an LLC, that the LLC, including single member LLC, submit a copy of the company's Operating Agreement. If your company will be buying or selling real estate, escrow companies will require a copy of its Operating Agreement. Banks, escrow companies and other interested parties demand to see copies of Operating Agreements because the document is the primary method to determine who the owners of a limited liability company and what powers, if any, are granted to the members and managers to act on behalf of the company.
When a company is owned by more than one member, it is especially important that the members enter into a written Operating Agreement. A good Operating Agreement typically covers the following types of issues:
 | Requiring super majority approval or unanimous approval of members for major company decisions such as borrowing large amounts of money, entering into major contracts, amending the Articles of Organization, changing the capital structure of the company, hiring or firing people related to members and managers, setting compensation of key employees, and entering into contracts with related parties or companies affiliated with members or managers. |
| Restricting members from selling, encumbering or transferring their interests in the LLC without first giving the company and other members a right of first refusal to acquire the membership interest. |
The best and easiest time to adopt an Operating Agreement is when the company is formed. I have seen too many sad member disputes that could have been avoided with a good Operating Agreement. An Operating Agreement is like insurance, i.e., if you never need it, you don't miss it, but if you need it and don't have it, you may suffer greatly.
Caution: If the members of an Arizona limited liability company do not adopt a written comprehensive Operating Agreement, their rights and obligations with respect to each other and the company will be as provided by the default provisions of Arizona law. Trusting Arizona law to govern your limited liability company can have substantial unintended and adverse consequences. For example, Arizona law provides that absent a written agreement to the contrary, all distributions of money and property from the company to the members must be made first in proportion to the amount of members' unreturned capital contributions and then equally to the members. See A.R.S. § 29-703.B.
Example of Unintended Consequences: John and Mary form an Arizona LLC. John contributes $10,000 to the capital of the company and Mary contributes nothing. They agree orally that the will split the profits and distributions 75% to John and 25% to Mary. If John and Mary do not document their agreement in writing, Arizona law provides that the members rights with respect to allocation of profits and distributions are as follows:
| John and Mary are each entitled to 50% of the profits. |
| John gets all distributions of money and property from the company until he gets his $10,000 back. |
| When John gets all of his money back, all future distributions of money and property must be split equally among the two members. |
| Until John gets all of his money back, Mary will be allocated 50% of the profits for federal income tax purposes and be liable to pay taxes on any profits allocated to her each year, but not be entitled to any distributions of money from the company. |
For the reasons why I strongly urge multi-member Arizona limited liability companies to put their agreements in writing and adopt a comprehensive Operating Agreement, see my article entitled "Arizona Limited Liability Company Operating Agreement FAQ."
KEYTLaw Operating Agreement Preparation Service
If you form your own LLC, your company should also have an Operating Agreement signed by all of the members. Here's the litmus test for determining if your company needs an Operating Agreement: How can a third party like a bank or title insurance company determine the identity of the members and their percentage ownership of the company? Without a written Operating Agreement, a bank or title insurance company will not accept the word of a member as to who the owners are and how much they own.
Let KEYTLaw prepare your company's Operating Agreement. Don't risk a future expensive dispute among owners by operating your company without a written agreement between the members that covers basic rights and obligations of the members. In 2003, the members of an LLC I formed in 1994 found themselves in Maricopa County Superior Court litigating over, among other things, exactly who the owners were and what percentage of the company they owned. Although I prepared an Operating Agreement for them in 1994, they never signed it.
Contents of KEYTLaw's 40+ Page Operating Agreement
Every KEYTLaw prepared Operating Agreement contains the following provisions:
names of the members,
percentage of the company owned by each member,
initial and future capital contributions, if any, required from each member,
limitations on withdrawal of capital contributions,
allocation of profits and losses among members,
powers of and limits on managers (for manager managed companies),
recordkeeping obligations and rights of members to inspect and obtain copies of records and financial information,
procedures applicable to calling meetings of members and voting on issues affecting the company and its management (such as the percentage of members needed to hold a valid meeting of members, how members can grant proxies to vote for them and how to approve action without a formal meeting of members),
restriction preventing members from unilaterally withdrawing from the company,
prohibition on admission of new members without the consent of existing members,
remedies if a member defaults and fails to pay a required capital contribution (Option 1: other members can make up the difference by loaning funds to the company or the defaulting member with repayments charged to the defaulting member; or Option 2: other members can purchase the interest of the defaulting member),
loans by members to the company
specific events that require the prior approval of a majority or super majority of the members or unanimous consent of all members,
prohibition on payment of compensation to a manager without members' approval,
indemnification of manager,
resignation and removal of managers and a procedure for replacing a manager or adding additional managers,
rights and obligations of members,
obligation to maintain confidentiality of company matters,
intellectual property created by members in connection with the business of the company belongs to the company (optional provision),
covenant not to compete (optional provision),
restrictions on transfer or encumbrance of membership interests,
right of first refusal to company and the other members if a member intends to transfer the member's interest in the company,
requirements for a transferee of a membership interest to become a member of the company, including the requirement the transferee sign the Operating Agreement,
sample promissory note for member loans and purchases of membership interests,
sample membership pledge agreement to secure a member loan
how to dissolve the company and liquidate its assets,
how to give legal notice to members to call meetings and for other purposes, and
- a disclaimer for a spouse to sign when the other spouse is to own his or her interest in the company as separate property
Separate Property v. Community Property Caution
Arizona is a community property state. A married Arizona resident owns two types of property: separate property and community property. Separate property is property that is owned only by one spouse and in which the second spouse has no interest. Community property is property that is owned jointly by both spouses and in which they each own an undivided fifty percent interest.
Arizona community property law provides that all property acquired by a spouse residing in Arizona during marriage is community property, except property acquired by gift or inheritance. The legal significance of this fact is that if a married member (who resides in Arizona) of an Arizona LLC intends to own his or her interest in the company as separate property, the married member must obtain his or her spouse's signature on a disclaimer by which the other spouse acknowledges that the member owns the interest in the LLC as separate property.
If any member of your LLC intends to own his or her interest in the company as separate property, it is imperative for that member to obtain a written disclaimer of interest from his or her spouse to obtain clear title to the interest. The spousal disclaimer is included in both of KEYTLaw's Operating Agreements.
Fee for KEYTLaw Prepared Operating Agreements
Every LLC Richard Keyt forms contains a custom drafted Operating Agreement included in the purchase price of $599. If you are going to hire Richard Keyt to form your LLC, just complete his online Arizona LLC Formation Agreement.
If your Arizona LLC doesn't have an Operating Agreement, purchase Richard Keyt's Operating Agreement for your LLC in editable Word format for $97 and have piece of mind knowing that you will have the basic terms and conditions of membership set forth in a legally binding written agreement.
Richard Keyt's Operating Agreement is not a form document grabbed from the internet or a form book. It is the product of Richard Keyt's 30+ years of experience as a business lawyer attending seminars, reading treatises, drafting over 2,400+ partnership agreements and LLC operating agreements, and advising partnerships and limited liability companies.
Operating Agreement with Buy-Sell Provisions
If your Arizona LLC has multiple unrelated members, a standard Operating Agreement is not adequate. I strongly urge members who are not related to adopt a comprehensive Operating Agreement with Buy-Sell provisions because it is the members' exit strategy if one or more members needs a company "divorce." Please read my article called "Why Multi-Member LLCs Must Adopt an Operating Agreement with Buy-Sell Provisions" for an explanation of why this document is critically important for multi-member LLCs that have one or more unrelated members.
How to Order Your Operating Agreement
To order an Arizona attorney prepared Operating Agreement now for your Arizona LLC, click on the OA Questionnaire link
About the Author
Richard Keyt, J.D., LL.M. (income taxation New York University Law School) is a business, real estate, transactions, contracts and estate planning attorney licensed to practice law in Arizona. He has formed over 2,400+ Arizona limited liability companies in the last few years because his low cost high quality LLC package is second to none and it only costs $599 for everything. Rick has practiced law in Arizona since 1980. Rick can be reached by telephone at 602-906-4953, ext. 3. Email at rickkeyt@keytlaw.com and fax at 602-297-6890. Rick's web site located at www.keytlaw.com had over 3,000,000 visitors in 2006 - 2008. To follow Rick on Twitter go to www.keytlaw.com/twitter. Rick does not accept matters involving landlord / tenant disputes or litigation of any kind (other than tax lien foreclosures). Communicating with Richard Keyt via email or otherwise does not cause you to become a client or cause your communications to be confidential or subject to the attorney client privilege.
All Documents Attorney Prepared - not Paralegal or Document Preparer Prepared
Click here for information about KEYTLaw's fixed fee Operating Agreement preparation service.
To order an Arizona attorney prepared Operating Agreement for your AZ LLC, click on the OA Questionnaire link
KEYTLaw LLC Formation Records: day: 17 (6/4/08); week: 27 (week ending 6/7/08); month: 64 (6/08); year: 425 (2007)
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This page was last modified on May 23, 2010.
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