Fitzgibbons Law Offices - Casa Grande and Maricopa Lawyers

520-426-3824

 
 
 
Tina Vannucci, Casa Grande Business Attorney

 

Fitzgibbons Law Offices
1115 E. Cottonwood Lane
Suite 150
Casa Grande, AZ 85122

Golden Corridor Living

This article appeared in the Spring 2016 issue of Golden Corridor Living Magazine

 

Business Law

June 2015

Formation of an Arizona Limited Liability Company (LLC)

Choosing which type of legal entity to form is one of the most important decisions to make when starting a business. This article examines the limited liability company (LLC), which is currently the most popular choice of Arizona business entity.

Limited liability companies developed from a melding of partnership attributes, such as decentralized management, and partnership tax status with the corporate concept of limited liability. An LLC is a unique business entity permitted by state law, first enacted by Arizona in 1992. An LLC is separate and distinct from its members and managers.

Arizona LLC statutes provide only very basic rules to govern the rights and obligations of the members. Most people choose an LLC because it is simpler than a corporation to form and to maintain but provides the members and managers protection from being liable for the debts, obligations and liability of the LLC.

Formation

To form an LLC, Articles of Organization are filed with the Arizona Corporation Commission for approval, followed by publication in a newspaper approved by the Commission. The Articles of Organization set forth the name and address of the LLC, its members and statutory agent, its general purpose, the term of the LLC, and whether the LLC will be managed by its members or a designated manager.

There are no minimum limits on the number of members an LLC can have. Therefore, one person may start an LLC and serve as the sole member, manager and statutory agent, or there may be several members, a separate manager and a separate statutory agent.

Unlike the rules for corporations, there are no requirements in Arizona for an LLC to hold meetings or file annual reports. Maintaining an LLC in Arizona is relatively easy, but formalities include filing Articles of Amendment when any of the information provided in the Articles of Organization changes and securing necessary licenses from federal, state and local jurisdictions.

Management

In a member-managed LLC, all members are responsible for management of its operations, while in a manager-managed LLC, the members designate a person or persons who will control the LLC activities. A manager can also be a member of the LLC.

Although not required, members should consider entering into an Operating Agreement regarding the LLC's operation and management. An Operating Agreement is an understanding among the members regarding business matters including, but not limited to:

•  startup capital,

•  allocation of profits and losses,

•  management rights and duties,

•  buy-out provisions,

•  procedures for business decisions,

•  valuations,

•  withdrawal of members,

•  restrictions on transfers of ownership interests,

•  non-complete clauses,

•  right of first refusal for existing members to acquire a selling member’s share,

•  dissolution, and

•  dispute resolution.

An Operating Agreement is necessary if the members intend to operate the business in any manner different from the Arizona statutory default rules.

Fiduciary Duties

Arizona LLC statutes are silent on the issue of whether members or managers owe fiduciary duties – a legal duty to act in the best interest of another, to each other or to the LLC when acting on behalf of the company. However, because Arizona courts have found that fiduciary duties are owed in partnerships and by officers, directors and majority shareholders in corporations, it seems likely that an Arizona court would impose fiduciary duties on a member or manager who is acting on behalf of the LLC.

Fiduciary duties are another matter that members may want to consider including in their Operating Agreement until there are clear standards provided by the Arizona courts or legislature.

Planning Ahead

It is important for individuals wanting to form an LLC to decide at the outset how they would like the LLC to be managed and how the affairs of the business and the individuals involved will be addressed. Having such foresight will assist the LLC and its members when dealing with any unanticipated matters or disputes.

Related article: Business Entity Formation in Arizona

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