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.
Note: While the information contained in this
article is accurate as of its publication date, 2018 passage of the Arizona
Limited Liability Company Act will impose major changes for LLCs formed on or
after September 1, 2019, and for all Arizona LLCs, regardless of their formation
date, beginning September 1, 2020. See David Fitzgibbons'
article for more information.
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.
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
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:
allocation of profits and losses,
management rights and duties,
procedures for business decisions,
withdrawal of members,
restrictions on transfers of ownership
right of first refusal for existing
members to acquire a selling member’s share,
An Operating Agreement is necessary if the members
intend to operate the business in any manner different from the Arizona
statutory default rules.
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. (See related article, “What Fiduciary Duties Do I Owe My Business Associate?”)
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.
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.
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