Does Your Arizona LLC Need an Operating Agreement?

By Anjali Patel, Business Attorney at Tyler Allen Law Firm in Phoenix, Arizona

An Arizona LLC operating agreement is not legally required, and that single fact convinces a lot of business owners to skip it, which is usually the most expensive shortcut they take. Arizona will happily let you run an LLC on nothing but Articles of Organization. What owners miss is what fills the silence: the Arizona Limited Liability Company Act supplies default rules for every question your missing agreement fails to answer, and several of those defaults are aggressively different from what most owners assume they signed up for, starting with a rule that company distributions be split equally among members regardless of who owns what percentage.

Is an operating agreement required for an Arizona LLC?

No. Arizona does not require an LLC to adopt an operating agreement, and nothing is filed with the Arizona Corporation Commission either way. But without one, the default rules of the Arizona Limited Liability Company Act, A.R.S. § 29-3101 and the sections that follow, govern the company, including default rules on distributions, voting, and fiduciary duties that many owners would never have chosen.

What happens if my Arizona LLC has no operating agreement?

Since September 1, 2020, every Arizona LLC, no matter when it was formed, has been governed by the Arizona Limited Liability Company Act, a statute modeled on the national uniform act. The Act works as a gap filler. Where a valid operating agreement speaks, the agreement controls, and the statute says so expressly. Where the agreement is silent, or does not exist, the statute's defaults apply automatically. That means an LLC without an operating agreement does have a complete set of governing rules. They were just written by the legislature for a hypothetical average company, not by the owners for this one. Companies formed under the old law with pre-2020 agreements have a related problem: those documents were drafted against a statute that no longer exists, and silence on the new Act's provisions puts the defaults back in play.

The equal-distribution default

The Act's most notorious default sits in A.R.S. § 29-3404. Unless the operating agreement says otherwise, any distribution the company makes before dissolution must be made in equal shares among the members, regardless of ownership percentages. Read that again with a real company in mind. Two members own a business 70/30 because one of them put in most of the money. For tax purposes, profits are still allocated by ownership, so the 70 percent member picks up 70 percent of the taxable income. But when the company distributes cash without an agreement overriding the statute, the split is 50/50. The majority owner pays tax on income the minority owner received. No one intended that result, no one would negotiate for it, and it is the automatic rule for every unequal-ownership Arizona LLC that never signed an agreement addressing distributions.

The voting and control defaults

Control follows the same logic to the same strange place. The Act ties members' voting power to how they share in profits, and because the default distribution rule is equal shares, the practical default is one member, one vote, again regardless of ownership percentage. A founder holding 90 percent of a three-member company can be outvoted two to one by members holding five percent each. Layered on top of that, the Act requires unanimous member consent for certain significant actions, including adopting or amending an operating agreement itself and authorizing acts outside the company's ordinary course of business. In a company with even one uncooperative member, those defaults convert routine governance into a hostage negotiation. An operating agreement replaces all of it with whatever voting structure the owners actually intend.

The fiduciary duty defaults

The Act also imposes default fiduciary duties, a genuine change from Arizona's old LLC law. Members of a member-managed LLC, and managers of a manager-managed one, owe statutory duties of loyalty and care along with an obligation of good faith and fair dealing under A.R.S. § 29-3409. For some companies those duties are exactly right. For others, especially ventures where the members have other businesses, invest in competing projects, or wear multiple hats, the default duty of loyalty creates lawsuit material out of ordinary conduct. The Act allows an operating agreement to expand, limit, or in most respects eliminate these duties, with the notable exception of good faith and fair dealing, which cannot be waived. Deciding what the members owe each other is precisely the kind of decision that should be made on purpose, in writing, before there is a dispute to apply it to.

What about single-member LLCs?

The internal-warfare defaults matter less when there is no one to fight with, but a single-member operating agreement still earns its keep. Banks and lenders routinely ask for one. Maintaining the document, and observing it, supports the separation between you and the company that the liability shield depends on. It also answers the succession question nobody wants to answer later: what happens to the company if you die or become incapacitated. A membership interest is an asset like any other, and coordinating it with your broader plan, including whether a trust should hold it, is the same conversation covered in why ordinary families still use trusts. One more Act-specific point applies to companies of every size: a member's promise to contribute money to the LLC is not enforceable unless it is in writing, so the handshake commitment to fund the next phase is worth exactly the paper it is not written on.

What a good operating agreement actually covers

The document does not need to be long, but it needs to decide the questions the statute otherwise decides for you. How distributions are shared and when they are made. How votes are weighted and what decisions need more than a majority. Who manages, and the limits of that authority. What duties members and managers owe. How new members come in, and what happens to a membership interest on death, disability, divorce, or a falling out, which is where buy-sell provisions do their work and where an exit connects to the questions we covered in what happens to debts when you sell an Arizona business. Many agreements also carry restrictive covenants among the members, and Arizona enforces those under the same reasonableness rules we walked through in how non-competes and non-solicits work in Arizona, with the useful wrinkle that covenants tied to company ownership are generally the easiest kind to enforce.

The pattern in disputes is remarkably consistent. Companies with a real operating agreement fight about what a clause means. Companies without one fight about everything, under default rules neither side has read, at litigation prices. The Act even supplies default rules on company records and members' rights to demand information, another area where the statute's one-size answer creates friction that a paragraph of drafting would have prevented. A few hours of drafting on the front end is the cheapest insurance an Arizona LLC can buy, and reviewing an existing agreement against the current Act is nearly as valuable, since an agreement that predates the statute can leave the worst defaults quietly in force.

If you need help with your situation in Arizona, you can book a consultation directly here.