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operating agreement

Basics: What is an Operating Agreement? [Arizona LLC]

You form your Arizona limited liability company and look for next steps.  A quick search on the internet makes it clear, you should put together an operating agreement.  In every entrepreneur’s journey, a pivotal decision is made in that moment.

Hire an attorney to draft your operating agreement or skip past GO and “keep” $200.  In other words, get a quick-fix solution online that keeps money in your pocket today, but causes problems in the future.

In this article, I’ll explain everything you need to know about operating agreements, why you should have one, and why it’s important to have a knowledgeable attorney help you draft an operating agreement.

What is an operating agreement?

 An operating agreement is a document entered into by the limited liability company, its members, and manager (if the LLC is manager-managed).  At its most basic form, the operating agreement outlines how the entity will operated by its members (and manager) including how the business’s functional and financial decisions are made.

At a minimum, the operating agreement should cover:

  • Voting rights;
  • Powers and duties of members (and managers);
  • Percentage of member ownership;
  • How meetings are to be held; and
  • Transfer of ownership.

Is the operating agreement the same as the articles of incorporation?

No. Your articles of incorporation is what the Arizona Corporation Commission returns to you once your entity is properly registered. Unless you’ve drafted the articles yourself or you had an attorney draft them, the articles of organization provided by the ACC will include the name of your business, your principal office, the registered agent and the date on which the entity commenced operations.

An operating agreement is far more robust and can be anywhere from 5 pages to 60 pages depending on the complexity of the LLC’s operations and the desires of the members.  This is why it’s so important to speak with an experienced attorney about having your operating agreement drafted or revised.  There’s a number of way

It’s important to note, however, that your articles of organization can contain certain restrictions

Why does an LLC need an operating agreement?

The sole purpose of the operating agreement is to assist the members in creating rules to govern the internal operations of the business.

Without an operating agreement in place or one that’s poorly drafted, the Arizona Limited Liability Company (LLC) Act must be followed.  While this is not inherently problematic, the Arizona LLC Act has not been drafted explicitly with the business owners’ best interests.

For instance, the Arizona LLC Act may defer to the operating agreement, allowing the members to decide how to operate the business and ignore the statutory rules altogether.

Read: 10 Legal Documents Every New Business Should Have

Who needs an operating agreement?

Every. Single. Business owner.

Even as a single-member LLC, you should have an operating agreement in place.  The operating agreement isn’t just for guiding multiple members through disputes or changes to the operation of their business. It’s also a place where you can lay out important protections and instructions in the event the member passes away or is incapacitated.

For instance, do you want the entity to continue to operate in your absence?  Or do you want a trusted friend or family member to wind down business operations and ultimately dissolve the entity?

Operating a business is no different than starting a family.  You should be planning for both your present and your future and all the things might go wrong along the way.

Action Steps for Your Business

If you don’t have an operating agreement, or your operating agreement needs updating, Nocturnal Legal can help you put one in place or have your current operating agreement amended and restated.

Paloma Goggins - Business Lawyer in Phoenix, Arizona
Paloma Goggins is an experienced business attorney specializing in helping business owners buy or sell a business

I’m Paloma

I’m an experienced business attorney licensed to practice in Arizona and Wisconsin. My client-first philosophy allows us to collaborate, turning skills, passions, and knowledge into the ultimate form of change-making. Let’s innovate together.