After 25 years, the state’s Limited Liability Company Act is being revamped to include more innovative provisions.
The Act, which was signed by Governor Ducey in the spring of 2018, will govern all LLCs formed after September 1st of this year and will govern all LLCs after September 1, 2020.
“It’s been 25 years since we had a wide-scale revision to our LLC Act. We were one of the first five or six states to actually enact an LLC Act back in the day when it was this new-fangled thing — when they first came into being,” business attorney Michael Patterson said. “The idea behind LLCs back in the day was that there’s a lot of flexibility, so you’re going to write your own law — this operating agreement that’s somewhere between 10 to 15 to 20 or sometimes 25 to 35 pages — and so people are going to write their own law and their own internal detail.”
The presence of LLCs has expanded rapidly in the state over the past 25 years, so redrafting an updated act to accommodate their legal needs was crucial. Presently, over 90 percent of operating entities in the state are LLCs, according to Patterson.
The legislation’s language is largely based on the Uniform Laws Commission’s Revised Uniform Limited Liability Act, which has been adopted by over two dozen states in the nation. As a result, Arizona LLC legal cases have a much wider body of case law as precedent, which allows any legal disputes and trials to settle quickly.
“We have bootstrapped into Arizona the ability to use this bigger body of law that interprets that section of rule because it’s similar in these 20 states,” Patterson said. “In a way, it approximates that there is some case law out there already interpreting similar provisions of our statute. So that makes us more attractive from a business perspective to form in Arizona because there is a body of law that we can look to interpret our Act.”
One of the central features of the updated LLC legislation is the clarification of fiduciary duties. Now, owners and managers know who owes a duty to whom, what the duty of law and care are, and more. Duties of each member must be addressed in the drafted operating agreement; if no agreement is written, the duties will align with the legislation’s rules by default. While duties have always been clear under corporate law, they’ve been much murkier for LLCs because of the outdated legislation; the new-and-improved act alleviates that.
“The largest innovation of it is around fiduciary duties, which the prior act was silent on….” Spencer Fane attorney Andy Anderson said. “That’s one of the keys for people that are forming an LLC now — if they’re a serial entrepreneur now and they have lots of irons in the fire and they just form an LLC and go with the default rules, they might get stuck married to a business partner with no duties to them and not be able to go do other deals with other business partners. They might get locked up in that way, and in certain industries, that’s a real problem.”
The Act also provides new protections for managers who run LLCs. With new statutory indemnification rights, company leaders can operate comfortably, knowing that the financial costs of any legal disputes they run into will be reimbursed in full.
More information about the updated legislation can be found on the Arizona State Legislature’s website.
“In sum, the new Act provides a more complete set of default rules for those companies without Operating Agreements, as well as those with very basic agreements that miss out on many issues,” Patterson concludes. “It’s time to dust off your old agreement — or prepare one — so that you are confident that your company continues to operate and be governed as you intended.”