If you have decided to set up an LLC in Phoenix, Arizona, one of the very first steps that you should take is to create an operating agreement. Taking the time to work with an attorney to create a detailed operating agreement is one of the best decisions that you can make for your new business.
What is an Operating Agreement?
An operating agreement is a legal agreement between the members of a limited liability company (LLC) that governs the internal operations of the business. It established the rights, powers, duties, liabilities, and obligations of all of the members of the LLC.
Why Do You Need an Operating Agreement in Phoenix?
An operating agreement is a vital part of your business plan. It serves to provide clarity and prevent future disputes. If you rely on assumptions and undocumented discussions, it can lead to misunderstandings and miscommunications. A well-structured operating agreement allows LLC members to concentrate on maximizing the potential of their business. By finding solutions to potential issues ahead of time, it lowers the chance of being stuck in costly and messy litigation down the road.
Is Having an Operating Agreement Required Under Arizona Law?
LLCs in Phoenix are not required to have an operating agreement under Arizona state law. However, if your LLC does not have an operating agreement, it will be governed by the Arizona Limited Liability Company Act. The default rules may not be tailored to your needs and result in unexpected outcomes.
What Terms Should You Include in Your Operating Agreement?
You are not required to include any specific provisions in your operating agreement. You can put in any provisions that you want, as long as they are not contrary to law. You should work with an attorney to discuss the unique needs of your LLC, but common provisions in Phoenix operating agreements include:
- Percentage of membership ownership and contributions. Most often, the percentage of ownership is based on the capital contributions each individual provides. However, you could also take into consideration the amount of work that each member puts into the operation of the LLC.
- New members. Many operating agreements include the process for admitting new members into the LLC, including how new members make initial capital contributions and the required contribution amount per member.
- Decision-making. The operating agreement should outline how and when decisions are made, including whether a majority or unanimous consent is required and whether some decisions can be made without seeking the approval of the members. The operating agreement should also include the voting power of each member. Generally, voting power is based on ownership interest in the LLC.
- Powers and duties of members and managers. An LLC can be managed by one or more of the members or by appointed managers. The operating agreement should include how strategic decisions will be made and how the LLC will be run day-in and day-out. All members should understand their responsibilities and the authority that they have to act on behalf of the LLC.
- Distribution of profits and losses. The method and timing of profit and loss distributions should be included in the agreement. For example, you could base distributions on the members’ financial contributions, or you could take into account the different financial needs or tax brackets of the members. The distributions could be at set times, triggered by specific events, or made at the management’s discretion.
- Buyout and buy-sell rules. You should plan for what will happen when a member wants to leave the LLC or dies. For example, will the ownership interest be offered to other members? Can the ownership interest be transferred to a third-party? Does a third-party transfer need approval?
- The operating agreement should include how and when the LLC will be dissolved or ended, including how much each member will get paid based on their ownership percentage or contributions.
- It is prudent to include language that states members have limited liability for their actions as members. This clause can help protect members from personal liability if it appears that they are operating as a sole proprietorship or a partnership.
How Do I Create an Operating Agreement in Phoenix?
A quick google search will lead you to hundreds of do-it-yourself operating agreement templates. However, there are many dangers of taking a DIY approach, and you risk having to pay more when unforeseen complications arise. Working with an experienced business planning attorney will ensure that your operating agreement is valid, comprehensive, and fulfills its purpose.
Your Phoenix Business Planning Attorney
If you have questions about operating agreements, you should contact a business planning attorney. Nicole Pavlik is an experienced business planning attorney based in Phoenix, Arizona. Call Nicole Pavlik Law Firm today at 602-635-6176 to schedule a free consultation and discuss your business planning needs.