Arizona LLC Operating Agreement: Provisions, Duties, and Dissolution

An Arizona LLC operating agreement is a private contract among the members that sets the rules for how the company is managed, how money moves, how ownership can change hands, and how the business ends. Arizona does not require one. The Arizona Corporation Commission states plainly that “an operating agreement is not required by statute,” and it instructs filers not to submit the agreement with their Articles of Organization.¹ Skipping it, though, hands your company over to the default rules in the Arizona Limited Liability Company Act, and those defaults rarely match what the owners actually intended.

What You Get If You Don’t Have One

When an LLC has no operating agreement, every gap gets filled by statute. A few of the defaults are reasonable. Several are not, and they catch owners by surprise.

Distributions are split in equal shares to each member under A.R.S. § 29-3404, regardless of what anyone contributed. If you put in 80% of the startup capital and your partner put in 20%, you still each get half unless the agreement says otherwise.²
Voting is per capita. Each member gets one vote regardless of ownership percentage, so a 5% owner carries the same weight as a 95% owner.¹
Amending the operating agreement or admitting a new member requires unanimous consent of all existing members.³
In a two-member LLC with no agreement, every decision requires both members to agree, because neither alone constitutes a majority. A single disagreement can freeze the company.¹

There’s also a liability dimension. Arizona courts can pierce an LLC’s veil and hold owners personally liable when the business lacks the formalities that show it’s genuinely separate from its owners. A written operating agreement is some of the strongest evidence that your LLC isn’t just your personal alter ego. A creditor who finds no agreement, no documented procedures, and no clear governance has a much easier argument that you and the company are the same thing.

A.R.S. § 29-3102 technically allows operating agreements to be oral, implied, written, or any combination.⁴ Proving what an oral agreement actually said in court is extremely hard, and banks and other third parties generally won’t accept one. Write it down.

What the Agreement Can and Cannot Do

A.R.S. § 29-3105 is the central statute. It establishes that the operating agreement governs relationships among members, the rights and duties of managers, and the company’s activities, and that the agreement controls whenever it conflicts with the statutory defaults.⁵ Members have wide latitude to design their own rules.

Arizona law draws a few hard lines the agreement cannot cross. It cannot eliminate the obligation of good faith and fair dealing, remove liability for willful or intentional misconduct, unreasonably restrict a member’s right to inspect company records, change the rules about statutory agents and Commission filings, or eliminate certain grounds for judicial dissolution.⁵ These exist to stop a controlling member from stripping everyone else of basic protections.

Provisions Worth Including

An operating agreement can address almost anything about how the company runs. The provisions below are the ones that cause the most trouble when left vague.

Management Structure

An Arizona LLC is either member-managed or manager-managed. In a member-managed company, every owner has authority to act for the business and takes part in daily decisions. In a manager-managed company, designated managers run operations while the other members act more like passive investors.³ Your Articles of Organization declare which structure you’ve chosen; the operating agreement should spell out exactly what authority each role actually holds.

Capital Contributions

Document each member’s initial investment precisely, whether it’s cash, equipment, intellectual property, or services. Contributions establish the baseline for ownership, distribution rights, and what each member recovers on dissolution. The agreement should also handle future capital calls: how they get decided, how much notice members receive, and what happens if someone can’t or won’t contribute. Common consequences include dilution of the non-contributing member’s percentage or treating the shortfall as a loan from the members who covered it.

Profit and Loss Allocation

Because the statutory default splits distributions equally, your agreement is the only place to put a different arrangement in writing.² You can allocate proportionally to ownership, by a custom formula, or any other way the members agree to. The agreement should also address timing and frequency of distributions, and whether the company will retain earnings before paying anything out.

Voting Thresholds

Under the default, matters outside the ordinary course of business require a majority in interest, while amending the agreement or admitting new members requires unanimous consent.³ Many LLCs adjust these: a supermajority (two-thirds or 75%) for major decisions like significant debt or selling company assets, with routine matters left to a simple majority or to the managers alone. Arizona also allows members to appoint proxies to vote on their behalf.

Transfer Restrictions

Unrestricted transfers can bring in strangers the existing members never agreed to work with. A typical agreement requires consent of other members before any transfer, grants a right of first refusal so existing owners can buy the interest before an outsider, or both. The agreement should also address what a buyer actually gets. Under the default, a transferee who hasn’t been formally admitted as a member receives the economic rights to distributions but not the governance rights that come with membership.

Buy-Sell Provisions

Buy-sell terms cover involuntary departures: death, permanent incapacity, bankruptcy, or serious breach of the agreement. Specify how the departing member’s interest gets valued, whether through a formula, an annually agreed value, or an independent appraisal. Say whether the company or the remaining members have the obligation or just the option to buy. Valuation is where most buy-sell disputes start, so this provision deserves real attention when you draft it, not later.

Indemnification

Arizona law lets the agreement establish indemnification and liability protection for members and managers acting on behalf of the company.⁵ A generic statement that the company is managed by members or managers is not enough on its own; the provision must describe the specific scope of protection. And no indemnification clause can shield anyone from liability for willful misconduct or bad faith.

Fiduciary Duties

Everyone who manages an Arizona LLC owes fiduciary duties to the company and the other members. In a member-managed LLC those duties fall on every member; in a manager-managed LLC they fall on the managers. The duty of loyalty requires accounting for any property or profit received from company activities, avoiding transactions where the manager has an adverse interest, refraining from competing with the company, and disclosing material conflicts before any vote. The duty of care requires avoiding grossly negligent, reckless, or intentionally harmful conduct. That’s a lower bar than the “reasonably prudent person” standard some states use.⁶

The agreement can expand, restrict, or modify these duties, but it cannot eliminate the obligation of good faith and fair dealing or remove liability for willful misconduct.⁵ If your members have outside interests that could collide with the company (real estate holdings, consulting work, competing businesses), spell out how those conflicts get handled rather than leaning on the broad statutory language.

Single-Member LLCs Still Need One

Sole owners often assume there’s no point to an agreement when there’s no one to negotiate with. The main reason to have one is protecting your personal liability shield. The agreement documents that you treat the LLC as a genuinely separate entity with its own procedures and governance. Without that documentation, a creditor can argue there’s no real separation between you and the business.

There are practical uses too. Banks routinely ask for an operating agreement when you open a business account.⁷ It gives you a place to document your federal tax classification. And if you later bring in partners, having an existing agreement makes that transition far easier than drafting one under deal pressure.

Federal Tax Classification

Your agreement should state how the LLC will be taxed, because the IRS gives you choices. By default, a single-member LLC is a disregarded entity for tax purposes and a multi-member LLC is a partnership.⁸ You can file IRS Form 8832 to be taxed as a C corporation, or Form 2553 for S corporation treatment.⁹ The agreement should match whichever election you make. A mismatch between what the agreement says and what the IRS expects creates problems during audits.

Signing, Storing, and Amending

Every member signs the agreement for it to take effect. Do not file it with the Arizona Corporation Commission; the Commission explicitly instructs filers not to.¹ Keep the original at the LLC’s principal office in Arizona and give every member a complete copy. Lenders, landlords, and potential business partners may ask to see it. If the only copy is lost, proving the terms later becomes much harder.

Members have a statutory right to inspect company records, and the agreement cannot unreasonably restrict that right.⁵ You can set reasonable conditions on how and when records are accessed, but you cannot block access.

Amendments require unanimous consent of all members unless the agreement itself sets a different process.³ That default protects minority members, but it also lets a single holdout block any change. A well-drafted agreement sorts amendments by type: unanimity to alter profit allocations or admit members, perhaps a two-thirds vote for administrative updates. Set whatever thresholds you want in the original agreement, because retroactively lowering the amendment threshold itself requires unanimous consent under the default. When amendments pile up, some companies restate the full agreement rather than keep stacking riders. Either way, every change should be signed by the required members and distributed to all owners so everyone is working from the same version.

Dissolution

Your agreement should address how the company ends, because the statutory triggers may not match what you expect. Under A.R.S. § 29-3701, an LLC dissolves on an event specified in the operating agreement or articles, on consent of a majority in interest of members who would collectively receive more than half the value of all assets on liquidation, after 180 consecutive days with no members, by court order (unlawful operations, impracticability, deadlock causing irreparable harm, or fraud or waste by those in control), or by administrative dissolution for noncompliance such as failing to maintain a statutory agent.¹⁰

Dissolution does not instantly end the LLC. The company enters a winding-up period where it must pay off debts, settle obligations, and distribute what remains. Creditors get paid first; members get what’s left.¹¹ When winding up is complete, you file Articles of Termination with the Corporation Commission along with a $35 filing fee.¹² Until that filing happens, the LLC still exists as a legal entity and must keep meeting its obligations.

The agreement can customize most of this: additional dissolution triggers, the member vote threshold, and how remaining assets get divided after debts are paid. One thing it cannot override is a court’s power to dissolve the company when operations become impracticable or when those in control are acting fraudulently.⁵

1
Arizona Corporation Commission. Instructions L010i Articles of Organization
2
Arizona Legislature. Arizona Code 29-3404 – Sharing of and Right to Distributions Before Dissolution
3
Arizona Legislature. Arizona Code 29-3407 – Management of Limited Liability Company
4
Arizona Legislature. Arizona Code 29-3102 – Definitions
5
Arizona Legislature. Arizona Code 29-3105 – Operating Agreement Scope, Function and Limitations
6
Arizona Legislature. Arizona Revised Statutes 29-3409
7
U.S. Small Business Administration. Open a Business Bank Account
8
Internal Revenue Service. Limited Liability Company (LLC)
9
Internal Revenue Service. Form 8832, Entity Classification Election
10
Arizona Legislature. Arizona Code 29-3701 – Events Causing Dissolution
11
Arizona Legislature. Arizona Code 29-3702 – Winding Up
12
Arizona Corporation Commission. Articles of Termination