Exploring the New Arizona LLC Act and Member Withdrawal

Company law in Arizona is surprisingly flexible when it comes to allowing members of an LLC to withdraw. At the moment, even if there is no operating agreement, a member can withdraw simply by sending a written notice to the other members of the company. The issue of requesting the return of a capital contribution, however, is more complex.

The Arizona Limited Liability Company Act of 2018 aims to simplify things. One of the main changes that companies will face as a part of the act is that if an LLC does not have an operating agreement right now, then they will be bound by the default agreement described in the act.

What Does This Mean for LLCs

Any LLC formed after 1 September 2019 will be bound by the new act. Any existing companies formed before that date will have the new rules come into effect on 1 September 2020. This means that you will be bound by the default operating agreement after that date. If you do not want your company to be bound by the default ALLCA agreement, then you will need to put an agreement of your own in place.

Capital and Responsibilities

The idea behind the LLC operating agreement is that it addresses the responsibilities of a member of a company and the circumstances under which they can withdraw, as well as what obligations they should fulfill when withdrawing. The agreement also looks at the ways that a company can pay back the capital of a withdrawing member.

Ideally, when a member withdraws the other members will buy up their stake in the business. If they are unable to do this then they have the option of selling the stake to someone else, or potentially offering distributions to the departed member for a time.

This scenario can be complex depending on the nature of the member’s departure, however, so it is important to seek legal advice to ensure that it is managed properly. If paying the member the capital that they are owed will interfere with the normal operation of the business then this must be addressed.

Before you withdraw from an LLC, you should get a report of your capital account so that you know the stake you have in the business. Discuss this with a legal expert to ensure that the withdrawal is properly managed. In most cases, an amicable solution can be reached that would allow you to get back your investment without issue.

Contingency Planning is Important

If you are currently a part of an LLC that does not have an operating agreement, seek legal advice as soon as possible and consider drawing up an agreement that dictates how much a member can withdraw, when, and how, as well as the circumstances under which departures can happen smoothly. This will give you peace of mind that your LLC is secure and stable, and means that you will not be bound to Arizona’s default agreement, which is a one-size-fits-all agreement that is not tailored to your business.

Patrick Monahan of the Monahan Law Firm, PLC can discuss with you the legal benefits and drawbacks so you are able to make an informed choice. Contact our office at (623) 385-3190.

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