Arizona LLC Operating Agreements: What to Include and Why

An operating agreement is the internal contract among the members of an LLC that sets out how the company is owned, run, and eventually wound down. In Arizona, it's a private document — you don't file it with the Corporation Commission, it isn't part of your public record, and no one at the state ever reviews it. But it's arguably more important than the Articles of Organization, because the Articles just create the entity while the operating agreement determines how it actually works.

Arizona doesn't require one — but the alternative is worse

Arizona law does not require an LLC to have a written operating agreement. What it does have is a full set of default rules under the Arizona Limited Liability Company Act that automatically govern anything your operating agreement doesn't address. So you don't get to skip having rules — you only choose whether they're the rules you wrote or the state's generic defaults. For most LLCs, the defaults are a poor fit: they may split profits in ways you didn't intend, give management rights you didn't plan for, or handle a member's departure in a way that surprises everyone.

Why single-member LLCs need one too

It's easy to assume a solo owner doesn't need an operating agreement — who would you agree with? But it still matters. For a single-member LLC, the operating agreement reinforces that the company is a genuine separate entity, which is exactly what a court looks at if someone tries to pierce the liability shield and reach your personal assets. Banks frequently ask for it when you open a business account. And if you ever add a member or sell the business, having the structure already documented saves real trouble.

The foundation of the agreement is who owns what and what they put in.

Ownership interests

Spell out each member and their ownership percentage — often called a membership interest. Be precise: "Member A owns 60%, Member B owns 40%" leaves no room for later disagreement. If ownership is expressed in units rather than percentages, define how many units exist and who holds them.

Capital contributions

Document what each member contributed to get the LLC started — cash, equipment, property, or services — and the agreed value of non-cash contributions. This matters for tax basis and for tracking who put in what.

Future contributions

Decide up front whether members can be required to contribute more money later (a capital call) and what happens if a member can't or won't. Options include diluting the non-contributing member's percentage, treating the shortfall as a loan, or other mechanisms. This is one of the most common sources of member conflict, and settling it in advance prevents a crisis when the company needs more capital.

This section defines who runs the company and how decisions get made — the day-to-day mechanics that keep an LLC functioning without constant renegotiation.

Management structure

State clearly whether the LLC is member-managed (the owners run it directly) or manager-managed (designated managers, who may or may not be members, handle operations while other members stay passive). This should match what you declared in your Articles of Organization. Define the managers' authority — what they can do alone and what requires a broader vote.

Voting rights

Decide how votes are counted. Common approaches:

• By ownership percentage — a 60% owner controls 60% of the vote
• Per capita — each member gets one equal vote regardless of ownership
• A hybrid — different rules for different types of decisions

Major decisions

List the decisions that require a higher threshold — a supermajority or unanimous consent — rather than a simple majority. These typically include admitting new members, selling major assets, taking on significant debt, amending the operating agreement, or dissolving the company. Protecting these decisions from a bare majority keeps minority members from being steamrolled.

Deadlock provisions

In a two-member LLC split 50/50, a disagreement can freeze the company entirely. Build in a way to break deadlocks — a tiebreaker mechanism, a buy-sell trigger, or mediation — so a single dispute can't paralyze the business indefinitely.

Money and exits are where relationships get tested, so these provisions deserve careful attention.

Allocating profits and losses

Specify how profits and losses are divided among members. This often matches ownership percentages, but it doesn't have to — members can agree to a different split for legitimate business reasons. Distinguish between the allocation of profit (which affects each member's tax liability) and actual distributions of cash.

Distributions

Define when and how the LLC distributes cash to members — on a set schedule, at the managers' discretion, or when certain thresholds are met — and in what priority. Members may owe tax on their share of profits even in a year when little or no cash was distributed, so it's common to include provisions for tax distributions that at least cover members' tax liability on allocated income.

Transfer restrictions

Decide what happens when a member wants to sell or transfer their interest. Most agreements restrict transfers to prevent an outsider from becoming a co-owner without the others' consent. Common tools include a right of first refusal (existing members can buy the interest first) and requiring approval before any transfer. Without restrictions, a member could sell to anyone, and you'd have a new partner you never chose.

Buyout and departure

Address what happens when a member dies, becomes disabled, wants out, or is removed. A buy-sell provision sets how the departing member's interest is valued and bought out, so the exit is orderly rather than a fight over price and process at the worst possible moment.

The last pieces cover how the company ends and how the agreement itself can change over time.

Dissolution provisions

Set out the events that trigger dissolution — a member vote, a fixed end date, the completion of a specific purpose, or another agreed condition — and how the company winds up if it happens. Define the order of distribution: creditors first, then members according to their interests. Having this in the agreement means that if the members ever decide to close, they follow a plan they wrote instead of the state's default wind-up rules.

Amending the operating agreement

Businesses change — members join or leave, ownership shifts, the strategy evolves. Include a clear process for amending the agreement, usually requiring a specified vote of the members. Without an amendment provision, changing the agreement can become contentious. With one, the company can adapt smoothly as circumstances change.

Keep it current and signed

An operating agreement only works if every member has signed it and it reflects the current reality of the company. Revisit it when ownership or management changes, keep signed copies with your business records, and treat it as the living governing document it's meant to be. Arizona won't ever ask to see it — but a bank, a lender, a court, or a prospective buyer might, and the members will rely on it every time a significant question comes up.