How an Operating Agreement Can Help Shield Your LLC from Lawsuits

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How an Operating Agreement Can Help Shield Your LLC from Lawsuits

Many Arizona business owners choose the limited liability company (LLC) structure for their business, primarily due to its ease of creation and operation and low costs. LLCs are flexible in that they can be tailored to the specific needs of the owners or members while offering tax protection and insulation from personal liability.

While the LLC is a business entity that can provide many legal protections, structuring your business entity as an LLC will not necessarily insulate you from legal disputes over contracts and employees, or from members who disagree on business operations unless you have taken the necessary steps to structure your operating agreement to avoid litigation risk.

Here are three potential areas of litigation risk where a properly worded operating agreement may be helpful in minimizing that risk:

  1. Member disputes.

Operating agreements help eliminate confusion by clarifying the specific responsibilities and rights of each member, including:

  • Each member’s ownership interest percentage;
  • How profits and losses are allocated among members;
  • Each member’s capital contribution responsibilities;
  • The voting power of each member;
  • How the LLC will be managed—e., by all members or by a member-manager;
  • How new members will be added and the process for withdrawal of members;
  • Voting rules;
  • Buy-sell agreement for what happens when a member wants to sell his or her shares, dies, or becomes disabled.
  1. Harm that could arise from default rules.

In 2018, the Arizona legislature passed the Arizona Limited Liability Company Act (ALLCA) to replace the 1992 LLC Act. ALLCA applies first to LLCs formed on or after September 1, 2019; it will apply to all Arizona LLCs beginning September 1, 2020.

While some ALLCA regulations may not fit for how you and other members of your LLC wish to operate your business, you can customize the LLC’s operating agreement to eliminate certain concerns.

For example, one of the major changes under ALLCA is the imposition of fiduciary duties on Arizona LLC members and managers, creating legal grounds for member or company lawsuits that did not exist under the 1992 LLC Act. Under ALLCA, those fiduciary duties are created only in the absence of an operating agreement or if fiduciary duties are not addressed in an existing operating agreement.

With an ALLCA compliant operating agreement, LLC members can steer clear of any problems that may develop over mandatory fiduciary obligations or other ALLCA regulations that are not in the best interest of the LLC.

  1. Harm that could arise from lack of clarity.

LLCs should not rely on state default rules to govern how disputes among members should be handled. Instead, an operating agreement that plans for potential scenarios preemptively ensures that members are aware of their individual responsibilities, thus avoiding potential disputes in the future.

Williams Mestaz, L.L.P., has the experience and reputation that you want when you are dealing with a business-related lawsuit. We are here to obtain the best possible outcome for your situation. Do not hesitate to contact Williams Mestaz, L.L.P., at (602) 256-9400, and see how we can help you resolve your legal matter.

 

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