As of September 1, 2019, Arizona’s LLC and PLLC law has changed. For LLCs created on or after September 1st, they must comply with the new law at the time they are created. For existing LLCs there is a grace period of 1 year. The biggest change to LLC law is the fiduciary requirement placed on managers, members and managing members.
In June 2019, the Arizona Supreme Court ruled in Sky Harbor Properties, LLC v. Patel Properties, LLC and found a similar fiduciary requirement under agency law should be applied to LLCs. So, essentially, existing LLCs should be actively complying with the new LLC law in order to comply with the Court decision.
For REALTORS® and investors who have the LLC as part of their business model, you should know there are now default provisions in the new LLC law you may want to change through the Operating Agreement. Some of the provisions you may want to address are:
The fiduciary duties of members and managers - The default provisions assume an agency relationship between managers, members and the LLC entity. You can change this in your Operating Agreement and limit the fiduciary relationships.
Define the Managing Members, their responsibilities and duties in the Operating Agreement
Distributions to members - There are tax and legal implications if you do not change the default distribution provisions contained in statute.
Read ARS section 29-3301 - to understand the default agency relationships and decide if you need to address this issue in the Operating Agreement
Understand how and why you may or may not want to hold your interest as Tenants in Common, Joint Tenants with right of survivorship or as Community Property with right of survivorship.
The bottom line is the Operating Agreement is very important and can make the difference legally and financially.
If you are a broker or agent who represents investors or LLCs as part of your business, there are some considerations you may want to ask your attorney about. For example: What happens if your brokerage lists an LLC property for sale and also represents the buyer LLC? While the brokerage would disclose its dual agency relationship, it may not know there are members common to each LLC. Failure to disclose common members and any pertinent information is a violation of fiduciary, and yet in a multi member LLC, members may not even know they are part of both LLCs.
If you are an agent or broker who particulates in investments, you will have additional questions to ask your legal and tax professional.
On October 22, 2019, WeMAR will be hosting a Lunch & Learn for members with Attorney David Brnilovich - Jennings Strouss Law Firm. David will discuss the new LLC law and how we can and our clients can update the Operating Agreement. Please register at www.wemargad.org so that we have food and seats for all.
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WERQ Song Credits:
"Werq" Kevin MacLeod (incompetech.com)
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