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Hidden Risks for LLC Members Under the New Arizona Limited Liability Company Act
If you are a member or manager of an Arizona limited liability company (or professional limited liability company), your obligations may be significantly expanded under a law that begins to take effect as early as August of 2019. This article summarizes the impact of the new law relating to fiduciary duties of members and managers, and provides some thoughts as to how you can understand and manage those obligations.
Fiduciary Duties Defined
A fiduciary, in simple terms, is a person who owes to another person certain duties, such as good faith, trust, special confidence, and candor. In the business context, fiduciary duties help ensure that each officer, director or manager of a business is acting in a manner that is consistent with the company’s objectives and the interests of other owners. Under Arizona law directors and officers of corporations, and members of a partnership have long been deemed to owe fiduciary duties to the corporation or partnership. Until relatively recently, it had been unclear whether managers or members of Arizona LLCs owe fiduciary duties to the company and the other members. There had not been a statute addressing the issue, and Arizona case law had generally been interpreted so as not to impose fiduciary duties on LLC members unless the Operating Agreements imposes such duties on the members.
Imposition of Fiduciary Duties on Members or Managers of LLCs
On April 10, 2018, Arizona Governor Ducey signed the Arizona Limited Liability Company Act (ALLCA). ALLCA will apply to all Arizona LLCs formed after August 31, 2019; on August 31, 2020, Arizona’s current LLC law will expire, and ALLCA will apply to all Arizona LLCs, regardless of their date of formation. One notable change brought about by ALLCA is the imposition of fiduciary duties on members and managers of Arizona LLCs. Under ALLCA, fiduciary duties will be imposed on members and managers if: (1) the LLC does not have a written Operating Agreement, or (2) if the LLC has an Operating Agreement that is silent on the subject of fiduciary duties.
For Members in a Member-Managed LLC
Under ALLCA, members of a member-managed LLC will owe a duty of loyalty and a duty of care to the LLC and to the other members; in addition, the members will be obligated to act in a manner consistent with a contractual obligation of good faith and fair dealing. See A.R.S §29-3409.
For Managers in a Manager-Managed LLC
Similarly, a manager of a manager-managed LLC will owe the LLC and the members essentially the same duties of loyalty and care as the members in member-managed LLCs owe to the company and to one another. A manager must also discharge his or her duties and obligations under the ALLCA in a manner that is consistent with the obligation of good faith and fair dealing. In a manager-managed LLC, the members will not owe fiduciary duties to one another solely because they are members of the LLC; the existence and scope of any fiduciary duties of a member in a manager-managed LLC will depend on the extent to which the member controls or participates in the management of the company.
Eliminating or Altering Fiduciary Duties in the Operating Agreement
An Arizona LLC can depart from certain ALLCA provisions in the LLC’s Operating Agreement, and with the exception of a few items, the LLC’s Operating Agreement will supersede the provisions of the ALLCA. A.R.S. §29-3105; See A.R.S. §29-3409(F) and A.R.S. §29-3409(N). This means that certain of the duties imposed under the statute can be expanded, limited or eliminated by the Operating Agreement. The Operating Agreement cannot, however, eliminate the managers’ or members’ contractual obligation of good faith and fair dealing, or the duty to refrain from willful or intentional misconduct.
To ensure that any fiduciary duties imposed on you as a member or manager of an Arizona LLC are aligned with your interests as a member or manager, you should consider whether you want to be bound by the provisions of ALLCA relating to fiduciary duties. If you want to modify or eliminate those duties, to the extent permissible under ALLCA, please contact us or another legal adviser.
This article is made available for informational purposes only and is not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.
 Arizona law recognizes an implied covenant of good faith and fair dealing in every contract; this covenant obligates parties to a contract to act in good faith, and in a manner that is consistent with fair dealing.