In Arizona, as in many other states, there are very few formalities required to form an LLC, in short: organizational articles submitted to the Arizona Corporation Commission (ACC), publication of articles on organization in an approved newspaper, and a statement of publication sent to ACC. However, it is advisable to take another step when forming an LLC: Create an operating agreement. An operating agreement serves two main purposes: 1) to protect the owners from creditors and 2) to protect the owners from each other.

1) Protect the owners from creditors

One of the main problems that owners of an LLC encounter are creditors who want to pierce the veil of the company, i.e. creditors who wish to remove the limited liability protection provided by an LLC. This can occur when the owner (s) of the LLC does not respect the LLC as an individual entity because the owner (s) treat it as an alter ego. For example, when an LLC owner pays his / her personal debt through the LLC, he / she uses the LLC as his / her alter ego. An operating agreement often helps convince courts that a particular LLC is not just the alter ego of its owner (s).

2) Protect the owners from each other

Most of the reasons for having an operating agreement relate to the protection that the owners of an LLC want from each other. Although few people do business with each other planning for the occurrence of adverse events, such events occur frequently, and a well-written operating agreement should address the following issues in an effort to protect owners if such events occur:
a) ownership interest
b) management
c) distribution share
d) vote
(e) changes in ownership; and
f) standard rules.

a) Ownership percentage

Often, members of an LLC will see fit to distribute ownership in proportion to the owners' contribution to the LLC, e.g. cash, equipment, etc. However, there are cases where an owner does not provide substantial capital contributions, rather future services. Because of this, the owners of the LLC may distribute the ownership in a different way than with respect to capital contributions. The beauty of an operating agreement is that it can allow such a distribution to take place and record such a distribution.

b) Management

LLC can be either member-managed or manager-managed. A member-managed LLC is precisely managed by its members. The members each act in favor of the LLC and have the authority to bind the LLC.

In contrast, a managerial LLC is governed by managers elected by the members of the LLC. These executives may also be members of the LLC, but they do not have to be. This is often desirable in situations where some of the LLC owners are passive and not involved in running the business. In this scenario, members cannot normally bind LLC.

c) Distributive share

The share of LLCs' profits and / or losses is typically distributed in accordance with the ownership percentage of the owners. This is often desirable, even in cases where one owner contributed capital and another contributed services, as the ownership percentage need not be tied to capital contributions as mentioned above. However, there are cases where special distribution of profits and losses is actually desirable. For example, one of the LLCs' owners contributes significant capital as a short-term investment and requires the LLC to pay him / her a disproportionate percentage of the LLCs profits and losses in the first years of the LLCs operations. Such allocations are often permitted, but there are special rules that apply to such allocations in order not to lose IRS rules.

Author's Bio: 

Before deciding whether filing an LLC is right for your specific situation, you will need to learn about some of the benefits, risks and requirements that will affect you and your business. Here are some of the benefits of forming an LLC.