Partnership and LLC default rules in Arizona

Default partnership rules in Arizona

Arizona adopted RUPA, treating partnerships as separate legal entities. Profits and losses are shared equally among partners by default. Partners have equal management rights and can bind the partnership in ordinary course of business. Each partner owes fiduciary duties of loyalty and care. These defaults can be modified by a partnership agreement, but certain core duties cannot be entirely eliminated.

The most important takeaway: profits are split equally by default in Arizona, regardless of capital contributions. If you and a partner start a business and one of you invests $100,000 while the other invests $5,000, you still split profits 50/50 without a written agreement. This is true in every US state, including Arizona.

LLC defaults in Arizona

Arizona follows RULLCA, which means LLC profits and losses are allocated equally among members on a per-capita basis by default, regardless of capital contributions. This is a significant departure from the traditional approach of splitting based on capital. Members have equal management authority in a member-managed LLC. Arizona does not require an operating agreement, but without one, these equal-split defaults apply. The state has no annual report fee for LLCs, making it one of the cheapest states for ongoing LLC maintenance.

Because Arizona follows RULLCA with equal per-capita defaults, LLC members should pay special attention to their operating agreement. Without one, a member who contributed 90% of the capital gets the same share of profits as a member who contributed 10%. Use our equity calculator to determine a fair split based on actual contributions.

What happens when a partner leaves in Arizona

Under Arizona's RUPA adoption, a partner's departure does not automatically dissolve the partnership. The partnership can continue, and the departing partner is entitled to a buyout at fair value. If a partner dissociates wrongfully, the buyout may be offset by damages. The partnership must settle with the departing partner within 120 days or face potential legal action.

A written partnership agreement should still address departure terms specifically, including how the buyout value is calculated, the payment timeline, and any non-compete provisions. While RUPA provides a default framework, the details of a buyout can still lead to disputes if not spelled out in advance. Understanding the concept of dead equity is important for managing these situations. Learn more about how dead equity affects businesses.

Marriage and business equity in Arizona

Arizona is a community property state. Property acquired during marriage is generally owned equally by both spouses. However, income generated by a separately owned business is typically treated as the separate property of the business-owning spouse, not community property. This is different from states like Texas and Idaho, where business income is community property regardless. A business started before marriage remains separate property, but contributions made during the marriage (time, effort, reinvested profits) can complicate the analysis. A prenuptial or postnuptial agreement can clarify these boundaries.

While Arizona is a community property state, income from a separately owned business is generally treated as separate property. This is more favorable for business owners than states like Texas and Idaho, where business income becomes community property. Still, prenuptial agreements provide additional protection and clarity, especially if the business grows significantly during the marriage.

Formation and cost considerations in Arizona

Frequently asked questions

Related resources

• Equity calculator: find a fair split for your business
• Does your small business need an equity agreement?
• Equity for small businesses: the complete guide
• Dead equity calculator: how much is yours costing you?
• Slicing Pie calculator
• What is an operating agreement?
• All 50 states: partnership and LLC default rules