Can an Arizona LLC Become a PLLC & an Arizona PLLC Become an LLC?

Question:  I have an Arizona LLC, but I want to change it to a professional LLC (a PLLC).  Is it possible and how do I make the change?

Answer:  Yes.  An Arizona LLC can be converted to a PLLC and an Arizona PLLC can be converted to an LLC.  You convert one type of LLC to the other type by filing an amendment to the Articles of Organization with the Arizona Corporation Commission and then publishing the name change in an ACC approved newspaper after the ACC approves the amendment.  The Amendment to the Articles of Organization must be signed by a member of a member managed company or a manager of a manager managed company.  The amendment to the Articles of Organization must satisfy the following requirements:

Converting from an LLC to a PLLC:

The Amendment to the Articles of Organization must contain the following provisions:

1.  A statement of the new name of the company with the correct ending.  Arizona Revised Statutes Section 29-4102.B states:

“A limited liability company organized under a law of this state other than this Article may elect professional limited liability company status by amending its Articles of Organization pursuant to Section 29-3202 to comply with subsection A of this Section and with Section 29-4106.

2. Arizona Revised Statutes Section 29-4106 states:

“The name of a professional limited liability company authorized to transact business in this state shall satisfy the requirements of Section 29-3112, except that the name shall contain the words “professional limited liability company” or the abbreviation “p.l.l.c.”, “p.l.c.”, “pllc” or “plc” in uppercase or lowercase letters.”

2. A statement that the company is a professional limited liability company.

3. A description of the professional service or services that the company is organized to provide.

Converting from a PLLC to an LLC:

The Amendment to the Articles of Organization must satisfy each of the following requirements:

1.  It must contain a statement of the new name of the company with the correct ending.

2.  It must remove the statement in the Articles of Organization that the company is a professional limited liability company.

3. It must remove the statement in the Articles of Organization that describes the professional service or services that the PLLC was organized to provide.

Read “What are the Differences Between an Arizona PLLC vs LLC?

Lessons to be Learned from Sheriff Joe’s Bad Example

Maricopa County Sheriff Joe Arpaio and his wife formed an Arizona limited liability company in December of 2010 called “Ava Investments, LLC.”  In June of 2011 they transferred eight parcels of land into Ava Investments, LLC.

Apparently Joe and Ava were not concerned about confidentiality because their home address is listed in the Articles of Organization and on the Arizona Corporation Commission’s website as well as their names.  I can’t fault Sheriff Joe, however because he didn’t have a chance to read my article called “The Confidential LLC – How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s)” because the article was written after the Arpaios formed Ava Investments, LLC.

Lesson 1:  If you want to keep your ownership of an Arizona limited liability company confidential and not on public display, do not be a member or manager of an Arizona LLC or use your home address for any purpose in the LLC’s Articles of Organization.

Apparently the purpose of Ava Investments, LLC, is to hold the Arpaio’s investment real estate.  I searched the Maricopa County Recorder’s website for Ava Investments, LLC, and found the following deeds:

  • June 6, 2011, Special Warranty Deed recorded on June 14, 2011, was signed by Joe and Ava as grantors conveying two parcels of land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investments Corporation, not Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio who acknowledged that she was “duly sworn on oath . . . that the foregoing statement is a true and correct of the facts pertaining to the transfer of the above described property.”  These two parcels are located at 10635 & 10637 North 71st Place, Scottsdale, Arizona.  Problems:  The price listed is $75,00, but the deed transferred two parcels.  What is the price of each parcel?  Is $75,000 the total price?  Who was the seller?  The deed was signed by the Arpaios, not Ava Investment Corporation.  The Affidavit of Value states that the seller was the corporation.  If the property is/was owned by the corporation then the deed signed by the Arpaios did not transfer the title to the LLC.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10614 North 71st Place, Scottsdale, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10610 North 71st Place, Scottsdale, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 16733 East Palisades Blvd., Fountain Hills, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10632 North 71st Place, Scottsdale, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is a single family residence and used for commercial or industrial use.”  Note:  The Affidavit says to check only one box to indicate the type of property, but two boxes were checked.  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 16743 East Palisades Blvd., Fountain Hills, Arizona.
  • June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC.  The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.”  The signature on the Affidavit appears to be that of Ava Arpaio.  This property is located at 10630 North 71st Place, Scottsdale, Arizona.

Lesson 2Diversity – do not put all of your eggs or assets in one basket.  We all know what happens when you drop your basket, you lose all of your eggs or real estate if you have all of your real estate eggs in one basket.  The Arpaios have 8 parcels of real property in one LLC.  If somebody gets killed or injured on one property and there is a large lawsuit against the LLC, all the properties could be lost.  For maximum asset protection, put each parcel of real estate in a separate LLC so in the worst case scenario, you only lose the equity you have in that one LLC.  Do not put multiple parcels of valuable real estate in the same limited liability company because you could lose everything if something goes wrong with one of the properties.  For more on this topic see my article called “How Many LLCs Should I Form for My Properties?

The paper trail raises some interesting issues that everybody who transfers land into an LLC should consider before making the transfer.

Lesson 3Always Consider Income Tax Consequences When Transferring Property.  The total purchase price of all the properties stated on the Affidavits of Value is $995,000.  The Affidavits of Value indicate that all the transfers involved an exchange or trade to satisfy the purchase price.  Therefore the newly formed Ava Investments, LLC, must have been funded with property valued at $995,000 that was used to exchange or trade with the sellers of the properties.  Did the Arpaios fund their LLC with a loan of property or make capital contributions of property valued at $995,000.  If the latter, the LLC’s basis in the property would be a carry over basis.  Would the exchange / trade be a taxable transaction?  Income tax law (Internal Revenue Code Section 1031) does provide for tax-free exchanges of real estate for real estate, but not real estate for personal property or money.  It is possible that one or more of the transactions could have created taxable events for buyer and seller.  Hopefully the Arpaio’s consulted with an experienced tax advisor before they consummated the transfers and taken steps to eliminate or mimimize any adverse income tax consequences.

Lesson 4Document & Track the Tax Basis of the Property Going into the LLC.  The LLC should document the income tax basis of property it acquires so it can deduct the basis from any amount realized on a later sale of the property.  If the LLC buys the property from the seller for its fair market value then the tax basis of the purchased property is the amount paid to acquire the property.  If the property is contributed to the LLC by a member, the LLC takes the same tax basis in the property that the member had in the property.

Lesson 5Document the Affect the Contribution of the Property to an LLC Has with respect to the Contributing Member’s Capital Account.  This is especially important when the LLC is a multi-member LLC other than a two member husband and wife LLC.  If a member contributes money or property to a multi-member LLC, the member’s capital account should be increased by the amount of money contributed or the value of the property contributed.  This is an important concept for multi-member LLCs.  Documenting or failing to document the value of members’ contributions added or not added to a their capital account has real economic consequences to the all the members.  All of the members should sign a document in which they agree to the value of contributed property and the amount that will be added to the contributing member’s capital account.  Think of a member’s capital account as similar to a bank account.  If you contribute real estate to a multi-member LLC that has $50,000 of equity, you want your capital account to increase by $50,000 because for every dollar that does not get credited to your capital account you will lose $1 or real money at some time in the future.

Lesson 6How Do You Determine Property Values?  It is unusual for two parcels of real estate to have the same value.  The purchase price of two of the parcels was $60,000, three parcels were priced at $75,000 and two were $325,000.  What a co-inky-dink!  How did the Arpaios determine the values of the properties?

See “Sheriff Joe Arpaio and His Fiesta Bowl Freebie.”

Sarah Palin Purchases Scottsdale Home – a Lesson on How to Purchase Real Estate in Arizona Confidentially

Sarah Palin, recently, made national headlines for purchasing a luxury home in North Scottsdale, Arizona.  Palin purchased the home through a Delaware Limited Liability Company that took title at closing.  I suspect one of the reasons Sarah formed a Delaware limited liability company to purchase the home was to make it more difficult for people to determine the owner of the real estate.

In Maricopa County, Arizona, where the home is located, it is a simple matter to determine the legal owner of a home.  Anyone who knows the address of the home can search the address on the Maricopa County Assessor’s website and find both the title holder and a link to the recorded deed on the Maricopa County Recorder’s website.  Her new home is located at 29005 North 82nd Street, Scottsdale, Arizona 85266.  See the Affidavit of Property Value recorded with the deed.  This document states that the buyer was Safari Investments, LLC, and shows the purchase price was $1,695,000.

The seller was Ian Whitmore who purchased the home in March of 2010 for $803,650 cash.  The Affidavit of Property Value recorded with the deed states that Ian Whitmore bought the home to use as his residence or the residence of a family member.

Safari Investments, LLC, is not an Arizona LLC nor has it registered to do business in Arizona.  Delaware does not require members of the LLC to disclose their identity in public filings.  The only information required in the Articles of Organization of a Delaware limited liability company is the name of the company and the name and address of the resident agent.  Arizona, however, requires that the Articles of Organization of an Arizona limited liability company contain the name and address of all members if the LLC is member managed or the names and addresses of members who own 20% or more of the company if the LLC is manager managed.

By forming a Delaware LLC to purchase the home in Scottsdale, Arizona, Sarah Palin may have intended to keep her ultimate ownership confidential, but that plan didn’t work.  Her ownership was discovered by many other sources.  Here are some potential downsides to having your LLC own your home:

  • If the LLC was formed outside Arizona, it may have to register to do business in Arizona in which case Arizona law will require that the foreign LLC disclose the names and addresses of its members using the same rules described above.  If the LLC is getting a loan to buy the property or if the LLC is purchasing title insurance (a buyer of Arizona property should always purchase title insurance) the title insurance company, the lender and the title insurer will require the foreign LLC to register to do business in Arizona, which would cause the disclosure of the foreign LLC’s owners.  If your foreign LLC will be required to register to do business in Arizona and you want to keep the ultimate owner(s) name off the LLC’s public, you will be forced to create two foreign LLCs, one of which will be the sole owner of the LLC that will register to do business in Arizona.  This is an expensive and an administrative nightmare.  See below for a better alternative.
  • The ultimate owner of the home will not be able to take advantage of Arizona’s homestead exemption because the exemption does not apply to entities, only to people.  Arizona’s homestead exemption protects the first $150,000 of equity in a person’s primary residence from non-consensual creditors.
  • Homeowner’s insurance may cost more because the home in not owned by the resident owner.
  • If the LLC is taxed as a C corporation, S corporation or a partnership for federal income tax purposes, the ultimate owner will not be able to exclude up to $250,000 ($500,000 for people filing a joint return) gain on a future sale of the property. Internal Revenue Code Section 121(a) states:

“Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”

See “With New Arizona Home, Palin Can Skip the Tanning Bed.”

A Better Cheaper Way to Purchase Arizona Real Estate Confidentially

I routinely form Arizona LLCs that allow the ultimate owner of the company to remain confidential.  A better way to maintain the secrecy of the ultimate owner of an Arizona LLC is for the owner to own the LLC in a trust.  When a trust owns the LLC, the name and address of the trust appear in the Articles of Organization and the Arizona Corporation Commission’s public records.  If the trust’s name does not include the owner’s name, then it is not possible to determine the beneficiaries (ultimate onwers) of the trust.

If you need to form an Arizona LLC and keep the ultimate owner(s) of the LLC secret, you should hire me to form the LLC and purchase my Confidential Trust.  This is a special trust I draft for the purpose of owning the membership interest in an Arizona LLC.  The ultimate owner is the trustee and the beneficiary of the trust and has total control over the trust’s assets – the membership in the LLC.  The name of the Confidential Trust appears in the Articles of Organization, not the name of the ultimate owner.

For more on this topic, read my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s)” and “Sarah Palin confirms buying home in north Scottsdale.”  This article explains that the way to form an Arizona LLC and keep your name and address off the public records of the Arizona Corporation Commission is to buy Arizona LLC attorney Richard Keyt’s Gold LLC package, aka the confidential LLC, for $997.

What to do if the Holder of a Name Reservation is not a Member?

Question:  A person who is will not be a member or manager of my Arizona LLC reserved the company’s name with the Arizona Corporation Commission. Will the ACC reject the Articles of Organization?

Answer:  Yes unless you take appropriate action to prevent the rejection.

Recently we were asked to form an Arizona limited liability company under a name that was reserved by the CPA of the to be formed LLC.  The CPA was not going to be a member or a manager of the new LLC.  The Arizona Corporation Commission will reject the Articles of Organization of a new Arizona LLC if a valid name reservation exists and the holder of the name reservation is not a member or manager of the new LLC.

Solution:  I called the Corporations division of the Arizona Corporation Commission and asked how to solve the problem.  The simple solution is to name the holder of the name reservation as the organizer of the LLC and have the organizer sign the Articles of Organization.  Arizona law does not require that a member or manager sign the Articles of Organization as the organizer.  Anybody with capacity and authorization can sign the Articles of Organization of an Arizona LLC.

We submitted the Articles of Organization signed by the organizer to the Arizona Corporation Commission and it was approved.

Go to Top