FAQs

How to Get a Certificate of Good Standing for an Arizona LLC

Question:  How can I get a Certificate of Good standing for my Arizona LLC from the Arizona Corporation Commission?

Answer:  The first thing you need to know is you should not follow the instructions on the Arizona Corporation Commission’s website because those instructions are wrong.  Second, the process is complicated, which is why I created an instructional video that shows you what you must do to purchase the COGS for $45 and immediately download a Certificate of Good Standing.

How Do I Protect My Company’s Name in All 50 States?

Question:  I want to form a new limited liability company and protect its name in all fifty states.  How do I do that?

Answer:  Each of the fifty states regulates and authorizes the names of companies formed in the state.  Company names are protected only in the state in which the company is formed.  There is no way to protect a company name in all fifty states other than forming a company with the same name in every state in every state, but that would not be practical or prudent.  Bottom line:  There is no practical way to protect a company name in all fifty states unless you can register the name as a trademark or service mark with the U.S. Patent & Trademark office.

Federally Registered Trademarks & Service Marks

The U.S. allows people and companies to register a trademark or service mark with the U.S. Patent & Trademark office. A federally registered trademark or service mark is protected in all fifty states. A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A service mark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of a service rather than goods.

Examples of trademarks and service marks include: brand names, slogans, and logos. The term “trademark” is often used in a general sense to refer to both trademarks and service marks. Use of a business name does not necessarily qualify as trademark use, though other use of a business name as the source of goods or services may qualify it as both a business name and a trademark or service mark.

Trademarks are territorial and must be filed in each country where protection is sought. A U.S. trademark does not afford protection in another country. For more information on how to apply for trademarks in a foreign country, contact the intellectual property office in that country directly.

2018-09-01T17:12:36+00:00September 1st, 2018|FAQs, How Do I|0 Comments

Title Insurance for an LLC that Acquires Real Estate from a Member

Question:  I own Arizona rental real estate.  I want to form a limited liability company to own the real estate for asset protection.  If I transfer title to the real estate to my one hundred percent owned Arizona LLC will the LLC be covered by the title insurance policy issued to me when I bought the land?

Answer:  No unless you take action that causes the title insurance company to add the LLC to your title insurance policy.  As a real estate attorney I recommend that the owner(s) of the LLC always do what is necessary to cause the LLC to be covered by the title insurance when the LLC acquires real estate from the owner(s) of the LLC.

A nationally recognized title insurance expert named John C. Murray wrote an excellent article called “Title Insurance For Limited Liability Company Transactions” in which he says:

“The best solution may be for the grantee LLC to request an ‘additional insured’ endorsement from the title insurer (in those jurisdictions where it is available), which would be effective as of the date of the conveyance. This endorsement specifically amends the existing owner’s policy to add the LLC as a named insured. The cost of the endorsement is usually nominal ($100 to $300) and many title insurers will routinely issue the endorsement for successor LLCs”

See also the Adobe pdf file that contains an article called “Do I still have Coverage if I transfer my property to.”  The author states the following with respect to a property owner who transfers land to the owner’s LLC:

“To ensure that title insurance coverage continues on the property, [the owner] should contact [the title insurance company] to discuss obtaining an additional insured endorsement to the current policy and/or discuss obtaining a new policy depending on the facts and circumstances supporting the transfer. Without doing that, they risk terminating title insurance coverage on the property.”

2018-08-04T09:03:03+00:00August 4th, 2018|FAQs, Real Estate Issues|0 Comments

LLC Documents Needed by Title Insurer & Escrow Agents

Question:  My limited liability company is the buyer on a contract to purchase Arizona real estate.  What LLC documents will the title insurance company or the escrow agent want?

Answer:  When a limited liability company is the buyer or seller of real property the title insurance company and escrow agent will require the LLC to supply copies of the following documents:

  • The LLC’s Articles of Organization approved by the Arizona Corporation Commission.  If we formed your LLC we would have sent this document to you as a pdf file attached to an email and given you a hard copy of the AOO in your red LLC portfolio (Silver & Gold LLC purchasers only).  Many times the title insurer and escrow agent will get a copy of the ACC approved Articles of Organization by doing a search of the LLC’s name on the ACC’s LLC online database and then printing the AOO that is linked to on the LLC’s page.
  • The LLC’s Operating Agreement signed by all of the LLC’s members.  This is an important document because it should state who can sign contracts for the LLC and authorize that person to enter into contracts to buy and sell real estate.  If we formed your LLC we would have sent you the LLC’s Operating Agreement as a pdf file attached to an email and given you a hard copy of the OA in your red LLC portfolio (Silver & Gold LLC purchasers only).  If your LLC doesn’t have an Operating Agreement hire us to prepare a custom Operating Agreement.
  • Some title insurers and all prudent buyers and sellers will require the LLC to deliver a copy of resolutions signed by the members that approve the LLC entering into the contract to buy or sell and that names the member of a member managed LLC or the manager of a manager managed LLC who has the authority to sign the contract and other documents on behalf of the LLC.  If you need resolutions purchase our do-it-yourself LLC member resolutions form for $37.
  • If a trust is the member of your LLC then you will also need to give the title insurer and escrow agent a copy of the trust agreement or a certificate of trust in lieu of giving the entire trust agreement.
2018-05-31T16:54:14+00:00May 2nd, 2017|FAQs, Real Estate Issues|0 Comments

How Does My LLC become an S Corporation?

Question:  My accountant says that I need to turn my LLC into an S corporation.  How do I do that?

Answer:  First you need to understand that the term “S corporation” refers to a method of income tax under the Internal Revenue Code of 1986.  S corporation is one of four federal income tax methods that can apply to a limited liability company.

You do not have to convert your LLC into a corporation.  Instead, the LLC simply makes an election with the IRS to have the LLC taxed as an S corporation by having all members of the LLC sign an IRS Form 2553 and then file the signed Form 2553 with the IRS.  See the Instructions to IRS Form 2553.  If you want your LLC to be taxed as an S corporation for the tax year beginning January 1, 2017, the members must sign and file IRS Form 2553 with the IRS not later than March 15, 2017.

Caution:  There are certain requirements that must be satisfied for an LLC to eligible to elect to be taxed as an S corporation. An LLC may to elect to be an S corporation only if it meets all the following tests.

  • It is (a) a domestic corporation, or (b) a domestic entity such as an LLC eligible to elect to be treated as a corporation, that timely files Form 2553. If Form 2553 is not timely filed, see Relief for Late Elections, later.
  • It has no more than 100 shareholders. You can treat an individual and his or her spouse (and their estates) as one shareholder for this test. You can also treat all members of a family (as defined in section 1361(c)(1)(B)) and their estates as one shareholder for this test.
  • Its only shareholders are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).
  • It has no nonresident alien shareholders or members.
  • It has only one class of stock (disregarding differences in voting rights). Generally, a corporation or LLC is treated as having only one class of stock if all outstanding shares of the corporation’s stock or LLC’s membership interests confer identical rights to distribution and liquidation proceeds.

There are other requirements, but the major requirements are listed above.  For more about S corporations and LLCs read my blog post called “S Corporation Ignorance.”

P.S.  Besides the S corporation federal income tax method, an LLC can also be called taxed as a sole proprietorship (if it has one member or two members who are married and own their membership interests as community property) partnership (if it has two or more members), a C corporation.

2017-01-10T16:49:18+00:00January 10th, 2017|FAQs, How Do I, Operating LLCs, Tax Issues|0 Comments

How Do I Transfer Real Estate to My LLC?

Question:  I own Arizona real estate that I rent to tenants.  I don’t want to be sued personally if somebody gets hurt on the property so I formed an Arizona limited liability company to own my investment real estate.  If a tenant or guest is injured on the property and he or she wants to sue the owner the defendant will be the LLC not me because the LLC will own the land.  What do I have to do to transfer the land to the Arizona LLC?

Answer:  Forming an LLC to own the real estate and to shield you from liability if something goes wrong with the real estate is definitely a good idea.  The plan, however, will not work unless you actually transfer ownership of the land from the current owner(s) to the LLC.  To transfer the land to the LLC the owner(s) must sign a deed and the deed must be recorded with the county recorder of the county in which the real estate is located.

Warnings:

1. Title Insurance Issue #1.  Example:  After the LLC acquired title it discovers that the property is encumbered by a $25,000 lien.  The title insurance policy acquired by the prior owner(s) did not list the lien as an exception from title insurance coverage.

Quit Claim Deed Bad Example.  Because the LLC acquired title by a Quit Claim Deed the title insurance policy will not pay the $25,000 lien.  A Quit Claim Deed does not contain any title warranties. This means that if a title defect is discovered while the LLC owns the land the LLC does not have a claim against the prior owner for breach of a title warranty.  Because the LLC does not have a claim against the prior owner for breach of a title warranty the prior owner’s title insurance policy does not cover the $25,000 lien.  The LLC must pay the lien or risk losing the property in a foreclosure.

Warranty Deed or Special Warranty Deed Good Example.  A Warranty Deed and a Special Warranty Deed both contain title warranties that if breached give the new owner a claim against the prior owner(s).  If a properly drafted Warranty Deed or Special Warranty Deed had been used to transfer title to the LLC the deed would contain a warranty that the land was not subject to the $25,000 lien.  The breach of this title warranty gives the LLC a claim against the prior owner(s).  Because the LLC has a claim against the prior owner(s) for breach of the title warranty the prior owner(s) could then make a claim under the prior owner(s) title insurance policy and the title insurance company would pay off the $25,000 lien.

2. Title Insurance Issue #2.  The LLC should contact the title insurance company that issued the prior owner(s) title insurance and purchase an endorsement to the title insurance policy that names the LLC as an additional insured under the original title insurance policy issued to the prior owner(s) as of the date the prior owner(s) acquired the title insurance.  With the endorsement the LLC can make a claim on the title insurance policy directly to the title insurer rather than against the prior owner(s) for breach of a title warranty.  This type of endorsement typically costs $75 – $125.

3. Insurance Issue.  When the LLC acquires title to the land be sure to contact your insurance company and notify it that the LLC owns the property and arrange for the LLC to be the named insured under the policy or added to the policy as an additional insured.  If the property burns to the ground you don’t want the insurance company to deny coverage because it insured the prior owner(s) not the LLC.  Make sure the LLC acquires all types of insurance that is appropriate for the property and its use.

4. Due on Sale Clause Issue.  If the property is encumbered by a lien, the lender may have an option to call the loan if the borrower(s) transfers title to the LLC.  This type of option is called a “due on sale clause.”  If you ask the lender for permission to transfer the land to your LLC the lender will always say no.  I’ve formed thousands of LLCs that acquired real estate subject to due on sale clauses.  I’ve never had a client tell me that their lender called their loan when they transferred their land to their LLC.  If you transfer your land to an LLC and your lender calls your loan, please let me know.  The good news with respect to Arizona real estate encumbered by a Deed of Trust is that Arizona Revised Statutes Section 33-813.A allows the prior owner(s) to cure the default and stop a trustee’s sale under a Deed of Trust by deeding the property from the LLC back to the prior owner(s) who must also pay the lender its foreclosure costs.

Purchase a Do-It-Yourself Special Warranty Deed

If you need to transfer Arizona real estate to a limited liability company, purchase one of my editable do-it-yourself Word documents for $47.  Each deed comes with instructions on how to complete the deed and record it with the appropriate Arizona county recorder.  Purchase a deed in my legal forms web form store.

S Corporation Ignorance

For the umpteen time today a client told me about the client’s discussion with a person who does not understand the difference between the type of entity formed under the law of one of the fifty states vs. the method of income tax applied to the entity by the Internal Revenue Code of 1986, as amended.   The ignoramus said, “My company insists that it enter into a contract with your company, but only if your company is an S corp.”  My client’s company is an LLC, but the ignorant person thinks his company cannot enter into a contract with the LLC because the LLC is not an “S corporation.”

Too many people, including CPAs and lawyers, do not understand that when they say the entity must be an S corporation they are mixing two concepts: (i) the type of entity formed under state law, and (ii) the income tax method applicable to the entity under the Internal Revenue Code.  Just today I downloaded the materials to a webinar I will watch later today.  The lawyer who is teaching the webinar created reference materials that constantly use the phrase “limited liability companies vs. ‘S’ corporation.”  The lawyer knows better, but falls into the trap of loose talk about S corporations.

Not one single state in the United States allows people to create an S corporation.  The states allow people to create, sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, for profit corporations, nonprofit corporations, benefit corporations, and limited liability companies.  The term “S corporation” refers to a method of federal income tax applicable to an entity under the Internal Revenue Code.  After forming your entity under state law you must then decide the federal income tax method you want to apply to your entity.  If Homer Simpson forms a for profit corporation in Arizona and an Arizona LLC, he can cause both entities to be taxed under Subchapter S of the Internal Revenue Code by timely filing an IRS form 2553.  The federal income tax law applies exactly the same to the corporation and the LLC taxed as S corporations.

P.S.  Timely filing the IRS Form 2553 means filing the form with the IRS within the first two and one half months of the entity’s existence or within the first two and one half months after the beginning of a calendar year.

For more on this topic see my article called “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?

Tax Free Merger of a Corporation into an LLC

Question:  How do I convert my corporation into a limited liability company?

Answer: Two ways – the easy way and the hard, but not too hard way.

Easy Way:  If your corporation does not have assets that have substantial value or contracts that cannot be assigned or transferred to the LLC without the consent of the other party to the contract then simply form a new LLC, dissolve the corporation and start doing business under the new LLC.  If your corporation is an Arizona corporation and you dissolve it before or concurrently with forming your Arizona LLC the new LLC’s name can be identical to the corporation’s name.

Harder Way:  Form an Arizona LLC and merge the corporation into the LLC.  The advantage of this method is that a merger causes the assets and liabilities of the corporation to become assets and liabilities of the LLC automatically as of the effective date of the merger.  If the dissolution of the corporation would cause its shareholders to pay unwanted income taxes the merger method may avoid the tax.

Example 1:  World Wide Widgets, Inc. owns property that has a value of $101,000.  The sole shareholder’s basis in his stock of the corporation is $1,000.  If the corporation assigned the property to its shareholder before dissolving the shareholder would have taxable gain of $100,000 ($101,000 value of property – $1,000 adjusted basis of the stock).

If the stock is a capital asset (held for more than one year) the shareholder in this case could be paying as much as 23.8% of the gain as federal income tax plus state income tax if the shareholder resides in a state that has a state income tax.  Arizona’s tax rate for capital gains in 2016 is 4.5%.  Therefore, if the shareholder is an Arizona resident and the stock is a capital asset the total federal and Arizona income tax on the $100,00 gain is $24,500 if the shareholder is not subject to the 3.8% federal surtax on net investment income or $28,300 if the shareholder is subject to the surtax.  Yikes!  Who wants to pay federal and state income tax if it can be avoided.

The good news is that if the corporation is taxed as an S corporation or a C corporation and the LLC is taxed as an S corporation or a C corporation the merger can be a tax free reorganization under Section 368(a)(1)(F) of the Internal Revenue Code.  By carrying out the “F” merger the shareholder can eliminate the income tax.

Example 2:  Same facts as example 1 except the corporation taxed as a C or an S corporation merges into an LLC taxed as a C or an S corporation.  Result:  $0 income tax instead of $24,500 or $28,300.

Conclusion:  Ask your CPA to tell you in writing what would be the income tax consequences to you if you were to dissolve your corporation.  If dissolution will cause you to pay federal and/or state income tax you do not want to pay then do an F reorganization, i.e. merge your corporation into an LLC that is taxed as a C or S corporation.

P.S.  If your surviving LLC will be an Arizona LLC hire me, Richard Keyt to prepare the merger documents and to consummate the tax-free merger.  Call me at 480-664-7478 if you have questions or to get started.

2016-11-24T11:13:40+00:00November 25th, 2016|FAQs, How Do I, LLCs & Corporations, Tax Issues|0 Comments

Caution: LLC Membership Interests Held as Community Property

Question:  My husband and I acquired a 50% membership interest in an Arizona LLC as community property with right of survivorship.  Homer & Marge Simpson own the other 50% of the LLC.  My husband died and my husband’s interest in the LLC passed to me automatically per Arizona Revised Statutes Section 29-732.01.

Homer Simpson says that he and Marge now have control of the LLC because the 25% interest I acquired from my husband is a mere assignment of his interest and is not a membership interest with voting rights.  The Simpsons say that I own a 25% membership interest in the LLC and the 25 votes associated with that membership interest and an economic right to 25% of the profits of the LLC without any voting rights.  Homer says that since my husband’s death members have 75 total votes instead of 100, the Simpsons have 50 votes and I have 25 votes  How many votes do I have?

Answer:  The interest in the LLC that you inherited from your husband is a membership interest with voting rights rather than an assignment of an economic interest without voting rights if the members of your LLC signed an Operating Agreement that provides that when a married couple own their interest in the LLC as community property with right of survivorship and one of them dies, the interest of the deceased inherited by the survivor is a membership interest.  Section 29-731.B.2.  If the members of your LLC did not sign such an Operating Agreement then what you inherited from your husband was a 25% economic interest in the LLC without any voting rights.

Lesson to Be Learned:  If your Arizona LLC has members who own their membership interests as community property with right of survivorship, joint tenancy with right of survivorship or tenants in common and the members want the heirs who inherit an interest to inherit membership interests with voting rights vs. economic interests without voting rights then the members of the LLC must sign an Operating Agreement that provides that inherited interests are membership interests with voting rights.

Note:  My standard Operating Agreement contains this automatic membership interest with respect to inherited interests clause.  Hire Arizona LLC attorney Richard Keyt to amend your existing Operating Agreement or prepare a new Operating Agreement by completing our online Questionnaire.

2017-05-29T10:46:48+00:00November 22nd, 2016|FAQs, Members, Operating Agreements|0 Comments

How Do I Form an Arizona LLC?

by Arizona LLC attorney Richard Keyt who has formed 6,200+ LLCs

Question:  How do I form an Arizona limited liability company?

Answer:  Two ways: (1) hire me (see the “Contents of the Bronze ($397), Silver ($597) & Gold ($997) LLC Packages), or (2) do it yourself.  There are two ways to form a do it yourself Arizona LLC:

Compare Forming an LLC Yourself with My LLC Formation Services

I have formed 6,200+ Arizona LLCs because I give my clients everything they need to know to operate the LLC during phase 2 and comply with Arizona LLC law.  When I form an Arizona LLC for $597 (I pay the $85 ACC expedited filing fee), I provide many LLC formation services, including preparing the following custom drafted LLC documents:

  • Articles of Organization – I do not use the minimally functional ACC fill in the blanks form AOO.  My Articles of Organization is a four page document that contains many provisions not found in the state’s form AOO.
  • Spousal Disclaimer – If a married member who is a resident of Arizona is to own his or her interest in the LLC as separate property, the non-owner spouse must sign a Disclaimer in which he/she disclaims any ownership of the LLC interest.  If the non-owner spouse does not sign and deliver a Disclaimer to the owner spouse, Arizona law presumes that the spouses own the LLC as community property even if the non-owner spouse is not named in any of Articles of Organization or the Operating Agreement.
  • Arizona LLC Operations ManualWhen we form an Arizona LLC we give our clients access to my 170 page ebook called the Arizona LLC Operations Manual. This book covers 75+ topics the members and managers of AZ LLCs must know.  We sell this must have book for $99 in our store, but the book is included in our Silver ($597) and Gold ($997) LLC formation packages.  Even if you do not hire Richard Keyt to form your Arizona LLC, you owe it to yourself to buy and read this book from cover to cover.  It explains what your LLC must do to comply with Arizona’s LLC laws.
  • Organizational Resolutions – Resolutions signed by all of the members that approve the issuance of membership interests, adoption of the Operating Agreement, opening a bank account, reimbursement of LLC formation expenses paid by any member, election of one or more managers and other formation related actions.  Silver ($597) and Gold ($997) LLC formation packages only.
  • Membership Certificates – The LLC equivalent of a numbered stock certificate issued to each member.  Silver ($597) and Gold ($997) LLC formation packages only.

We put all of your LLC documents in a nice portfolio with everything organized behind tabs  Silver ($597) and Gold ($997) LLC formation packages only.  To see exactly what I give to every Silver and Gold LLC package purchaser, watch the KEYTLaw Girl’s demo video.

2017-11-07T15:53:31+00:00July 14th, 2016|FAQs, Forming LLCs, How Do I|0 Comments

How to Get a Certificate of Good Standing for an AZ LLC

Question:  How can I get a Certificate of Good standing for my Arizona LLC from the Arizona Corporation Commission?

Answer:  It is very easy.  First go to the link below and search for the LLC.

http://ecorp.azcc.gov/Search

Do the following:

  • Enter the name of the limited liability company in the name field.
  • Click on “Search.”
  • Click on the link that says “Check Corporate Status.”
  • Click on the link that says “Print Certificate.”
  • Click on the link that says “Payment Screen.”
  • Follow the instructions to pay $45 with your major credit card to buy the Certificate of Good Standing.
  • As soon as you pay print the Certificate of Good Standing.
2018-09-27T13:03:13+00:00June 4th, 2016|FAQs, How Do I|0 Comments

Latest IRS Procedure for a Nonresident Alien to get an EIN

Question:  I am not a citizen or resident of the United States who wants to form a U.S. limited liability company.  Can I get a federal employer identification number (EIN) for my LLC and if so, how?

Answer:  The instructions to IRS Form SS-4, explain how a non-U.S. citizen who is a non-resident of the U.S. can get an EIN for his or her LLC.  The instructions say the following:

“Apply by telephone—option available to international applicants only. If you have NO legal residence, principal place of business, or principal office or agency in the U.S. or U.S. possessions, you may call 267-941-1099 (not a toll-free number), 6:00 a.m. to 11:00 p.m. (Eastern time), Monday through Friday, to obtain an EIN. The person making the call must be authorized to receive the EIN and answer questions concerning Form SS-4.

Note. It will be helpful to complete Form SS-4 before contacting the IRS. An IRS representative will use the information from Form SS-4 to establish your account and assign you an EIN. Write the number you’re given on the upper right corner of the form and sign and date it. Keep this copy for your records.

Apply by fax. Under the Fax-TIN program, you can receive your EIN by fax generally within 4 business days. Complete and fax Form SS-4 to the IRS using the appropriate fax number listed in Where To File or Fax, later. A long-distance charge to callers outside of the local calling area will apply. Fax-TIN numbers can only be used to apply for an EIN. The numbers may change without notice. Fax-TIN is available 24 hours a day, 7 days a week. Be sure to provide your fax number so the IRS can fax the EIN back to you.”

2016-11-16T08:23:41+00:00May 7th, 2016|FAQs, How Do I, Tax Issues|0 Comments

Should Richard Keyt or LegalZoom Form My LLC?

Question: People frequently ask me “why should I hire Richard Keyt to form my Arizona limited liability company rather than LegalZoom?

Answer: You should hire me, Arizona LLC attorney Richard Keyt, to form your AZ LLC instead of LegalZoom for the following major reasons:

  • 138 Five Star Reviews: See our happy client reviews
  • Cheaper:  I’m $195 less for similar services as of 4/8/18 (see the comparison table below).  See also the price summary that omits the $159 resident agent fee.
  • Attorney Formed: I’m an Arizona attorney who has formed 6,200+ Arizona LLCs since I formed my first LLC in 1992.

(more…)

2018-05-02T20:27:16+00:00February 1st, 2016|FAQs, Forming LLCs|0 Comments

Can I be the President of My LLC?

Question: I am the sole member of my Arizona limited liability company.  Can I tell the public that I am the President of my LLC?

Answer:  Yes, but I don’t recommend you use that term because some people may mistakenly think they are dealing with a corporation rather than an LLC.  Arizona LLC law refers only members and managers of an Arizona limited liability company.  The term “member” means a person or entity that holds an ownership interest in the LLC.  The term “manager” means a person or entity of a manager managed AZ LLC that is a manager of the LLC.  FYI:  If your Arizona LLC is member managed, then it does not have any managers.

Although the terms President, Vice President, Secretary and Treasurer are most commonly used when referring to officers of a corporation, an Arizona LLC could elect to use any or all of those terms when referring to people who are associated with the LLC.  If you own the LLC you can call people associated with the LLC anything you desire, but if the term is not member or manager it has no legal significance unless the term is defined.

If you insist on using a corporate term to describe somebody associated with your LLC I recommend that the LLC’s Operating Agreement specify the terms to be used and that it describe the duties and powers applicable to each position.  For example, if your Arizona LLC is manager managed and you want to call the manager the “President” of the LLC, add the following text to the LLC’s Operating Agreement:

The manager of this Company may be referred to as the Company’s President both internally and in matters dealing with the public.  The duties and powers of the President are identical to the duties and powers of the manager of this Company.

2016-11-16T08:23:41+00:00January 31st, 2016|FAQs, How Do I|0 Comments

Should I Create a C Corporation?

Question:  We discussed forming an LLC, but I’ve had some people recently tell me that I should create a C Corporation instead of an LLC. They said that the C Corporation gives the best tax advantages. I read on your website, that “Arizona recognizes that corporations may be formed for profit or not-for-profit, but not as C or S corporations.”   So maybe what I’m hearing from these other people is that they are in other states and their laws are different from Arizona law regarding C corporations?

Answer:   If a person tells  you that you should form a C corporation you should run away as fast as possible because that person doesn’t know what he or she is talking about.  No state in the U.S. has something called a C corporation.  All states have for profit corps and nonprofit corps.  The term C corporation refers to one of four methods of income tax under the Internal Revenue Code of 1986.  The person that says form a C corp or form an S corp is confusing the type of entity formed under state law with the method of federal income tax under the Internal Revenue Code.

There is something in the Internal Revenue Code called subchapter S, which provides for how an entity that elects to be taxed under subchapter S is taxed.  There is another subchapter called subchapter C, which provides how entities taxed under that chapter are taxed.

Before you form an entity the first question is what type of entity should you form under the law of a particular state.  The types of entities are LLCs, LPs, LLPs, LLLPs, general partnerships, for profit corps and nonprofit corps.  In Arizona, the LLC replaced the for profit corporation as the best entity to form.  For an in depth discussion of whether to form a corporation or a limited liability company in Arizona to operate a business see my article called, “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?

After you form the entity under the law of the chosen state the next question is how should the entity be taxed?  An LLC can be taxed as a C corporation under subchapter C by filing an IRS Form 8832 with the IRS.  When the LLC files the Form 8832 you can then say the LLC is taxed as a C corporation, but the entity remains an LLC.

To learn more about the four ways an LLC can be taxed read KEYTLaw attorney and former CPA Richard C. Keyt’s article called “How are LLCs Taxed?

2016-11-16T08:23:41+00:00January 28th, 2016|FAQs, Tax Issues|0 Comments

How Can I See If My Desired LLC Name is Available?

Question:  I intend to form a new Arizona limited liability company.  I know that the Arizona Corporation Commission will reject my Articles of Organization if my desired LLC name conflicts with the name of an existing Arizona entity or an Arizona trade name issued by the Arizona Secretary of State. How can I insure that my desired LLC name will not be rejected by the ACC?

Answer:  Actually, the latest version of the ACC’s online database has an easy to use name checker that will tell you if your desired name will be accepted or rejected.  Here’s how to check a prospective LLC name.

  • Go the the Arizona Corporation’s name checker website.
  • Click on the text that says “Name – Forms for entity name reservations.”
  • Click on the text that says “Check Entity Name Availability.”
  • Enter your desired LLC name in the Name field.
  • Click on the down icon to the right of the text that says “Select an Entity Type.”
  • Click on the letters “LLC.”
  • Click on Check Name.

The ACC’s database will then tell you the desired name is bad or it is available.

Name Reservation Warning:  Although the ACC’s database will ask if you want to reserve the name, I don’t recommend that you waste the $45 unless there is a lot of money riding on the name.  Before purchasing a name reservation ask yourself this question:  Given that the desired name has been available from the beginning of time up to the moment you checked the name, what are the chances somebody will use your desired name before you file your Articles of Organization?

What are Arizona LLC Members Voting Rights?

Question:  The members of my multi-member Arizona limited liability company never signed an Operating Agreement.  The members now disagree on how to run the company.  What are the members’ voting rights?

Answer:  One of the primary reasons the members of a multi-member LLC should sign an Operating Agreement is to set rules on members’ voting rights and to set what major actions require the prior approval of a majority or super majority of the members or the unanimous approval of all members.  If the members fail to adopt a good Operating Agreement then the default voting rules of Arizona’s LLC law apply and its a matter of time before the members disagree on action and big problems arise.

When the members of an Arizona LLC fail to adopt an Operating Agreement that provides for members’ voting rights or if the members adopt an Operating Agreement that is voting rights deficient, Arizona Revised Statutes Section 29-681 applies and provides the default members’ voting rules and rights.

The voting rules that apply to an Arizona LLC that does not have an Operating Agreement with voting rules signed by all of the members are listed below.  There are only nine actions that require the approval of members – four of which of which require the approval of all members and five of which require the approval of a majority of the members.

  • All Members Get One Vote:  Every member has one vote regardless of how much money the member invested or how much of the LLC the member owns.  For example, if Homer and Marge Simpson invested $1,000 in World Wide Widgets, LLC and acquired a 1% membership interest as community property and Ned Flanders invested $99,000 for 99% of the company then each of the three members has one vote with respect to the nine major actions listed in Section 29-751Warning:  If you are the major investor and/or the owner of a majority of the percentage interests in an Arizona LLC Section 29-751 is the reason you must have a good Operating Agreement that sets forth voting rules and rights.
  • When Unanimous Approval is Required:  Only four actions require that all members approve the action.  “The affirmative vote, approval or consent of all members is required to:

1. Adopt, amend, amend and restate or revoke an operating agreement or authorize a transaction, agreement or action on behalf of the limited liability company that is unrelated to its purpose or business as stated in an operating agreement or that otherwise violates an operating agreement.

2. Issue an interest in the limited liability company to any person.

3. Approve a plan of merger or consolidation of the limited liability company with or into one or more business entities as defined in Section 29-751.

4. Authorize an amendment to the articles of organization that changes the status of the limited liability company from or to one in which management is vested in a manager or managers to or from one in which management is reserved to the members.”

  • When Approval of a Majority of the Members is Required: Only five actions require the approval of a majority of the members.  “The affirmative vote, approval or consent of a majority of the members, or if management of the limited liability company is vested in one or more managers, the affirmative vote, approval or consent of the sole manager or a majority of the managers, is required to:

1. Resolve any difference concerning matters connected with the business of the limited liability company.

2. Authorize the distribution of limited liability company cash or property to the members.

3. Authorize the limited liability company to repurchase all or part of any member’s interest in the limited liability company from that member.

4. Authorize the filing of articles of termination concerning the limited liability company.

5. Subject to subsection C, paragraph 4 of this section, authorize an amendment to the articles of organization, except that an amendment that merely corrects a false or inaccurate statement in the articles of organization may be filed at any time by a manager if management of the limited liability company is vested in one or more managers or by a member if management of the limited liability company is reserved to the members.

When there is no Operating Agreement Section 29-751.E.1 & 2 give the majority of members a lot of power to out vote the minority members and run the company.

The members failure to to adopt an Operating Agreement more often than not will eventually lead to a dispute among members as to how to run the company.  One of the most common reasons people call me is to learn their options when their Arizona LLC does not have an Operating Agreement and the members need a company divorce.

2016-11-16T08:23:42+00:00February 1st, 2015|FAQs, Member Disputes, Members, Operating LLCs|0 Comments

Annual Meetings of Members of an Arizona LLC

Question:  Does Arizona limited liability company law require the members and managers of an Arizona LLC to hold an annual meeting?

Answer:  No.  However, some badly worded Operating Agreements do require that the members hold annual meetings.

Although no Arizona statute or case requires annual meetings or special meetings of the members or managers of an Arizona LLC as an Arizona LLC attorney who has formed

5,600+ Arizona LLCs I recommend that both types of meetings be held. There are two reasons why members and managers should hold meetings.

  • To reduce the chance that a court will pierce the veil and hold the members of the LLC liable for the debts of the LLC.  One of the factors courts consider when asked to pierce the veil is “did the LLC operate like a business or a hobby?”  Prudent businesses hold meetings and document the actions approved or rejected by the members and managers.  LLCs operated like a hobby do not hold meetings.  Note:  If your LLC’s Operating Agreement requires that the members or managers hold annual meetings then you must make sure that the meetings are actually held and document that fact.  The failure of members to hold annual meetings required in an Operating Agreement is a factor that counts against the members when a court is asked to pierce the veil and hold the members liable for the debts of the LLC.
  • To inform members and managers of important proposed company before it occurs and give them the opportunity to vote to approve or reject the proposed action.  This is especially important when an LLC has multiple unrelated members.  Consider two hypotheticals:  (1) LLC is considering whether to enter into a contract that will require the company to pay a third party a lot of money.  The member who owns more than 50% who is a manager signs the contract without prior notice to the other members who learn of the contract after it’s a done deal.  (2) Same facts, but majority member holds a meeting of the members at which all of the members discuss the proposed contract and then vote on whether or not to sign the contract.  The first method risks alienating the other members who will rightly feel left in the dark.  The second method gives everybody a chance to be informed in advance and give their two cents on signing or rejecting the contract.  Guess which method is less likely to result in disgruntled members who may want a company divorce.

Purchase My Do-It-Yourself Meeting Minutes & Resolutions

I’ve made it very easy for Arizona LLCs to document actions approved by members and managers. Just purchase my editable Word meeting minutes and resolutions that you can modify whenever needed to document special and annual meetings of your LLC’s members and managers.  You can also purchase a document called “Action by Consent” by which the members and managers can adopt resolutions approving company actions in lieu of actually holding a meeting. Each document comes with 16 resolutions for the most common types of actions voted on by members and managers.

Go to my Arizona legal form store to purchase your do-it-yourself minutes and resolutions.

 

2016-11-16T08:23:42+00:00December 6th, 2014|FAQs, Operating LLCs, Veil Piercing|0 Comments

Can an LLC be a Tax-Exempt 501(c)(3) Charity?

Question:  My group is considering forming a tax-exempt charitable organization.  Can the organization be a limited liability company or must it be a nonprofit corporation?

Answer:  It can be an LLC if the LLC is wholly owned by a single exempt organization and the LLC satisfies the 12 conditions described in an IRS paper called “Limited Liability Companies as Exempt Organization Update.” The LLC cannot have individuals or nonexempt organizations as members, and its organizing documents must state a purpose to further the charitable purpose. To learn more about nonprofit corporations see my website called “Nonprofit Corporations & Charitable Organizations.”

The 12 conditions are:

1. The organizational documents must include a specific statement limiting the LLC’s activities to one or more exempt purposes.

2. The organizational language must specify that the LLC is operated exclusively to further the charitable purposes of its members.

3. The organizational language must require that the LLC’s members be section 501(c)(3) organizations or governmental units or wholly owned instrumentalities of a state or political subdivision thereof (“governmental units or instrumentalities”).

4. The organizational language must prohibit any direct or indirect transfer of any membership interest in the LLC to a transferee other than a section 501(c)(3) organization or governmental unit or instrumentality.

5. The organizational language must state that the LLC, interests in the LLC (other than a membership interest), or its assets may only be availed of or transferred to (whether directly or indirectly) any nonmember other than a section 501(c)(3) organization or governmental unit or instrumentality in exchange for fair market value.

6. The organizational language must guarantee that upon dissolution of the LLC, the assets devoted to the LLC’s charitable purposes will continue to be devoted to charitable purposes.

7. The organizational language must require that any amendments to the LLC’s articles of organization and operating agreement be consistent with section 501(c)(3).

8. The organizational language must prohibit the LLC from merging with, or converting into, a for -profit entity.

9. The organizational language must require that the LLC not distribute any assets to members who cease to be organizations described in section 501(c)(3) or governmental units or instrumentalities.

10. The organizational language must contain an acceptable contingency plan in the event one or more members ceases at any time to be an organization described in section 501(c)(3) or a governmental unit or instrumentality.

11. The organizational language must state that the LLC’s exempt members will expeditiously and vigorously enforce all of their rights in the LLC and will pursue all legal and equitable remedies to protect their interests in the LLC.

12. The LLC must represent that all its organizing document provisions are consistent with state LLC laws, and are enforceable at law and in equity.

2016-11-16T08:23:42+00:00August 4th, 2014|FAQs|0 Comments

New IRS Procedure to Get EIN for an LLC Owned by a Nonresident Alien

Question:  I am a not a U.S. citizen and I live outside the U.S., aka a “nonresident alien.”  I formed a limited liability company in the U.S.  How do I get a federal employer id number (EIN) for my LLC?

Answer:  You can get the EIN one of two ways:  the easy way or the not so easy way. Before January of 2014 we could get an EIN for an LLC we formed for a nonresident alien if the nonresident alien completed and signed an IRS form SS-4 that designated my legal assistant as a third party designee authorized to contact the IRS and get the EIN.  My legal assistant would call the IRS international EIN number, fax the SS-4 to the IRS agent and spend about 45 minutes on the phone, but at the end of the call the IRS would give my legal assistant the EIN.

Beginning in January of 2014, the IRS canned that procedure.  Now a company of any type owned by a nonresident alien gets an EIN for the company by one of the following two methods:

You should be able to get the EIN for the new LLC by using the IRS’ online wizard here:

Easy Way: If the nonresident alien has an IRS issued International Taxpayer Identification Number (ITIN), the nonresident alien can obtain the EIN in a 5 – 10 minute data entry session using the IRS’ online EIN wizard.  After submitting all of the information the website will display the EIN.  Be sure to print the page with the EIN and keep it in a safe place.

Hard Way:  If the nonresident alien does not have an ITIN then he or she must complete and sign an IRS form SS-4 and fax or mail it to the IRS.  Faxing the SS-4 to the IRS is the better method because the IRS will fax the EIN to the applicant in approximately four business days vs. three to four weeks if the SS-4 is mailed to the IRS.  Prepare, sign and fax the IRS form SS-4 to the IRS at 859-669-5760.

To get a partially completed IRS form SS-4 for an LLC and my detailed instructions on how to fill out the form read my article called “How to Complete IRS Form SS-4.”  Be sure to delete all the text at the bottom of the form in the Third Party Designee Fields and insert your name, phone number and fax number at the bottom of the form.

2017-10-06T21:36:19+00:00June 5th, 2014|FAQs, Forming LLCs, Tax Issues|0 Comments