Question: Did you file my LLC as partnership? My tax accountant needs this information and a copy of that document.
Answer: You need to get a new accountant who understands LLCs and federal income tax law. It is not possible in any state to file an entity (corp or LLC) as a partnership for federal income tax purposes. The IRS’ default tax method for a multi-member LLC like your two member LLC is partnership. No need to file any papers with the IRS other than the LLC’s IRS form 1065, which is its partnership tax return. If the LLC wants to be taxed as an S corp it has to file an IRS form 2553. If your LLC did not file IRS form 2553 then it is automatically taxed as a partnership.
Question: People frequently ask me why they should hire me, Richard Keyt, an Arizona LLC attorney who has formed 9,000+ AZ LLCs, to form their Arizona limited liability company instead of LegalZoom?
Answer: People should hire me to form their AZ LLC instead of LegalZoom for the following reasons:
- We file the new company’s FinCEN Beneficial Owner Information report required by the Corporate Transparency Act for our Silver and Gold LLC formation packages. If your new company does not file this report within 90 days of its formation date the U.S. Treasury can fine the company $500 a day for each day the report is late. See FinCEN Filer, LLC to learn more about this law. Companies formed before 2024 must file their report on or before December 31, 2024. LegalZoom charges an additional $99 to file this report.
- I’m $372 Cheaper than LegalZoom for Similar Services: As of 2/24/24 LegalZoom’s premium LLC formation package is $582, but it includes an attorney fee of $49/month for a year, which is an additional $588/year. FinCEN BOI report filing fee is $99. The total LLC premium formation fee for the first year is $1,269, which is $372 more than my $897 Silver LLC package which includes filing the FinCEN BOI report.
- Our annual statutory agent (aka Registered Agent) fee is $99. LegalZoom’s annual statutory agent Service is $199/year.
- I’ve Got 354 Five Star Reviews: Read our 354 happy client five-star reviews on Google, Facebook & Birdeye. When I Google LegalZoom it doesn’t display any reviews.
- I’m an Arizona LLC Attorney who has been forming LLCs since 1992: I formed the first LLC in Arizona the day Arizona’s LLC law became effective in October of 1992. I have formed 9,000+ Arizona LLCs since I started counting in 2002.
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.
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.”
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.
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, 2022, the members must sign and file IRS Form 2553 with the IRS not later than March 15, 2022.
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.
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?“
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.