FAQs

Don’t Pay LegalZoom More than an Arizona LLC Attorney to Form an Arizona LLC

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 356 Five Star Reviews: Read our 356 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.

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2024-05-26T07:33:16-07:00April 1st, 2024|FAQs, Forming LLCs|0 Comments

Loan Can’t be Called if Land Is Transferred to an LLC

Question:  Can my lender call my loan that encumbers my land if I transfer the land to an LLC I own?

Answer:  Probably not.  The Federal National Mortgage Association, aka Fannie Mae, has something called Servicing Freddie Mac Mortgages Series 8000.  Section 8406.4(b) Additional permitted Transfers of Ownership Effective 10/20/2021 states:

“Permitted Transfers of Ownership subject to conditions.  In situations where all of the following conditions are met, Freddie Mac will permit a Transfer of Ownership of the Mortgaged Premises:

  • At least 12 months have passed since the Origination Date and
  • The transfer is to a limited liability company (LLC) or limited partnership (LP), provided that:

The managing member/general partner of the LLC/LP is the original Borrower. If there are multiple Borrowers, all of them must be members/partners of the LLC/LP, and at least one of them must be a managing member/general partner. If the transfer results in a permitted change of occupancy type to an investment property, such change must not violate the Security Instrument (e.g., the 12-month occupancy requirement for a Primary Residence), and

The Servicer notifies the original owner or natural person that the Mortgaged Premises transferred to an LLC/LP must be transferred back to the original owner or natural person prior to any subsequent refinance or modification application to meet Freddie Mac’s underwriting requirements

Fannie Mae ruling D1-4.1-02: Allowable Exemptions Due to the Type of Transfer (04/13/2022) says due on sale clauses cannot be enforced if the borrower transfers the encumbered land to a limited liability company.  The rule states:

“the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer: . . . A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to a limited liability company (LLC), provided that

  • the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and
  • the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).”

Bottom line is Fannie Mae approves transfers of encumbered land without the lender being able to enforce a due on sale clause.

Did Your File My LLC as a Partnership?

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.

2023-08-08T15:03:18-07:00August 8th, 2023|FAQs, Tax Issues|0 Comments

Should I Get a DBA for My Arizona LLC?

Question:  If my Arizona LLC is called Widget World, LLC and I want to use Best Widgets in my LLC’s advertisements do i need to file a DBA with Arizona?

Answer:  DBAs in AZ are called trade names.  If you use text that is not the full name of the LLC you should register that text as a trade name with the Arizona Secretary of State.  Getting a trade name or dba from the Arizona Secretary of State is relatively easy to do. It’s a simple online application and the fee is $10. To learn how to get the trade name (aka dba) watch my Youtube video at:

Here’s the link to the Arizona Secretary of State’s trade name page:

https://azsos.gov/business/trade-names-trademarks

2023-10-24T10:17:50-07:00June 3rd, 2023|FAQs, Questions People Ask|0 Comments

Well Fargo Bank Demands LLC Change its Principal Address

Question:  Client received a letter from Wells Fargo bank that said the client’s new LLC’s principal address on file with the Arizona Corporation Commission cannot be 24 W. Camelback Rd, #467, Phoenix, AZ 85013.  That address is also the mailing address of the LLC’s statutory agent.  Do I have to amend my LLC’s Articles of Organization to change the LLC’s principal address?

Answer: Arizona Revised Statues Section 29-2101.B states:  “The Articles of Organization [of an LLC] must state. . . the [LLC’s] principal address, which may be the same as the mailing address of the company’s statutory agent.”  Arizona Revised Statues Section 29-3102.20 defines Principal Address as “the mailing address of a limited liability company or foreign limited liability company, whether or not located in this state.”

24 W. Camelback Rd, #467, Phoenix, AZ 85013 is a UPS mail box. You are dealing with an idiot banker who is ignorant of Arizona LLC law.  The banker is telling you that your LLC’s principal address stated in its Articles of Organization filed with the Arizona Corporation Commission cannot be the LLC’s statutory agent’s mailing address even though that address is expressly authorized in Arizona Revised Statues Section 29-2101.B. Only an uniformed idiot would say that. In forming 8,700+ LLCs I can only remember one other person whose banker said the same thing. It is very common for businesses to have a PO box or a UPS mail box.

The bank has no legal basis to say that the LLC’s principal address cannot be 24 W. Camelback Rd, #467, Phoenix, AZ 85013, because that is KEYTLaw, LLC’s, mailing address and KEYTLaw, LLC is the LLC’s statutory agent.

Recommendation:  Go to another bank, but never use Wells Fargo, Bank of America or Chase Bank.


Will My Lender Call My Loan If I Convey Land to My LLC?

Question:  I own a rental home that I want to put into an LLC for asset protection, but it is subject to a deed of trust that has a due on sale clause in it.  If I form an LLC and convey the home to the LLC will the lender exercise the due on sale clause and demand I pay off the loan?

Answer:  A due on sale clause is text in the deed of trust that says that the lender can demand payment of the balance owed on the loan if the borrower transfers ownership of the land.  This is a common clause in residential loan documents.

I’ve formed 4,000+ AZ LLCs into which people transferred land that was subject to a mortgage or deed of trust. I’ve never had an LLC client’s lender call the loan because of the transfer. If your lender were to call your loan Arizona law says that if you cure the default by transferring the land back to you the lender must stop the foreclosure.

The purpose of a due on sale clause is to give the lender an option to call the loan when the borrower ceases to own or have any involvement with the land. When the borrower transfers the land to the borrower’s LLC the borrower continues to be involved with the land and will make the future payments. That’s why lenders don’t call the loan when the borrower transfers the land to the borrower’s LLC.

Advice:  Don’t contact the lender and ask for permission.  The standard response is you cannot do it and you may get yourself on the lender’s radar.

Chase Bank Refused to Open LLC Account Because It Could Not Verify LLC’s Phone Number

Question:  What is a verified LLC phone number?  I tried to open a bank account for my LLC at Chase Bank.  The bank clerk said that he could not open a bank account for the LLC unless he could “verify” the LLC’s phone number.  My client who is the sole member and manager of the LLC gave the banker all of his phone numbers.  The banker was unable to verify any of the phone numbers and declined to open a bank account for the LLC.

Answer:  I don’t have a clue what a verified phone number is.  In forming 9,000+ Arizona LLCs since 1992 I’ve never had anybody call or email me and say their bank required a phone number (verified or unverified) to open a bank account.  My advice was go to another bank, preferably not Chase, Wells Fargo or Bank of America.

Idiot Banker Won’t Open a Bank Account for an LLC Owned by a Trust

Question:  You setup an LLC for me that is owned by a revocable living trust you created.  I gave the bank a copy of the Articles of Organization, the Operating Agreement, the Trust Agreement and the Certification of Trust, but the bank won’t open an account for the LLC unless you send the bank a letter that says that I am the trustee of the trust that is the member of the LLC?

Answer:  You are dealing with an idiot banker because he/she wants somebody who is not an owner of the LLC or affiliated with the LLC, i.e., me, to sign a letter that states who owns the trust.  Ask the idiot banker if another bank employee can sign the letter because that person has the same connections to the LLC and the trust as I have.

Your Certification of Trust and your Trust Agreement show that you are the trustee, aka the “owner” of the trust.  Why doesn’t the banker know that?  It’s because he or she is an idiot.

I’ve formed 8,700+ LLCs and only one other time has a bank idiot asked me to sign a letter before opening an account.  The other time the idiot banker wanted me to sign a letter as the LLC’s statutory agent stating that the LLC’s address was the address displayed on the Arizona Corporation Commission website.  Why wouldn’t the idiot ask the owner of the LLC to sign that letter?

Go to another bank or a different branch.  I don’t recommend that LLC owners open accounts with Chase, Wells Fargo or Bank of America.

I Want Investors to Invest in My LLC

Question:  I am interested in more information on Arizona Revised Statutes Section 44-1844.A.  I am want to open a new business and I’m looking for investors. I want information on how to do it without affecting the Arizona Securities Division.

Answer:  If you will offer interests in your LLC to investors in exchange for them paying money or value assets you are offering and selling a security and must comply with federal and state securities laws.  If you fail to comply with federal and state securities laws and an investor loses money federal and state securities laws say the promoter(s) – you in this case – are liable for the loss.

You need to hire an experienced securities law attorney to advise you and prepare the documents needed to comply with federal and state securities laws.  The cost of the legal advice is a cost of raising the capital. We do not provide securities law advice.

How Many LLCs Should I Form?

Question:  You have formed most, if not all, of my LLCs over the years and I am grateful for the efficiency, cost and professionalism.  I do have two quick questions.

  • Is it best to have rentals each in their own LLC or is okay to have them all under one?
  • What is best practice for banking? Is it best to have a separate account for each for the sake of liability?

Answer:  The reason you want multiple LLCs to operate multiple businesses or own multiple real estate properties is because you don’t want all of your eggs in one basket.  You know what happens if you drop the basket.  You get the same result if one business or property causes a lawsuit against the LLC and there is a big judgment that exceeds the insurance – you lose all your eggs, aka businesses or properties.

A fundamental rule of LLC asset protection is that each LLC must have its own bank account into which its income is deposited and from which its expenses are paid.  Each LLC also needs its own books.  If you break this fundamental rule and a lawsuit is filed, a court is going to rule that because you are treating the LLCs as if there is only one LLC the court will do the same and allow all of the assets of the LLCs to be reached by a creditor of one of the LLCs.

3 Ways Your Loved One Will Be Harmed If You Own an LLC & Do Not Prepare for Death

If a member of an Arizona LLC dies and the member did not take action to protect the member’s loved one(s) bad things will happen.  The failure to plan for death creates the following problems:

1. The membership interest of the deceased member may not be inherited by the person or people the deceased member would want to inherit the membership interest.

2. A person who inherits the membership interest of a deceased member of a multi-member LLC will not be a member of the LLC.  Instead, the heir will acquire only an economic interest in the LLC, which means the heir(s) will not be able to vote on any issue or receive records that all members have a right to receive.

3. The person who inherits the LLC interest may have to do an expensive and time consuming court probate to change ownership of the LLC.

Click on the blue text below or the + icon to open the text box to see the explanation of each problem.

If you do not have a will or a trust that states who inherits your interest in the LLC if you die the LLC will go to the person or people selected by the intestate succession law of your state of residence.  Your state’s plan for who inherits may be different from who you want to inherit the LLC.

If you are an Arizona resident see “Who Inherits Property of an Arizona Resident Who Dies without a Will or a Trust?

Example 1: Bob Jones owns his LLC as his separate property.  He is married to Linda and has two children from a prior marriage.  Bob wants Linda to inherit all of his valuable LLC.  Bob dies without a Will or trust that designates who inherits the LLC.  The law of intestate succession of Bob’s state of residence gives one half of the LLC to Linda and the other half to Bob’s children equally.

Solution:  Bob should have signed a will or a trust that named Linda as the sole heir of Bob’s interest in the LLC.

Example 2: Bob Jones invests $90,000 in J&F LLC and owns a 90% membership interest.  Linda is Bob’s significant other of 20 years. Ned Flanders invests $10,000 and owns 10%.  Bob dies without a Will or a trust.  Instead of the 90% interest in the LLC going to Linda the law of intestate succession of Bob’s state of residence gives the LLC interest to Bob’s son whom Bob hasn’t heard from in 25 years.  Linda gets none of the LLC.

Solution: Bob should have signed a will or a trust that named Linda as the sole heir of Bob’s interest in the LLC.

Example 3: Bob Jones is single and has three kids.  Bob wants his entire interest in his LLC to go to his daughter Maggie who works in the business with Bob. Bob dies without a Will or trust.  The law of intestate succession of Bob’s state of residence gives the LLC interest equally to Bob’s three kids.  Maggie gets one third of the LLC instead of all of it.

Solution: Bob should have signed a will or a trust that named Maggie as the sole heir of Bob’s interest in the LLC.

Example 4: Bob Jones is single.  He wants his brother James to inherit his LLC.  Bob dies without a Will or a trust.  The law of intestate succession of Bob’s state of residence gives the LLC interest to Bob’s parents.  James gets nothing.

Solution: Bob should have signed a will or a trust that named Linda as the sole heir of Bob’s interest in the LLC.

Arizona Revised Statutes Section 29-3502 states:

A. A transfer, in whole or in part, of a transferable interest does not entitle the transferee to either of the following:

(a) participate in the management or conduct of the company’s activities and affairs.

(b) . . . have access to records or other information concerning the company’s activities and affairs.

B. A transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.

This statute prevents an heir from voting on LLC matters and getting information about the LLC.

Example 5: Same facts as Example 2 above, but the good news is that Bob’s Will left Bob’s 90% interest in the LLC to Linda.  Because of Section 29-3502 Linda does not have any voting rights and can’t get any information about the LLC.  Linda inherited only an economic interest in the LLC, not a membership interest.  This means that Ned Flanders who owns 10% of the LLC is the only voting member and now has total control of the LLC that Linda has a right to receive 90% of the and distributions.

Solution:  The Operating Agreement of the LLC signed by Bob and Ned should have had a clause that stated that Bob’s heir Linda would automatically become a member of the LLC entitled to all rights of membership on Bob’s death.  Our Operating Agreements contain this language.

If you die and your LLC is not owned by your trust your heir(s) may be forced to open a probate with a court in your state of residence to transfer ownership of the LLC to your heir(s).  We are Arizona probate lawyers.  Our fee to do an uncontested Arizona probate is $2,500 – $3,500 and it takes five or six months.

If you are an Arizona resident and the value of ALL of your personal property including your LLC is less than $75,000 your heir(s) can avoid probate by preparing a small estate affidavit.

Example 6:  Bob dies without a Will or a trust.  The total value of his personal property exceeds $75,000.  Bob’s wife inherited his LLC interest under Arizona’s law of intestate succession, but she has to spend $3,500 to hire an attorney to do a probate.

Solution: If Bob had signed trust the LLC interest would have passed automatically to his wife on Bob’s death without the need for a probate.

2023-11-01T10:18:05-07:00November 26th, 2020|FAQs, How Do I, Members, Operating Agreements|0 Comments

How to Form an LLC in Arizona FAQ

Because people ask us the same LLC formation questions over and over I created an article called  “How to Form an LLC in Arizona FAQ” that answers these LLC frequently asked questions.  The questions and answers are:

  • How do I start an LLC in Arizona?
  • How much does it cost to form an LLC in Arizona?
  • How long does it take to form an LLC in Arizona?
  • Do I have to publish my LLC AZ and Do I have to publish my LLC?
  • What happens if you don’t publish your LLC?
  • How do I start a LLC company?
  • Can I start an LLC by myself?
  • Do I need an Arizona business license?
  • How do I set up an LLC in Arizona?
  • How long does an LLC take to process?
  • How LLC’s are taxed?
  • How are LLCs taxed in Arizona?

If you have any LLC questions that are not answered in my article, call me on my direct line at 480-664-7478 or send an email message to me at [email protected].  You can also book a free phone, office or Zoom video consultation with using my online calendar at www.keytlaw.com/rk.

To hire me to form an Arizona LLC for ($497 Bronze, $797 Silver & $1,297 Gold [the confidential LLC]) submit my LLC Formation Questionnaire or call me and give me your info over the phone.   Our Gold LLC is the confidential LLC for people who do not want their name and address on the Arizona Corporation Commission’s public records, .

2023-02-18T10:20:45-07:00January 3rd, 2020|FAQs, How Do I|0 Comments

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.

Watch my video below called “How to Get a Certificate of Good Standing from the ACC” then you will be able to get the COGS in 5 – 10 minutes using the Arizona Corporation Commission’s online ecorp system.

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.

2018-09-01T17:12:36-07:00September 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.”

2019-07-25T13:11:02-07:00August 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.
2019-06-15T06:51:13-07:00May 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, 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.

2022-01-31T07:50:17-07:00January 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.

2016-11-24T11:13:40-07:00November 25th, 2016|FAQs, How Do I, LLCs & Corporations, Tax Issues|0 Comments
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