Ask the KEYTLaw Girl

The KEYTLaw Girl and LLC legal assistant Katie Leavitt answers frequently asked questions about forming and operating Arizona limited liability companies.

We Say Good Bye to Katie Leavitt, the KEYTLaw Girl

On September 30, 2012, my wonderful daughter, Katie Leavitt, aka the KEYTLaw Girl, started her new job as a fashion styling specialist for Origami Owl.  She was my LLC legal assistant for six years beginning when she started her senior year at ASU.  She is leaving the law pursue her passions, fashion and photography.  She will be involved in helping a great young company increase its sales.  Origami Owl discovered Katie because of her fabulous website called Running On Happiness, a site that showcases Katie’s fashion sense, writing ability and photography skills.  My wife and I will miss working with our little girl every day, but it is time for her to move on and do what she really wants to do.  Katie will continue to be the KEYTLaw Girl in videos we make in the future.

2017-10-22T15:11:53-07:00September 10th, 2012|Ask the KEYTLaw Girl|0 Comments

How to Transfer Land to an Arizona LLC

Question:  How do I transfer land to an Arizona LLC?

Answer:  You may have formed a limited liability company to help protect you from things that might go wrong with property you own. For the LLC to protect your personal assets from liability, it must hold the title to the land.  To get real estate into a limited liability company, the current owners must sign a deed that conveys the property to the limited liability company and record the deed in the county where the real property is located. If you acquired title to the property in a transaction that went through an escrow company, ask the escrow company if it will prepare the deed. Sometimes the escrow company will prepare the deed for you for no charge or a nominal amount.

Some other issues to consider are:

1. If you transfer the title to the LLC, ask the title insurance company that issued you the title insurance policy on the land to give an endorsement to the title insurance policy as of the date the policy was issued that names the LLC as an additional insured on the title policy. The cost for this type of endorsement is typically $75. If you do not get the endorsement, the LLC will not have title insurance on the land unless it purchases a new policy.

2. Coordinate with the insurance companies that insure the property and arrange to get a new policy or policies of insurance that name the LLC as the insured. Alternatively, you could add the LLC as an additional insured on the existing insurance policy or policies. If you purchased fire insurance that names you as the insured and the home is damaged or destroyed in a fire, the insurance company will probably deny coverage because you are not the owner of the property. Make sure you have written evidence from the insurance company that says the LLC is covered as of the date the real estate is transferred to the LLC.

3. Consult with your insurance agent and make sure that you and your LLC are covered with all appropriate types of insurance that have high amounts of coverage. Examples of such insurance would be home owners and liability insurance, however the types of insurance you need depends in part on the actual business and/or activities of the LLC. An LLC that owns a home leased to a family needs different insurance types and coverages than an LLC that operates an assisted living facility.

Is Property Acquired During an Arizona Divorce Community Property or Separate Property?

Question:  An Arizona resident in the process of getting a divorce wants to form an Arizona limited liability company. If he/she forms an Arizona LLC before his/her divorce is final, will the spouse own a community property interest in the new LLC?

Answer:  It depends. Arizona law defines community property as all property acquired by either spouse during the marriage. There are two exceptions to this rule.

First, community property does not include property acquired during the marriage by gift or inheritance.

Second, community property does not include property acquired AFTER service of a petition for divorce, legal separation or annulment if the petition results in a decree of divorce, legal separation or annulment.

This means that if somebody gives money or property only to one spouse, the property is separate property unless the recipient changes the separate property to community property. Likewise, if a parent dies and leaves money or property to a married child, the money or property is separate property unless the recipient changes the separate property to community property.

Separate property can be changed to community property and community property can be changed to separate property. It is best to document changes in the character of property with a written document such as a deed. Married people who have separate property and who want to keep it as separate property must take care not to change the separate property into community property. Separate property can be changed to community property if it is titled in the name of both spouses, or if it is money, deposited in a joint bank account. Also, if community assets such as wages or salary are used to benefit separate property, it can cause some or all of the separate property to become community property. For example, if a man inherits a home from his parents and uses some of his salary, which is community property, to pay the mortgage or make improvements to the home, a part of the home will become community property.

Now, back to the question. If Spouse 1 is an Arizona resident and forms a new Arizona LLC after service of a petition for divorce on Spouse 2 and if the petition results in a decree of divorce, Spouse 1 is the sole owner of the interest in the LLC as separate property. Otherwise, Spouse 1’s interest in the LLC is deemed to be community property.

I recommend that an Arizona resident who is married and wants to ensure that he or she will be the sole owner of an interest in a new Arizona LLC should not rely on the divorce becoming final, but should get the non-owner spouse to sign a document in which the non-owner spouse disclaims any interest in the LLC. Of course, if the non-owner spouse will not sign the disclaimer, the divorce must become final for the owner spouse to own one hundred percent of the new LLC.

2019-06-15T11:15:42-07:00July 1st, 2011|Ask the KEYTLaw Girl, FAQs|2 Comments

Should I Form an Arizona C Corporation or an S Corporation?

Question:  Should I form an Arizona C corporation or an S corporation?

Answer:  I form for profit corporations, nonprofit corporations, limited liability companies, and limited partnerships.  I’ve formed 7,000+ LLCs since 2001.  However, I do not form C corporations or S corporations because Arizona corporate law does not recognize or care about C corporation or S corporations.   Those two terms describe one of four methods of federal income tax applicable to entities. Nobody forms S or C corporations in the United States. People form:

  • for profit corporations (obsolete in Arizona except for limited circumstances)
  • nonprofit corporations
  • limited liability companies (most popular entity in Arizona)
  • limited partnerships (obsolete in Arizona except for limited circumstances)
  • general partnerships (never ever form a general partnership because every partner is 100% liable for everything that goes wrong)
  • sole proprietorships (never ever operate a business this way because the owner is 100% liable for everything that goes wrong)
  • business trusts (rarely used and not appropriate in Arizona)

The first four types of entities are formed pursuant to the statutory law of each state. No state in the U.S. allows for the formation of a C or an S corporation, both of which are methods of taxing an entity under the federal income tax code.

Before forming an entity, the first question is in what state should I form the entity? The second question is what type of entity should I form? After you form the entity, the next question is how should the entity be taxed for federal income tax purposes?

If you form a corporation, it can be taxed two ways:

  • C corp – the default method, or
  • S corp – if the corp is eligible to be an S corp and all of the owners sign and submit an IRS form 2553 to the IRS before the deadline.

If you form a limited liability company, it can be taxed four ways:

  • C corp
  • S corp
  • Partnership if it has two or more owners
  • Sole proprietorship if it has one owner or a husband and wife owners who own the company as community property

One of the many reasons Arizonans are forming LLCs 12 times more often than corporations is because of the four methods of tax available to the LLC vs. the two methods of tax available to a corporation.

I recommend that as soon as possible after forming your entity, but not later than 75 days, you talk to your tax advisor to determine which method of tax is best for you and the entity.

I do form for profit corporations when there is a good reason to do so or if I cannot convince my client that the Arizona LLC is a much better entity than the Arizona for profit corporation. To date, I have formed 7,000+ Arizona LLCs.

For an in depth discussion of whether to form a corporation or a limited liability company in Arizona to operate a business or hold real estate, see my article on my website called, “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?

See also my article called “If My New Business Will Have Start Up Losses, Should It be an LLC or an S Corporation?.”

How Can I Legally Omit My Name as a Member of an Arizona LLC?

Question:  I want to form an Arizona limited liability company.  I understand that Arizona law requires that the names and addresses of all members of an Arizona member managed LLC must be disclosed in the Articles of Organization, which is a public record on the internet.  How can I form an Arizona LLC and avoid having my name and address appear on the Arizona Corporation Commission’s public records?

Answer:  Yes if you do it the right way.  Arizona Revised Statutes Section 29-632.A.5 requires that the Articles of Organization filed with the Arizona Corporation Commission must contain the name and address of all members if the LLC is member managed or the names and addresses of only those members who own 20% or more of the LLC if the company is manager managed.

There is a simple and relatively inexpensive way to comply with Arizona law, but not disclose your name in the Articles of Organization filed with the Arizona Corporation Commission to form an Arizona LLC.  For the solution and how to keep your name off the records of an Arizona LLC, see my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s).”

If My New Business Will Have Start Up Losses, Should It be an LLC or an S Corporation?

Question:  I am considering starting a new business and I anticipate that it will produce losses, rather than profits for the first few years.  Should I form a limited liability company or an S corporation to own and operate the business?

Answer:  People ask this question of me a lot, which is why I wrote a detailed article called “LLCs vs. Corporations:  Which Type of Arizona Entity Should You Form?”  My article explains the many reasons why I believe that the LLC is the entity of choice in Arizona.  People who ask this question are mixing the type of entity formed under state law with a method of taxation under the Internal Revenue Code of 1986, as amended.  When you are thinking of forming an entity in Arizona to operate a business or to own investment real property, the first question is what type of entity should I form under Arizona law?  Almost always the answer is a limited liability company.

After you form your company, the next question is what is the best method of income tax for the entity?  If your tax adviser says that your LLC should be taxed as an S corporation and if it is eligible for that method of tax, then all of the members of company must sign an IRS Form 2553 (the instructions) and file it with the Internal Revenue Service before the deadline for making the S corp election.  An LLC taxed as an S corporation is a “pass through” entity (it does not pay income taxes), which means that losses are passed through to the owners who can deduct the losses on their personal income tax returns (if they have sufficient basis).  Note: An LLC that elects to be taxed as a C corporation, an S corporation, a sole proprietorship or a partnership for federal income tax purposes does not change its character.  The entity always remains an LLC created under Arizona law regardless of the method of federal income tax applicable to the entity.

Bottom line:  If S corp tax treatment is important and your business is in Arizona, form an Arizona LLC and cause it to be taxed as an S corporation by filing an IRS form 2553 in the first 75 days after forming the LLC.

P.S.  I recommend that everybody who forms an LLC consult with a good tax advisor as soon as possible after forming the entity to obtain advice on which of the four federal income tax methods (sole proprietorship, partnership, C corporation or S corporation) is best for the limited liability company.  The election to change the default method of income tax (sole proprietorship or disregarded entity for a single member LLC or partnership for a multi-member LLC) must be filed within 75 days of the date of forming the LLC for the election to be effective from the date of formation.  For a list of the Certified Public Accountants I recommend in Arizona see “Professionals We Like.”

To learn why 7,000+ people have hired me to form their Arizona LLC, see “Contents of Arizona LLC Attorney Richard Keyt’s $597 Complete LLC Package” and Testimonials.

Should You Reserve a Name with the Arizona Corporation Commission for Your New LLC or Corporation?

Question:  What is your opinion on reserving a name for my new company with the Arizona Corporation Commission?

Answer:  I never reserve a name for a new LLC or corporation unless it would be a big problem if the company did not get the name.  Big problem to me means that the loss of the name would cause my client to pay a lot of money or if you think somebody who knows about your plans for a new company might reserve the name just to prevent you from getting it. In the thirty years I have been a business lawyer in Arizona forming over 2,300 companies, I have reserved a name less than five times.

Think of it this way.  If you check a name with the Arizona Corporation Commission (check it here) and it is available, it means the name has been available from the beginning of time to the moment you checked it.  The chance that somebody is going to get that exact name before you in the near future are slim to none.

When people do reserve a name, it is not a problem for me when we form the limited liability company or corporation if the person or company that reserved the name is a member or manager named in the Articles of Organization of an LLC or named in the Articles of Incorporation of a corporation.  If that person is not named in the Articles, the holder of the name rights must assign the rights to the name to one of the people or entities named in the Articles and the assignment document must be submitted to the Arizona Corporation Commission when you file the Articles.

P.S.  Early in my legal career, I was merging two corporations into one survivor corporation.  I reserved the name of the new corporation.  It was very important that the merger occur on a specific date.  The Arizona Corporation Commission rejected my merger documents because it said correctly that I was not named in the name reservation.  That’s when I learned about the need for the name holder to assign the rights to the name to somebody who is named in the Articles.

2019-06-15T11:28:02-07:00February 25th, 2010|Ask the KEYTLaw Girl, FAQs, Forming LLCs|0 Comments

Can an Arizona LLC be Owned Entirely by Non-U.S. Citizens Who Do Not Reside in the U.S.?

Question:  Can an Arizona limited liability company be formed and owned by non-United States citizens who do not reside in Arizona or the United States?

Answer:  Yes.  Arizona limited liability company law does not require that any owner of an Arizona LLC be a U.S. citizen or a resident of the United States.  I have formed many Arizona LLCs for people who live outside the U.S. and who are not U.S. citizens.

LLC’s Need a Federal Employer Tax ID Number:  It is also possible for an LLC owned only by non-U.S. citizens to get a federal employer identification number from the Internal Revenue Service.  An LLC needs  an EIN to open a bank account in the United States and to put on federal income tax returns and forms.

U.S. Bank Account:  As for opening a bank account in the U.S., it is best if at least one owner or the manager is in the U.S. to open the account in person in the United States.  U.S. bank laws require that the bank know and verify who is it dong banking business with.    If that is not possible, I recommend that LLCs owned solely by non-U.S. citizens coordinate opening an account in the U.S. with the branch office of a bank in their county of residence that has one or more bank branches in the U.S.

Can My Arizona LLC Do Business in Another State?

Question:  If I form an Arizona limited liability company, can it do business in a state other than Arizona?

Answer:  Yes.  An entity formed in one state can do business in any other state in the United States.  Usually, if an entity formed in State A does business in State B, the entity must register or qualify to do business in State B, which means filing some papers and paying a fee to State B.  If State B has an income tax and the entity formed in State A does business in State B and derives income from within State B, the entity must file a state income tax return in State B and pay State B the tax on the income derived from within State B.

Two Easy Ways to Hire Richard Keyt to Form Your Arizona LLC for $397 (Bronze), $597 (Silver) or $997 (Gold)

To learn about what is included in each of our three LLC formation packages see our Bronze ($397), Silver ($597) & Gold ($997) LLC Formation Packages Comparison page.

We’ve made it very easy to hire Richard Keyt (7,000+ LLCs formed) and KEYTLaw, LLC, to form your new Arizona LLC.  It’s a simple 5 – 10 minute process.  To hire Richard to form your new LLC select one of the following two options:

Option 1 – Telephone

Call any of the following KEYTLaw people and give your LLC and credit card information over the phone:

  • Richard Keyt (father) – 480-664-7478
  • Richard’s son and former CPA Richard C. Keyt – 480-664-7472
  • KEYTLaw LLC legal assistant Rachel LeBeau - 480-664-7846

Option 2: Online – Available 24/7

100% Satisfaction Guaranteed

If you are not happy with the formation service we provide, you may ask for a refund in writing within thirty days after the date we file your LLC’s Articles of Organization and we will refund your LLC formation fee less the $85 filing fee.

2019-06-15T08:36:17-07:00October 2nd, 2009|Ask the KEYTLaw Girl, FAQs, Operating LLCs|0 Comments

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

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

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

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

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

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

Personal Guaranty’s & LLC’s

Question:  My LLC is borrowing money and the lender wants me to sign a guaranty.  Should I sign it?

Answer:  It depends on whether you can convince the lender that it should drop the guaranty.  A prudent lender will always require that the members of an LLC that is borrowing money personally guaranty the loan.  No guaranty – no loan unless the LLC has sufficient assets to assure the lender that the loan will be repaid.  Without a guaranty signed by the members, the lender’s only source for repaying the loan is the LLC and its assets.  Prudent lenders require the owners of an LLC and a corporation to sign guaranties by which the owners of the LLC promise to pay the loan if the LLC does not do so.

A client sent me a copy of a guaranty that a contractor asked each member of the limited liability company to sign.  The client asked:

“If I sign the guaranty, can the contractor come after my personal assets?  If so, why doesn’t my LLC protect me from the liability?”

The general rule of Arizona law is that the members (owners) of an Arizona limited liability company are not liable for the debts or obligations of the LLC.  There are exceptions to the general rule.  The biggest and most common exception arises when a member guarantees the debts or obligations of the LLC.

By guarantying the LLC’s debts or obligations, the member becomes liable under contract law to satisfy the LLC’s debts and obligations that were guaranteed.  For example, if the LLC borrows $10,000, the general rule is that the members are not liable for the debt.  However, if a member signs a guaranty in favor of the lender that says the member will pay the debt if the LLC defaults, the member is agreeing in the contract (the guaranty) that the lender can sue the member for the amount owed on the loan if the LLC defaults and obtain the member’s personal assets to pay the debt.

LLC members should avoid guarantying debts and obligations of their LLCs unless absolutely necessary.

The concepts described above also apply to shareholders of Arizona corporations and limited partners of Arizona partnership.

2019-06-15T11:24:27-07:00September 10th, 2009|Ask the KEYTLaw Girl, Asset Protection, FAQs|0 Comments