To crack down on terrorists, drug dealers and human traffickers the House Financial Services Committee in June of 2019 passed the Corporate Transparency Act. The bill would require all limited liability companies and corporations that have less than $5 million of revenue or twenty employees to disclose to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) personal information about the entity’s owners.
Each entity subject to this law must report to FinCEN the social security number, drivers license information, address, birth date and name of all owners of the entity. The penalty for not complying is a $10,000 fine and up to three years in jail.
The Wall St. Journal said “The reality is that the law would hit small businesses with another compliance burden, their confidential information would become less secure, and real criminals are unlikely to be deterred.”
The National Federation of Independent Business (NFIB) said the law is a “threat to more than 5 million small businesses in America.”
Arizona Attorney General Mark Brnovich announced today [March 11, 2019] that his office recently filed suit in the U.S. Supreme Court against the State of California seeking to invalidate California’s extraterritorial tax assessments and seizures, which result from an unconstitutional “doing business” tax against businesses and individuals that don’t actually conduct any business in California.
Every year, California assesses an $800 “doing business” taxes against Arizona businesses that conduct no actual business in California. Instead, their only connection to California is a mere passive, non-managing investment in a California limited liability company. California continues to assess these “doing business” taxes even though both its state courts and tax appeals agency have held that the taxes are illegal under California law.
The lawsuit filed by Arizona alleges that these taxes are plainly unconstitutional under the Due Process and Commerce Clauses of the U.S. Constitution. The Supreme Court has held that passive investment in a company located in another state is not sufficient “minimum contacts” to impose taxation under the Due Process Clause (Shaffer v. Heitner, 433 U.S. 186 (1977)). The Supreme Court has also recognized four requirements for states to impose taxes on out-of-state businesses under the Commerce Clause. California’s “doing business” assessments brazenly violate all four.
The amounts collected by these “doing business” assessments are substantial. Arizona estimates that its citizens pay over $10 million in these unconstitutional taxes to the State of California every year.
These taxes also impact Arizona’s tax collections. Since the “doing business” taxes are deductible expenses, Arizona loses an estimated $484,000 in tax revenue each year due to California’s illegal taxation.
These figures are further compounded since the tax applies to all individuals in other states who invest in California businesses.
Making matters worse, if California’s tax assessments are not paid voluntarily, California frequently further tramples on the sovereignty of other states by issuing orders to interstate banks, demanding that they transfer funds in Arizona-based accounts for back payment. Those seizure orders threaten the banks that, if they do not transfer the funds, California will take the taxes and penalties owed from the banks instead. Not surprisingly, the banks almost uniformly consent to California’s strong-arm tactics.
Exhibit G in the filing provides an example where California demanded that Wells Fargo not only transfer the $800 tax, but also a $200 “demand penalty,” a $432 “late filing penalty,” a $79 “filing enforcement fee,” and $63.40 in interest, for a “Total Tax, Penalties, Interest and Fees” of $1574.40.
The lawsuit alleges that these seizure orders violate both the Due Process Clause (by exercising jurisdiction over out-of-state funds without the requisite “minimum contacts”); and, the Fourth Amendment (by effectuating seizures without a warrant, probable cause, or involvement of any court). Those seizure orders further preclude the banks from filing any court challenge.
Arizona’s suit seeks to end California’s unconstitutional tax encroachments.
- Copy of the filing.
- Copy of NTUF brief.
- Copy of DRI and NFIB brief.
- Copy of Southeastern Legal Foundation and Cato Institute brief.
- Copy of Law Professors brief.
If you are a non-U.S. citizen who is the sole member/owner of a U.S. limited liability company treated by the IRS as a disregarded entity (a “DE”) you must file an IRS form 5472 with the IRS on or before the due date of the Form 5472 or become liable to pay the IRS a penalty of $25,000. If you must file Form 5472 and fail to file it before the due date and then fail to file the Form 5472 within 90 days after the due date you will become liable for an additional $25,000 penalty.
The U.S. DE LLC must file Form 5472 if it had a reportable transaction with a foreign or domestic related party. To learn what are reportable transactions, who are related parties and more about this topic read my article called “LLCs 100% Owned by Foreign Persons Must File IRS Form 5472 or be Liable for $25,000 Penalty.”
[bctt tweet=”Learn about the $25,000 penalty when a foreign person who owns a U.S. LLC that is a disregarded entity fails to file IRS form 5472.” username=”azattorney”]
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I formed my first Arizona LLC the day Arizona’s LLC law became effective in October of 1992. I did not start counting the number of LLCs I formed until 2002 so I don’t know how many LLCs I formed the ten years after Arizona adopted LLCs. On June 1, 2018, I formed Arizona LLC number 6,000.
The reason I’ve formed so many Arizona LLCs is because my LLC services are second to none. Nobody offers as many LLC services as I provide for the low prices of $597 (Silver LLC) and $997 (Gold LLC that includes a revocable living trust). Read some of the 175 five star Google & Facebook reviews our clients have given me.
The Arizona Corporation Commission announced today that its franken-monster, i.e., its online e-document filing and document retention system is almost alive! That’s what the email I got today from the Arizona Corporation Commission tells me. Here’s the text of the message
We are pleased to inform you that we are going live with our upgraded E-filing/database system! Some details to note:
- E-filing will NOT be available from Wednesday, May 16 at 5:00 pm until Monday, May 21 at 8:00 am.
- The website is otherwise available for searching and viewing entity records up until Friday, May 18 at noon.
- We will accept paper documents at our physical locations in Phoenix and Tucson up until Friday, May 18 at noon.
- The new system/site will be available on Monday, May 21, at 8:00 am.
- During implementation, penalties for late-filed corporation annual reports will be waived, and corporations will not be administratively dissolved for failing to file the annual report.
If you previously responded to a request to provide your email address (for some statutory agents and MOD account holders), beginning May 21 you can register in the new system using that email address. As a reminder, MOD accounts will be handled solely online.
We will send a separate email explaining how the statutory agent process works in the new system.
Online filing is not mandatory, but is strongly recommended. When the new system is up and running (as of May 21), we will continue to accept documents by mail, in person, by fax, and through the email address of firstname.lastname@example.org. The EMAIL document intake will be discontinued approximately 2-3 weeks after the go-live date. We will change the bounce-back auto message on that email to give a date certain for termination of that service.
Bottom line: A new Arizona Corporation Commission electronic world is about to begin. I’m sure there will be growing pains, but from the demo I saw last November it looks like the new digital / online filing and record-keeping system is going to be great. I anticipate that we will soon be filing all LLC and corporation documents with the Arizona Corporation Commission using its online e-filing system.
Watch the Arizona Corporation Commission’s short explanation video.
Last week we got 5 star online review number 100. Shortly thereafter we got number 101. These 101 reviews include 71 5 star Google reviews and 16 5 star Facebook reviews. The other reviews are on Birdeye and Avvo. Thanks to all who gave us the nice reviews. We appreciate it very much and will continue to provide excellent legal services.
Wall St. Journal: “In the age of the internet, privacy is an especially valuable commodity. To that end, many home buyers and real-estate investors form limited-liability companies with cryptic names when purchasing property. This appeals to the publicity shy, but LLCs also help homeowners avoid scams, identity theft and frivolous lawsuits.”
Arizona LLC law requires that the Articles of Organization of an Arizona LLC contain the name(s) and address(es) of all members of member managed LLCs and the name(s) and address(es) of all managers and members who own 20% or more of the capital or profits of the LLC.
The Confidential Arizona LLC
If you want to form an Arizona LLC without having your name and address stated in the Articles of Organization then you need to purchase my Gold LLC package for $997. Our Gold LLC package provides confidentiality for the ultimate owner because we prepare a confidential trust to be the member of the LLC.
To learn more about the confidential LLC read my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s).”
We get most of our new clients from people who visit one of our websites. For example, this Arizona LLC law website is the reason we have formed 6,700+ Arizona LLCs. I’ve invested thousands of hours into creating content on my sites and the investment has paid off.
We all know that a good website can generate business. Most business people, however, are unaware that another great source of business is Youtube. Youtube is owned by Google. Google may be the most visited website, but Youtube is the second most visited website. Youtube can also be a great source of business.
In November of 2017 I made a commitment to update and invest in my firm’s Youtube channel. I’ve added many new videos in the last three months and will be adding many more videos in the future. There is a lot more to creating a successful Youtube channel that just uploading videos. It does have a learning curve.
Check out our KEYTLaw Youtube channel. Please click on the subscribe icon and the bell symbol to the right of the subscribe icon to get a notice when we upload a new video. I encourage you to leave a comment and tell me what you think about our channel.
On December 13, 2016, the IRS issued T.D. 9796, which created a new reporting requirement for owners of U.S. limited liability companies that are owned solely by one member that is a “foreign person.” A U.S. LLC with both of these traits is called a “reportable disregarded entity.” This new reporting requirement is set forth in Treasury Regulation 26 CFR 1.6038A-1.
Every LLC that is a reportable disregarded entity will be treated as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under section 6038A of the Internal Revenue Code. Translation: LLCs that are reportable disregarded entities will be treated as corporations with respect to the reporting obligations under section 6038A.
Reportable disregarded entities are subject to the IRS’s new information reporting requirements with respect to tax years that begin on or after January 1, 2017, and that end on or after December 13, 2017. The first returns will be due in early 2018. The taxable year of a reportable disregarded entity is the same as the taxable year of the foreign person if the foreign person has a U.S. income tax or information return filing obligation for its taxable year otherwise it is the calendar year.
The Arizona legislature passed SB1272, which was signed into law by the Governor or Arizona. This new law makes minor changes to Arizona’s LLC and corporate laws. These new laws are effective on August 9, 2017. A summary of the changes is below.
NEW LEGISLATION SUMMARY
SB1272 was passed this last session. It was a corporation omnibus bill, and it affects several filing requirements for both corporations and LLCs. The changes are summarized below in the order in which they appear in the bill. To read the entire bill, click on the bill number.
The bill grants the Commission the discretion to allow the use of MOD (money-on-deposit) accounts. Previously, the statute did not give the Commission any discretion. (See changes to A.R.S. § 10-122(K).) For the foreseeable future, the ACC will continue current procedure with MOD accounts.
Approval of documents:
The Commission is no longer obligated to return a copy of an approved document to the customer; the obligation now is to provide notice of the approval. (See changes to A.R.S. § 10-125.) Effective August 9, 2017, the Commission will no longer send out a copy of the document with the approval letter; only the approval letter will be returned to the submitter. Approved documents are available on our website.
Rejection of documents:
The Commission will continue to return a copy of a rejected document along with the letter explaining the rejection. (See changes to A.R.S. § 10-125.)
Electronic transmission and Notice:
Definitional changes were made, and other references throughout the corporation and LLC statutes have been modified to refer to “electronic transmission” where appropriate, and that definition links back to the definition of “electronic record” found in the electronic transactions statutes, A.R.S. § 44-7001, et seq. This is an attempt to codify the use of email as an allowable means of communication and for giving Notice between the Commission and entities. (See, e.g., A.R.S. §§ 10-140(21), 10-141, and 10-504.) The Commission now can send official notices, such as a Notice of Pending Administrative Dissolution, via email. Please note that this will NOT be implemented until the new computer system is up and running. When the new system is in use, the Commission will ask for the entity to consent to receive such notices by email. If the entity does not consent, notices will be sent via the U.S. Post Office.
The requirements for Statements of Change have been simplified. Only the new information for address and agent will be required. We are revising our forms to reflect the minimal requirements and will have those available as of August 9.
The dissolution and withdrawal statutes have been revised to allow for a six-month suspension of the annual report requirement for corporations that file for a voluntary dissolution/withdrawal. (See, e.g., changes to A.R.S. § 10-1403.) Corporations have six months after submission in which to complete a dissolution or withdrawal. Often, corporations will try to complete the dissolution/withdrawal but find that they now owe their annual report and/or owe penalties for not filing it on time. This bill provides that the annual report requirement is suspended for six months from the date the dissolution/withdrawal is submitted. Note: once the six months passes, the annual report is due and so are penalties, if enough time has passed since the due date. TIP – obtain the tax clearance certificate before submitting the dissolution. That way, you will never run into a penalty situation with the annual report. This change is being programmed into the current system and should be implemented by August 9. The new law applies only to dissolutions or withdrawals delivered to the ACC on or after August 9, 2017.
Foreign nonprofit corporations:
The gap left by last year’s SB1356 is now closed – foreign nonprofit corporations no longer have to file applications for new authority when they amend their articles. A foreign nonprofit corporation that amends its name, duration, or state of jurisdiction will now file Articles of Amendment to Application for Authority (along with a certified copy of the amendment) – a significant cost savings ($25 fee instead of $175). This change is already in effect for foreign for-profit corporations, from last year’s SB1356. The ACC’s form will apply to both for-profit and nonprofit corporations as of August 9, 2017.
Another gap was closed – nonprofit corporations can sue for false filings. For-profit corporations and LLCs were granted this right of action in last year’s SB1356. Note – this is a private right of action and is not something the ACC will do for the corporation.
LLC administrative dissolution:
LLCs whose latest date to dissolve has passed will now be administratively dissolved. (See changes to A.R.S. § 29-786.) The LLC does have an option of amending its articles, or, if it is administratively dissolved, of reinstating and then amending its articles. There are several thousand LLCs that will be administratively dissolved pursuant to this provision, beginning on or after August 9, 2017.
Proposition 206, the Fair Wages and Healthy Families Act (the “Act”), was a ballot initiative approved by Arizona voters on November 8, 2016. The Act established a new Arizona state minimum wage effective January 1, 2017, and entitles employees to accrue earned paid sick time. Effective July 1, 2017, employers of Arizona employees must accrue and provide paid sick leave for all employees except exempt employees. Earned paid sick time is sick time accrued by an employee that is compensated at the same hourly rate and with the same benefits, including health care benefits, as the employee normally earns during hours worked.
Employees can begin accruing earned paid sick time at the commencement of employment or July 1, 2017, whichever is later. Employees may use earned paid sick time for themselves or for family members (see Arizona Revised Statutes § 23-373 to see who qualifies as a family member) in the following circumstances:
- Medical care or mental or physical illness, injury, or health condition;
- A public health emergency; (see Arizona Revised Statutes § 23-373 for more information about what qualifies as a public health emergency) ; and
- Absence due to domestic violence, sexual violence, abuse, or stalking.
For employers with 15 or more employees: Employees must accrue a minimum of one hour of earned paid sick time for every 30 hours worked, but employees are not entitled to accrue or use more than 40 hours of earned paid sick time per year, unless the employer selects a higher limit.
For employers with fewer than 15 employees: Employees must accrue a minimum of one hour of earned paid sick time for every 30 hours worked, but they are not entitled to accrue or use more than 24 hours of earned paid sick time per year, unless the employer sets a higher limit.
An employee who earns sick time is every person who performs work for compensation, whether full-time, part-time, or on a temporary basis, as an employee. For purposes of determining the number of employees, an employer has 15 or more employees if it maintained 15 or more employees on the payroll for some portion of a day in each of 20 different calendar weeks (the weeks do not have to be consecutive) in the current or preceding year.
Earned paid sick time shall be carried over to the following year, subject to usage limitations based on employer size. Alternatively, in lieu of carry over, an employer may pay an employee for unused earned paid sick time pursuant to Arizona Revised Statutes Section § 23-372(D)(4). An employee of an employer with 15 or more employees may carry over to the following year a maximum of 40 hours of unused earned paid sick time. An employee of an employer with fewer than 15 employees may carry over to the following year a maximum of 24 hours of unused earned paid sick time.
Employers Must Give Employees Notices of Accrued Sick Time
Employers must give employees written notice of the following at the commencement of employment or by July 1, 2017, whichever is later:
- Employees are entitled to earned paid sick time;
- The amount of earned paid sick time that employees are entitled to accrue;
- That retaliation against employees who request or use earned paid sick time is prohibited;
- That each employee has the right to file a complaint if earned paid sick time is denied by the employer or the employee is subjected to retaliation for requesting or taking earned paid sick time; and
- Contact information for the Industrial Commission.
See the Industrial Commission’s 2017 model earned paid sick time employee notice.
Employer’s Record-keeping Requirements
Unless otherwise exempted from the record-keeping requirements, employers subject to Arizona’s earned paid sick time laws are required to comply with notice, posting, and record-keeping requirements pertaining to earned paid sick time. The requirements include:
(1) posting earned paid sick time notices in the workplace;
(2) providing employees with the employer’s business name, address, and telephone number in writing upon hire;
(3) providing employees with a notice that informs them of their rights and responsibilities under the Fair Wages and Healthy Families Act; and
(4) maintaining payroll records in accordance with Arizona’s statutes and rules.
For more information about which employers are subject to Arizona’s earned paid sick leave laws, see Which employers are subject to earned paid sick time laws?
Download and print the Industrial Commission’s 2017 model earned paid sick time notice.
Note: The Industrial Commission is currently proposing rules that would exempt small employers (defined as a corporation, proprietorship, partnership, joint venture, limited liability company, trust, or association that has less than $500,000 in gross annual revenue) from the Act’s posting requirements.
Paycheck Notice Requirement
An employer must also provide employees either in or on an attachment to the employee’s paycheck:
- The amount of earned paid sick time available to the employee;
- The amount of earned paid sick time taken by the employee to date in the year; and
- The amount of pay time the employee has received as earned paid sick time.
An employee may use earned paid sick time as soon as it is accrued. However, an employer may require an employee hired after July 1, 2017, to wait 90 calendar days after the start of employment before using accrued earned paid sick time.
Employers’ Recommended Reading Assignment
If you or your company is an employer that employees people who are covered by the Act then the employer must comply with the Act. All employers should read one of the following:
- the Arizona Industrial Commission’s pdf version of frequently asked questions about the Act.
- the Arizona Industrial Commission’s online FAQ
Posters Employers Must Post for Employees
Arizona law requires employers to post SIX notices, or “posters,” and each notice must be posted in a conspicuous place where employees will see it. Go to the Industrial Commission’s required notices page to see the list of required notices and download each notice.
I am very proud of my son Richard C. Keyt for speaking on four topics at a two day seminar called “Estate Planning and Administration: the Complete Guide” offered by the National Business Institute (NBI). Ricky, who is licensed to practice law in Arizona and California and who was a CPA in a national accounting firm before he went to ASU’s law school, spoke on the following subjects on June 26 & 27, 2017:
- Common trust structures and when they are used
- Tax consequences of trusts
- Post-mortem tax planning options
- Marshaling assets and dealing with creditors
Ricky and I work together to prepare wills, trusts and estate plans for people. We are co-authors of a book called “Family Asset Protection.” The purpose of our book is to answer common questions people have about estate planning and explain what you need to do to protect your most valuable assets, your loved ones. Get free access to Family Asset Protection.
If you own real property in Arizona do not fall for the “you need to get a copy of your deed” rip off. Companies send real property owners official looking letters that contain language intended to convince the reader that it is important to have a copy of their deed. One of the letters says:
“The U.S. Government Federal Citizen Information Center website recommends that property owners should have an official or certified copy of their deed. If you don’t already have this important document, you may obtain one now. This document provides evidence that your property was transferred to you.”
Each letter offers to send you a copy of your deed for a price 2 – 5 times the cost of purchasing the deed directly from the county recorder.
If you get one of these letters throw it in the trash. If you own real estate you would have gotten the original deed when you acquired the real estate. If you need a copy of your deed you can get a copy at no cost from the county recorder’s website or from the county recorder’s office for a nominal fee if the county does not have its documents available on the internet. To get a copy of a deed from the Maricopa County Recorder, go to the recorder’s excellent website.
Three companies that send out these letters are:
- First Documents
- Local Records Office
- National Record Service Inc.
A client sent me an email in which he said, “the “Arizona Department of Real Estate is asking for ‘a copy of the resolution signed by members stating: whether management of LLC is established as manager/member controlled’.”
This is the first time in the 34 years I’ve been forming Arizona LLCs that anybody ever asked that question. If that is really what the Department of Real Estate wants then it/they are ignorant of Arizona LLC law and are asking for an irrelevant document that does not actually prove the LLC’s type of management.
The type of management of an Arizona LLC is not determined by resolutions signed by the members. Management type is stated in the Arizona LLC’s Articles or Organization filed with the Arizona Corporation Commission. Arizona Revised Statutes Section 29-632 states:
“The articles of organization shall state . . . Either of the following statements:
(a) Management of the limited liability company is vested in a manager or managers.
(b) Management of the limited liability company is reserved to the members.”
The Articles of Organization filed with the Arizona Corporation Commission to create an Arizona LLC contains a statement that the LLC is manager managed or member managed. Anybody who wants to verify the type of management of an Arizona LLC should look up the LLC on the ACC’s website (enter the name of the LLC in the search box on the top right) then click on the link to the Articles of Organization and read the management type set forth in the Articles.
Because my firm, KEYTLaw, LLC, is the statutory agent for 2,000+ Arizona LLCs and we form a lot of LLCs (448 in 2016) we get a lot of mail addressed to our LLC clients. We get a lot of letters addressed to our LLC clients from Personnel Concepts.
If you get a letter from Personnel Concepts, throw it in the trash. The letter looks like an official government letter because the sender wants to fool you into buying a labor poster your company doesn’t need.
A bona fide business poster company says this about these types of letters:
“All in One Poster Company, Inc would like to warn its customers as well as other small business owners to avoid mass mailer scams informing them that their labor law posters are outdated while pressuring them to purchase an overpriced product for their employee and business. These mailers are false, misleading, deceptive and even threatening. . . . Even when posting is required, the individual notices are provided at no charge by the U.S. Department of Labor as well as various agencies within your state’s labor department.
Here’s the Personnel Concepts envelope.
What follows below is the actual text of the very official looking letter.
On January 29, 1972, 45 years ago I married the love of my life. Finding and marrying Carol was the best thing that ever happened to me. I first saw Carol at a Phi Gamma Delta fraternity party at Penn State in the winter of 1967. I was a pledge and she had been invited to the frat party because her sister Ellen was pinned to one of the brothers. It wasn’t love at first sight, but I do remember I thought she was the prettiest girl I had ever seen.
We were both freshmen that winter. Carol dated a number of my fraternity brothers over the next two and a half years. At the beginning of my junior year I asked Ellen if she would fix me up with Carol and she did. Unfortunately for some reason I stood Carol up. I was a no show. Ellen was understandably mad and said she would never fix me up with Carol again.
The beginning of our senior year I got the courage to call Carol and ask for a date. Getting dates at PSU in 1966 – 1970, the years we attended PSU, was very hard for guys because there were five guys for every woman. My freshman year I called a girl for a date and she booked me six weeks later because that was her first opening.
Lucky for me Carol agreed to go out with me. We hit it off immediately and dated exclusively our senior year. After graduation I went to USAF Officer Training School at Lackland AFB, Texas, and Carol returned to her home town to take a job teaching in elementary school. We tried long distance dating, but it was hard in the days before the smart phone, facetime, email and texting.
In the fall of 1971 I was just beginning the six month program in which I learned how to fly the F-4 Phantom supersonic fighter-bomber at Luke AFB, Arizona.
F-4Es returning to Korat Royal Thai Air Base, Thailand, from missions over North Vietnam
I called Carol and asked her to marry me. She said yes. We didn’t have time to plan a wedding. On Friday, January 29, 1972, Carol and I were married in the Methodist Church at Central Avenue and Missouri Avenue in central Phoenix. Six people attended – my parents and brother, two of my parents’ friends and my best friend from college who happened to be passing through Phoenix. Unfortunately nobody from Carol’s side of the family was able to attend the wedding.
We drove to San Diego that afternoon for our short honeymoon. I had to be back to work on Monday so we drove back to Phoenix Sunday afternoon. We lived at Oakwood Garden apartments on 40th Street just north of Camelback Road, in Phoenix. I drove to Luke AFB everyday to fly the F-4, attend academic classes and fly the F-4 simulator. The traffic was much lighter back then, but it still took 45 minutes to drive one way.
In May of 1972, four months after we were married the Air Force sent me to the Vietnam war and Korea for 13 months. Carol stayed behind in our apartment and worked at American Express at 32nd Street and Lincoln in Phoenix. Carol lived with me in my one room barracks bedroom at Kunsan Air Base, Korea, for three weeks in 1973. During the 13 months I was overseas we wrote a lot of letters to each other. When I returned to the States we decided to destroy all our letters because we didn’t want our future children to read what we thought was too much “mushy” language. I now regret destroying those letters.
Carol and I have three children and three grandchildren. For the last 16 years Carol and I have worked closely in my law practice. She is the office manager, bookkeeper and the legal assistant in charge of our LLC formation practice. She is one of the reasons I’ve been able to have a very successful law practice.
I love my wife very much and thank God everyday for letting her be the love of my life.
This week I learned about a now defunct Arizona LLC that was terminated by the Arizona Corporation Commission (the “ACC”) without the prior knowledge or consent of the sole member and manager of the LLC. The Articles of Organization filed with the ACC to create the LLC named Homer Simpson (not the member’s real name) as the member and manager of the manager managed LLC called World Wide Widgets, LLC (not real LLC’s name).
Sometime in 2015 somebody filed Articles of Termination to terminate World Wide Widgets, LLC. The document was not signed by Homer Simpson. It was signed by Bob Faker (not the real name of the signer) who signed as the manager of the LLC. The ACC approved the filing and terminated World Wide Widgets despite the fact Bob Faker was not listed on the records of the ACC as a member or a manager of the LLC.
I notified the ACC about the fraudulent termination of the LLC and this is its response:
“We accept filings at face value, and do not request any verification of authority to act. As you know, we are just a filing agency, not an enforcement agency. We do not investigate or have any authority to enforce any laws with respect to allegations of fraud. We are unable to assist with reinstating this entity. If you were to get a court order requiring reinstatement, we would follow that order”
The fraudulent termination of an LLC could have extremely negative consequences for the members of the terminated LLC. Here are just a few problems that the termination causes:
- The termination would cause the IRS to take the position that the termination caused all of the assets of the terminated LLC to be distributed to the members in the year of the termination. If the value of the distributed assets exceeds the member’s tax basis in the LLC the member has taxable income equal to the value of the distributed assets minus the tax basis. For example, if the LLC’s only asset is a parcel of real property valued at $200,000 and the sole member of the LLC has a tax basis of $100,000, the member has taxable income of $100,000 in the year of the fraudulent termination.
- If the LLC owns assets that have a title, there is no document that evidences a transfer of ownership from the LLC to the member. In the example above, the member would be the beneficial owner of the real estate, but there is no deed signed by the terminated LLC that transfers the title to the land to the member. Because the LLC was terminated, it is not possible for it to sign a deed that transfers title. The member will be forced to file a quiet title lawsuit to get the title changed from the LLC to the member.
- If the terminated LLC has intellectual property such as patents or trademarks those assets will be in limbo.
- The financial history of the terminated LLC will be lost. The member can form a new LLC with the same name, but could not say that the new LLC has been in business since 1995.
I am sure there are many additional problems a fraudulent termination can cause.
Consequence of Filing a False Document with the ACC
Arizona LLC law provides that it is a felony to file a false document with the ACC. Arizona Revised Statutes Section 29-613.A states:
“A person who . . . signs any articles, statement, report, application or other document filed with the [Arizona Corporation] commission that is known to the person as false in any material respect is guilty of a class 4 felony.”
Solution to the Problem
The issue becomes what, if anything, can the members of the terminated LLC do to correct the problem. The answer alluded to by the ACC’s response above is for the members of the LLC to file a lawsuit and ask the superior court to issue an order to the ACC that the ACC reinstate the existence of the terminated LLC and correct its records to reflect that the fraudulent termination of the LLC never occurred.
This sad story reinforces something I have been telling my LLC clients for years: YOU MUST CHECK THE ACC’S WEBSITE AT LEAST ONCE EVERY THREE MONTHS TO CONFIRM THAT ALL THE INFORMATION ABOUT YOUR LLC IS CORRECT. If you find that your LLC was fraudulently terminated then you can file your lawsuit to correct the problem sooner rather than later.
If your LLC was fraudulently terminated, call me at 480-664-7478 or send me an email message at email@example.com
Go the the ACC’s ecorp website to search for your LLC and confirm it exists and all information is correct.