Operating LLCs

People Love Our 170 Page LLC Operations Manual eBook

When people purchase my Silver or Gold LLC package one of the features they get is access to the 170+ page ebook I wrote called the “Arizona LLC Operations Manual.”  In forming 6,200+ Arizona LLCs I learned a long time ago that people have the same post formation questions.  I realized I could save myself a lot of time on the phone and answering emails if I wrote a book that answers all of people’s post LLC formation questions.  See the Table of Contents to see the many LLC topics that are explained in the Operations Manual.

Here are four recent emails I got from happy LLC clients who wrote about the Operations Manual:

“The operations manual well written and easy to follow. A great tool to have as a guide and reference. I would recommend an LLC keep this guide for its existence.  On a separate note thanks for the regular communication … wish all law firms were as easy to work with.”

“The LLC Operations Manual has been a great resource.  Its is well organized and provides clear instructions on what tod (and what not to do).”

“The online book is very helpful, as well as the email alerts.  I appreciate having the information that, for most the part, is easy to understand.”

“So, far I have not ended up with questions not covered by the book.”

2018-11-12T13:59:31+00:00November 13th, 2018|Forming LLCs, Operating LLCs|0 Comments

The Importance of a Well Drafted Buy Sell Agreement

Last month I attended a four  hour seminar on Buy Sell Agreements.  I’ve been drafting Buy Sell Agreements for LLCs since 1992, but the seminar gave me a lot of new information.  I especially enjoyed the presentations by two very experienced business appraisers.  The seminar caused me to review and revise my Buy Sell Agreement and to write several new articles about Buy Sell Agreements to help people learn about and understand why all multi-member LLCs (other than a married couple LLC) should have a comprehensive Buy Sell Agreement.

I also revised my online Buy Sell Agreement questionnaire to give my clients a lot of new options to select for their very custom drafted agreement.  Scroll through my Buy Sell Agreement questionnaire and you will be amazed at the number of options and their depth.  I doubt you could find anybody else that will give you as many options with respect to provisions to include or exclude from your Buy Sell Agreement.

Here is the list my articles about Buy Sell Agreements and why your multi-member LLC needs one drafted by somebody that knows what he or she is doing.

To learn more about Buy Sell Agreements and why your LLC needs one or needs to update its existing agreement sign up for my article called “Why Members of a Multi-Member LLC are Crazy if They Don’t Sign a Buy Sell Agreement.”  To get this free article click on the link then give us your contact info and opt in.  You will get the article and several follow up email messages that have more information about Buy Sell Agreements and how it can save you money and stress if the members of your LLC ever need to go their separate ways.

If you have any questions about Buy Sell Agreements call me at 480-664-7478 or my son Arizona LLC attorney and former CPA Richard C. Keyt at 480-664-7472.  We don’t charge to answer questions over the phone.

 

 

 

2018-11-12T08:38:40+00:00November 12th, 2018|Buy Sell Agreements, Operating LLCs|0 Comments

We Updated Our Buy Sell Agreement Triggering Events that Can Cause a Buy Out

Most multi-member LLCs other than a two member LLC owned by a married couple should have an exit strategy because like marriages, more than fifty percent of multi-member LLCs have one or more members who want a company divorce.  If members of a multi-member company do not sign a contract that provides for the buy out of one or more members on the happening of an event described in the contract they are stuck together forever unless a member convinces a court in an expensive lawsuit to judicially dissolve the company.  See my article on this important topic called “A Multi-Member LLC’s Most Important Document” aka a “Buy Sell Agreement.”

My Buy Sell Agreement is very comprehensive because it is the product of my 38 years of being a business lawyer who has seen far too many LLC divorces.  I updated my Buy Sell Agreement to add more “triggering events.”  A triggering event is an event that gives the company an option to buy the entire membership interest of the member who is involved in the event.  Members can also provide in their Buy Sell Agreement that certain triggering events such as the death of a member require the company to buy the entire membership interest from the estate of a deceased member.

To hire me to prepare a Buy Sell Agreement one of the members must complete and submit my online Buy Sell Agreement questionnaire.  The questionnaire asks the LLC member who completes the questionnaire to pick and chose the provisions and triggering events that will be included in their company’s Buy Sell Agreement.  Look at the Buy Sell Agreement questionnaire to see the many triggering events that you can select or deselect for your company’s custom drafted Buy Sell Agreement.  FYI:  We can also arrange for all members to digitally sign their Buy Sell Agreement using DocuSign.

Here is a list of the triggering events from which my clients can select for their Buy Sell Agreement.

Triggering Event
Purpose
1. Any event the members desireA Buy Sell Agreement can include any triggering events that are important to the members. For example, the members could agree that if the New York Yankees win the World Series, member 1 must sell to member 2 for $100.
2. Operating Agreement defaultIf a member defaults under the Operating Agreement signed by all of the members the LLC has an option to buy out the defaulting member.
3. Member fails to contribute money or propertyThis provision encourages a member to satisfy the member's obligation in a written document to pay money or assign property to the company because if the member fails to satisfy that obligation the LLC will have an option to buy out the defaulting member.
4. Death of a memberThe LLC or surviving members have an option to purchase the interest of a deceased member. The Buy Sell Agreement can also require the LLC to buy-out a deceased member. These types of buy outs can be funded with life insure on the lives of members.
5. Member is convicted of a felonyMany LLC members do not want to have another member who has been convicted of a felony.
6. Divorce of a memberPrevents the wrong spouse from acquiring an interest in the LLC if two members own their interest as community property and they get divorced and the wrong spouse becomes the sole owner of all or a portion of the membership interest.
7. Member files for bankruptcyIf a member loses the member's interest in the LLC because of filing for bankruptcy, the company and other members should be able to buy the interest from the creditor who acquires it out of the bankruptcy.
8. Member transfers all or part of the member's membership interest without the approval of the other membersThe Buy Sell Agreement provides that a member may not transfer or encumber all or any interest in the member's interest in the company without the approval of the members and compliance with the terms and conditions of the Operating Agreement and/or the Buy Sell Agreement. If a member violates the no transfer/encumbrance provisions, the LLC should have an option to acquire the interest of the defaulting member, perhaps at an amount less than the fair market value of the interest.
9. Termination of employment of a memberApplies only to a member who is employed full time by the LLC. Especially important when the employee is a minority member and should only own an interest while employed.
10. Member loses his or her professional licenseCommonly used for LLC's that are owned by members who must be licensed in a particular area. For example, the Buy Sell Agreement of an LLC owned by physicians might give the LLC and other members an option to acquire the interest of a physician/member who loses his or her license to practice medicine.
11. Majority member sells membership interest"Drag Along" provision: Majority member has the option to require minority members to sell their interests in the LLC if the majority member sells. The sale of the minority members' interests are on the same terms and conditions as the sale of the majority member's interest.
12. Majority member sells membership interest"Tag Along" provision: Minority members have the option to require the majority member to include the sale of the minority members' interests in the LLC if the majority member intends to sell. The sale of the minority members' interests must be on the same terms and conditions as the sale of the majority member's interest.
13. Member is disabledUsed to acquire the interest of a member who become permanently disabled and unable to provide needed services for the LLC.
14. Member retiresMembers sometimes want to retire, but without a Buy Sell Agreement that provides for a retirement purchase, it probably will not happen.
15. Member is incompetentApplies if a member loses his or her mental capacity and a court appoints a conservator to manage the members financial affair.
16. Member files a false document with the ACCIf a member causes a false document to be filed with the Arizona Corporation Commission it is a triggering event that can cause a buy out,
17. Member causes somebody to be added or removed from the LLC's bank accountIf a member causes a signer to be added or removed on the company's bank account without the approval of the members per the operating agreement it is a triggering event that can cause a buy out.

Other Important Provisions in My Buy Sell Agreement

My Buy Sell Agreement also contains the following provisions:

  • Restrictions on Transferring Membership Interests:  Members may not transfer all or any part of their membership interest without the consent of the members.  Transfers to family members or trusts are allowed unless your Buy Sell Agreement also prohibits these transfers.
  • Right of First Refusal:  If a member desires to sell or transfer the member’s membership interest the company first and then the other members have the option to match to proposed sale and acquire the membership interest.
  • Life Insurance:  Members may purchase life insurance on the life of other members and use the life insurance proceeds to pay the purchase price to buy the membership interest of a deceased member.
  • Non-Compete:  This provision prohibits a member and/or ex-member from competing with the company’s business and hiring the company’s employees.
  • Dispute Resolution:  This provision obligates the members to settle disputes without resorting to litigation.

Questions?

If you have any questions about Buy Sell Agreements, call me, Richard Keyt, at 480-884-7478 or send an email message to me at rk@keytlaw.com.  I don’t charge to answer questions about Buy Sell Agreements.

How to Purchase an LLC Buy Sell Agreement

To hire me to prepare your Buy Sell Agreement complete and submit my Buy Sell Agreement questionnaire.

2018-09-02T11:54:53+00:00September 2nd, 2018|Buy Sell Agreements, Operating LLCs|0 Comments

Arizona Adopts an Entirely New LLC Law Effective 9/1/19

On April 10, 2018, Arizona Governor Ducey signed Senate Bill 1353, a law that will entirely replace existing Arizona limited liability company law with a new LLC law.  Arizona’s new LLC law called the “Arizona Limited Liability Company Act” (ALLCA) is effective September 1, 2019, for Arizona LLCs created after August 31, 2019.  All Arizona LLCs created before September 1, 2020, will become subject to the ALLCA from and after August 31, 2020.

In the coming months I will be adding a lot of articles, blog posts and videos on our Youtube channel about the new law and its affect on members and managers of Arizona LLCs.  Here are some important facts about Arizona’s new LLC law:

  • The new ALLCA will govern all 800,000+ Arizona LLCs that exist after August 31, 2020.
  • Beginning September 1, 2020, all Arizona court cases that deal with Arizona’s current LLC law will be effectively eliminated.
  • Beginning September 1, 2020, Operating Agreements drafted for current LLC law will become obsolete and all Arizona LLCs will need an Operating Agreement drafted pursuant to the new ALLCA.
  • All Arizona LLCs created after August 31, 2019, will need an ALLCA compliant Operating Agreement.
  • All of the LLCs we form after May 31, 2018, will have an ALLCA compliant Operating Agreement.
  • Starting June 1, 2018, we will sell ALLCA compliant Operating Agreements to existing Arizona LLCs.  If you have an existing Arizona LLC you should join the free ALLCA newsletter email list offered below to get information about when and how to purchase a new ALLCA compliant Operating Agreement for your Arizona LLC.
  • An ALLCA compliant Operating Agreement will be critically important for all multi-member LLCs because a good Operating Agreement will eliminate many of the bad liability creating provisions in the new Arizona LLC law.  Join my ALLCA newsletter list to learn about the liability creating provisions contained in the new ALLCA.

Join Our Free ALLCA Newsletter Email List

We will be sending informational emails about Arizona’s new LLC law to people who subscribe to our free ALLCA email list.  If you want to learn more about Arizona’s new LLC law join our ALLCA email list by completing and submitting the sign up form below.  After submitting the form below you will get an email asking you to opt in unless you previously opted in.



Text of Senate Bill 1353

The complete text of Arizona Senate Bill 1353, aka the Arizona Limited Liability Company Act, that applies to new Arizona LLCs after August 31, 2019, and all Arizona LLCs after August 31, 2020, is contained in the pdf below.

sb-1353

2018-07-30T07:53:31+00:00April 27th, 2018|New Arizona LLC Act, Operating LLCs|0 Comments

LLC Formation – 9 Post Formation Tasks Your LLC Must Do

Yesterday we uploaded the video shown below to the KEYTLaw Youtube channel. Of the 38 videos now on our channel this video had more views (468) in its first 24 hours than any of our 37 other videos.  The video also got 78 likes and 60 comments.  Check out our channel and click on the subscribe icon and the bell to get notices of new videos we upload in the future.

2018-03-22T10:51:12+00:00February 20th, 2018|Operating LLCs, Our Videos|0 Comments

Arizona Secretary of State’s Trade Name Application is Now Online

The Arizona Secretary of State supplemented its old fashioned hard copy trade name application pdf form and with an online electronic trade name application.  The fee remains $10.  The Arizona Secretary of State says the following about Arizona trade names:

“Filing a trade name registers a business name for public record. A trade name is similar to a ‘doing business as’ (‘DBA’) name, and is not legally required but is an acceptable business practice. A trade name does not grant exclusive rights to a business name, nor is a trade name similar to a corporation or limited liability company (‘LLC’).”

If your Arizona business is using a DBA that is different from the legal name under which the entity was formed, the business should register the DBA, aka trade name, with the Arizona Secretary of State.

2018-04-03T19:31:34+00:00May 17th, 2017|Operating LLCs|0 Comments

How Does My LLC become an S Corporation?

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

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

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

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

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

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

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

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

Why Your Arizona LLC Needs Richard Keyt’s Custom Operating Agreement

I formed my first Arizona LLC the day the Arizona LLC law became effective in October of 1992.  Since then I have formed 5,000+ Arizona LLCs.  In practicing LLC law for 24 years I have sees the same LLC operational problems over and over.  When I learn about an operational problem I add new language to my LLC Operating Agreement to “fix” or prevent the problem.

For example, one of the most common LLC operational problems occurs when members cannot agree and need a company divorce.  When members have major disagreements over running the LLC it is very common for a member without any authority or basis to file an amendment to the LLC’s Articles of Organization that removes one or more members as members of the LLC.  The culprit may also open a new bank account and misrepresent to the bank who the members of the LLC are.

People who file false documents with the ACC are usually unaware that they could be committing a felony.  Arizona Revised Statutes Section 29-613.A states:

“A person who . . . signs any articles . . . 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.”

Unfortunately the Arizona Attorney General does not prosecute people who file false documents with the Arizona Corporation Commission.

The purpose of Arizona Revised Statutes Section 29-858 is to reduce false filings with the Arizona Corporation Commission and give aggrieved members a remedy.  This statute states:

“any person that authorizes or signs a report, certificate, notice or other document with respect to a limited liability company that is delivered for filing with the commission pursuant to this chapter and that has knowledge at the time of delivery to the commission for filing that the information contained in that report, certificate, notice or other document is materially false or misleading is liable to the limited liability company and its creditors and members for all damages resulting.”

The problems with this statute are: (i) proving damages for a false filing is very difficult, and (ii) the cost to sue coupled with the risk of winning and collecting a judgment makes this remedy very risky.  Few members will actually use this statute to sue another member.

After seeing the false amendment to the Articles of Organization too many times I added a clause to my Operating Agreements that provides that a member who files a false document with the Arizona Corporation Commission is liable to all other members for liquidated damages of $10,000 and if the damages are not paid in full within sixty days the member who filed the false document ceases to be a member.

Why Your Existing or New Arizona LLC Needs Richard Keyt’s State of the Art Operating Agreement

I have prepared 5,000+ Arizona LLC Operating Agreements.  My Operating Agreement is unlike any Operating Agreement prepared by anybody else including attorneys because it contains provisions I created to prevent or solve common LLC operational problems I have seen representing thousands of LLCs.  For a partial list of common LLC operational problems see my article called “Common LLC Disasters a Good Operating Agreement Prevents.”

To hire me to prepare an Operating Agreement for an LLC that does not have one or to amend an Operating Agreement for an LLC whose members signed an Operating Agreement complete my comprehensive Operating Agreement Questionnaire.

P.S.  To see Operating Agreement provisions in my Operating Agreements that you will not get any where else scroll to the bottom of my Operating Agreement Questionnaire.

2016-12-04T10:20:52+00:00December 4th, 2016|Operating Agreements, Operating LLCs|0 Comments

Arizona LLC Alert System Includes 48 Email Messages

A lot of lawyers and document preparers form Arizona limited liability companies including yours truly.  My LLC formation services, however, include many features nobody else offers.  One of my unique services is the Arizona LLC Alert System, which is a series of email messages I send to people who purchase my Silver and Gold LLC packages.

In forming 6,200+ Arizona LLCs I learned a long time ago that people need help learning about and accomplishing the many post LLC formation tasks that arise when people form a new LLC.  Here is a short list of common LLC post formation tasks:

  • Get federal employer ID number.
  • Open bank account in name of the LLC.
  • Arrange for all members to sign the Operating Agreement.
  • Set up a bookkeeping system.
  • Consult with tax accountant about which of the four ways an LLC can be taxed is best for the owner(s) of the LLC.
  • File IRS Form 8832 or 2553 if recommended by the LLC’s tax advisor.
  • Transfer land to the LLC by recording a deed (for LLCs that are to own real estate).
  • Purchase insurance.
  • Get a dba or trade name from the Arizona Secretary of State.
  • Register a federal trademark.

Another unique service I give purchasers of Silver and Gold LLCs is access to my 170 page ebook called the “Arizona LLC Operations Manual.”  Chapter 3 of the Operations Manual is a checklist of 34 tasks the LLC should accomplish in its first 75 days after being formed.  To help members of new LLCs I form accomplish these 34 tasks I created the Arizona LLC Alert System.  It is a series of email messages I send to the members of Silver and Gold LLCs I form.  These messages remind people to accomplish important LLC post formation tasks.

The Arizona LLC Alert System consists of 47 email message alerts.  See the entire list of the 47 Alert emails now included in the Alert System.  The Alert System sends members a mobile friendly email message that links to a mobile friendly web page where the actual content of the alert is displayed.  Our LLC members love getting these informative alerts.

The following is a list of other unique LLC formation services I provide for all purchasers of my Silver and Gold LLC formation packages.

  • Two different Operating Agreements – a 30 page Operating Agreement for single member LLCs and husband and wife owned LLCs and a 55 page Operating Agreement for multi-member LLCs.
  • Provisions in the Operating Agreement needed as a result of the Bipartisan Budget Act of 2015, that modified the partnership audit rules applicable to LLCs.
  • Addition of Partnership Representative provisions in our multi-member LLC Operating Agreement.  These provisions replace the tax matters partner provisions required under prior law called TEFRA.
  • Optional Service:  Members digitally sign the Operating Agreement and are sent pdf copies of the digitally signed documents.

Hire Me to Form Your Arizona LLC for $397, $597 or $997

See the contents of our Bronze, Silver and Gold LLC packages.  To hire us to form an Arizona LLC follow one of the two options on our LLC formation page.

2018-11-01T18:55:31+00:00August 29th, 2016|Forming LLCs, Operating LLCs|0 Comments

What are Arizona LLC Members Voting Rights?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Annual Meetings of Members of an Arizona LLC

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

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

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

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

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

Purchase My Do-It-Yourself Meeting Minutes & Resolutions

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

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

 

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

Beware Certificate of Good Standing Rip Off

Today we received in the mail about 30 envelopes from Arizona Business Filing Services.  The envelopes contained an official looking document entitled “2014 Certificate of Good Standing Request Form.” The document suggests that the brand new Arizona LLC should pay ABFS $59.99 to obtain a Certificate of Good Standing for the new LLC.  As soon as I saw the document I knew it was a scam.  Here are some tell tale signs that the letter should be ignored:

  • It starts with IMPORTANT!
  • It states “Your Articles of Formation have been filed with the Secretary of State of Arizona.”  Arizona LLC’s don’t file Articles of Formation with the Secretary of State.  Arizona LLCs file Articles of Organization with the Arizona Corporation Commission.
  • The cost for the Certificate of Good Standing is $59.99, but anybody can obtain a COGS from the Arizona Corporation Commission for $10.

FYI:  We never get a Certificate of Good Standing for LLCs we form.  Your LLC does not need a COGS unless some party like a bank or title insurance company asks for it.  When somebody does demand a COGS the requestor wants a current document, not one obtained two years before the request for the COGS.

The following is the text of a June 9, 2014, press release from the Arizona Corporation Commission concerning the Arizona Business Filing Services COGS letter:

Corporation Commission Warns Business Owners of
False Service Claiming to Offer “Official” Documents

PHOENIX — The Arizona Corporation Commission is warning business owners that an individual or group calling itself “Arizona Business Filing Services” is sending out an official – looking document offering to provide an “Arizona Certificate of Good Standing” for a fee of $59.99. This entity is not affiliated with the Corporation Commission, and business owners do not need to go through any third party to obtain their Certificate. Further, the Commission cannot guarantee the authenticity of such a document.

Valid Certificates of Good Standing can only be obtained directly from the Corporation Commission. The entity status can be viewed online, or a hard – copy certificate of good standing can be obtained by corporations and limited liability companies immediately online for a fee of $45, or by mail, for a fee of $10 (regular processing time).

The Commission has referred this false advertisement to the Attorney General’s office for investigation. I f you have received it, please contact the Arizona Attorney General’s Office in Phoenix at (602) 542-5763, in Tucson at (520) 628-6504, or outside the Phoenix and Tucson metro areas at 1 (800) 352-8431. To file a complaint online, please visit the Attorney General’s web site at www.azag.gov. To file a complaint in person, the Attorney General’s Office has 37 satellite offices throughout Arizona with volunteers available to help. Locations and hours are posted on the Attorney General’s web site .

Warning: Improper Contract Signature May Create Personal Liability

Question:  My LLC is to be the tenant on a real property lease.  The landlord’s lease has a signature block that indicates I will sign the lease as the manager and as a member of the LLC.  The signature block looks like this:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager and Member

If I sign the contract will I be personally liable under the lease in addition to the LLC?

Answer:  Probably.  If you sign the contract with the signature block as indicated above the landlord will claim you signed the contract in your capacity as the manager of the LLC AND in your individual capacity as a member.  A court might agree because that is the strict reading of the text under your signature.  Arizona LLC law says that a member does have have the legal power to sign a contract and bind the Arizona LLC on legal obligations.  Therefore the text “and Member” can only mean the signer is signing in his or her individual capacity.

Bottom Line:  If you do not want to be liable for obligations under a contract, make sure the signature line/block shows that you are signing only on behalf of the LLC.  The signature block should be one of the following:

If the LLC is member managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Member

If the LLC is manager managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager

2016-11-16T08:23:42+00:00April 21st, 2014|FAQs, How Do I, Operating LLCs|0 Comments

How Do I Complete IRS Form SS-4

Question:  I just formed a limited liability company.  I want a third party to obtain a federal employer id number (EIN) from the IRS.  The form is confusing.  Can you help me complete IRS Form SS-4?

Answer:  Yes.  We get this question so often LLC attorney Richard Keyt wrote a detailed article that explains how to complete the IRS Form SS-4.  Read “How to Complete IRS Form SS-4.”

Note:  If you are not asking a third party to get your LLC’s EIN don’t use IRS Form SS-4.  Instead, go to the IRS’ EIN wizard and take five minutes to answer questions online.  The IRS will issue your LLC an EIN at the end of the simple data entry process.

2017-10-06T21:44:18+00:00April 20th, 2014|FAQs, Forming LLCs, How Do I, Operating LLCs|0 Comments

Do I Need a Certificate of Good Standing for My LLC?

Question:  Do I need to purchase a Certificate of Good Standing for my Arizona limited liability company from the Arizona Corporation Commission?

Answer:  Not unless a third party requires it.  The purpose of the Certificate of Good Standing is to prove to people or companies that your Arizona LLC was formed and is in good standing with the Arizona Corporation Commission.  You do not need the Certificate of Good Standing unless a third party requests it.  If you do get a request for a Certificate of Good Standing the requester will want a current Certificate of Good Standing, not one created months or years before the date of the request.

The most common reason you might need a Certificate of Good Standing is your LLC wants to borrows money from a financial institution.  Lenders frequently ask for a Certificate of Good Standing because they want to confirm that the LLC exists and is in good standing with the Arizona Corporation Commission when the lender loans the money.

Don’t waste your money on getting a Certificate of Good Standing unless somebody asks for it and complying with the request is important to your LLC.

If you need a Certificate of Good Standing for an Arizona LLC or corporation for your company or somebody else’s company watch my demonstration video and I will show you how to purchase the Certificate of Good Standing for $45 and download it immediately.

What is Piercing the Veil of an LLC & Why is Do You Need to Understand It?

Question:  I have heard the term “piercing the veil” of a corporation or a limited liability company.  What does the term mean and why do owners of LLCs need to understand it?

Answer:  “Piercing the veil” means that a court disregards the shield or veil created by state law that says the owners of a corporation or an LLC are not liable for the debts of the entity.

Example 1: Homer Simpson’s LLC called World Wide Widgets, LLC, borrowed $25,000 from Ned Flanders.  The LLC signed the promissory note, but Homer didn’t.  The LLC does not pay.  World Wide Widgets, LLC, doesn’t have any assets so Ned knows if he gets a judgment against the LLC he can’t collect it.  Ned never gets his money.

Example 2:  Same facts as Example 1, but in operating the LLC Homer did not follow Arizona LLC law and did not follow proper procedures.  Ned sues the LLC and Homer and asks the court to pierce the veil and hold Homer liable for the LLC’s debt.  The court finds there are grounds to pierce the company veil and holds Homer personally liable for the LLC’s $25,000 debt.  This is the bad result for the LLC member and frustrates the reason people form an LLC, i.e., to protect themselves from liability for the debts of the LLC.

Jay Adkisson, a nationally known asset protection lawyer, said the following in response to a recent court ruling in a case called Shermane Hector v. Mo–Dad Environmental Serv., LLC:

The veil-piercing/alter ego challenges to LLCs are going to be interesting because they start out with the intended lack of formality of corporations, and then their owners often get loosey-goosey about how the company is operated, how it is capitalized (and continues to be capitalized), etc.  IMHO, the real challenge for planners is not so much in the meticulous drafting of LLC management agreements and the like, but in the education of owners as to how the entity needs to be run after all the ink dries.

How true.  The vast majority of people think that if they file the Arizona Corporation Commission’s fill in the blanks form Articles of Organization they are home free and their life savings are protected from the LLC’s debts.  Ignorance may be bliss, but ignorance of the legal concept called “piercing the company veil” can cost LLC members big bucks.

Most people who form an LLC don’t know that they must comply with Arizona’s LLC law or risk a court piercing the veil and holding them liable for the LLCs debts.  For example, Arizona LLC law requires that every Arizona LLC maintain certain records.  If you own an Arizona LLC don’t you think it would be a good idea to comply not only with that statute, but other Arizona LLC laws too?

The Shermane Hector v. Mo–Dad Environmental Serv., LLC court said this about veil piercing:

Some of the relevant factors considered in determining whether to apply the alter ego doctrine include: commingling of corporate and shareholder funds; failing to follow statutory formalities for incorporating and transacting corporate affairs; undercapitalization; failing to maintain separate bank accounts and bookkeeping records; and failing to hold regular shareholder and director meetings”

In forming 5,600+ Arizona LLCs I learned a long time ago that I must educate my LLC clients about Arizona LLC law.  I accomplish this two ways:

  • The LLC Operations Manual:  This is a 170 page book I wrote that explains Arizona’s LLC law in great detail.  For example, chapter 3 of the Operations Manual contains a list of 31 tasks that every LLC should complete in its first 75 days.  Learn more about the LLC Operations Manual.
  • Informative Email Messages:  Everybody who hires me to form an Arizona LLC will be sent 30+ email messages during the first year informing them about Arizona LLC law and reminding them to do things like sign the Operating Agreement, open a bank account, set up the LLC’s bookkeeping system, consult with a CPA and document loans by members to the LLC.

To learn more about this very important topic read my article called “Two Phases in the Life of an LLC.”

Question about the Arizona Joint Tax Application Form

Question:  I am completing the Arizona Joint Tax Application (the sales tax license application) for my Arizona limited liability company that is owned by my Confidential Trust.  How do I answer question 18 that asks for the social security number of the owner?

Answer: Because your Confidential Trust owns your LLC so that your name does not appear on the public records of the Arizona Corporation Commission for confidentiality purposes, the answers to question 18 may not be obvious.  The trust owns the LLC so put the trust’s name in question 18.A. The trust is a revocable living trust, which means the IRS treats the trust as if it does not exist so for federal income tax purposes the trust uses the social security number of the trustmaker. Put the SSAN of the trustmaker in question 18.B. In question 18.C put the word “member.”

To learn more about the LLC owned by a Confidential Trust read my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s).”

2018-05-20T14:01:27+00:00March 11th, 2014|FAQs, How Do I, Operating LLCs|0 Comments

Watch Out for Ignorant Bank People

Question:  I went to the bank to open my LLC bank account and they need to know what kind of LLC I have.  The bank wanted to know if I have an S LLC, C LLC or partnership LLC.

Answer:   You need to go to another bank that knows how to deal with LLCs.  The State of Arizona only has two types of LLCs, i.e., an LLC and a professional LLC (PLLC).  You have an LLC.

There are no such terms as S LLC, C LLC or partnership LLC.  The person you are talking to is ignorant, which is troubling.  He or she may be asking for the LLC’s tax method under the internal revenue code, which could be:

  • Sole proprietorship
  • C corporation
  • S corporation or
  • Partnership

Those terms refer to the four possible federal income tax methods availabe to LLCs under the Internal Revenue Code.  The terms do not describe a type of LLC.

The bank does not need to know how the LLC is taxed.  The default tax method for your two member LLC is partnership.  The LLC will be taxed as a partnership unless it files a timely IRS form 8832 (election to be taxed as a C corporation) or an IRS form 2553 (election to be taxed as an S corporation).  The subject of the four possible LLC tax methods is discussed in great detail in your Operations Manual in your LLC portfolio.

2016-11-16T08:23:43+00:00October 30th, 2013|FAQs, Operating LLCs|0 Comments

Consequences of S Corporation Tax Method Termination

Question:  My multimember LLC filed an election to be taxed under Subchapter S of the Internal Revenue Code, aka S corp method of federal income tax.  Recently one of the members transferred 10% of the LLC to his corporation, which caused the IRS to terminate the S corp tax method.  Our LLC is now taxed as a partnership.  Do the other members of the LLC have a claim for damages against the member who caused the termination of the S corp tax method?

Answer:  It depends.  If the loss of the S corp election causes economic harm to the other members they could sue for damages, but it would be a roll of the dice as to who would win.  The defendant member’s defense would be “I was free to transfer my membership interest and never promised to refrain from doing anything that would cause the loss of the S corp tax method.”

If your LLC was formed by me then the Company and the other members would have a claim against the transferring member for breach of contract because every Operating Agreement I prepare contains a clause that says no member will take any action that would cause the LLC to lose its S corporation tax method, but it a member did cause the loss that member would be liable to the other members for damages.

My Operating Agreements also contain language that prohibits a member from transferring all or a  portion of the member’s membership interest without the consent of a majority of the members.

Caution about S Corp Method of Tax

To be eligible to be taxed as an S corporation none of the LLC’s owners can be a corporation, LLC (unless it is a disregarded entity), limited partnership, limited liability limited partnership, limited liability partnership or a nonresident alien.  If a qualified party ever becomes a member of the LLC it causes an automatic termination of the S corporation tax method as of the date the disqualified party acquires the membership interest.  This is the reason all multimember LLCs taxed as S corporations must have language in their Operating Agreements that prohibit transfers of membership interests without the approval of the other members.

Moral of the story:  Every multimember LLC needs a good Operating Agreement prepared by an LLC attorney who knows the LLC law of the state in which the LLC is formed.

2013-09-13T08:45:17+00:00September 13th, 2013|FAQs, Operating LLCs, Tax Issues|0 Comments