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.

2016-11-16T08:23:43-07:00October 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.

2013-09-13T08:45:17-07:00September 13th, 2013|FAQs, Operating LLCs, Tax Issues|0 Comments

If You Have a Confidential Trust Don’t Create a Separate Estate Planning Trust

Question:  You created a Confidential Trust for me to own my Arizona LLC and keep my name off the public records of the Arizona Corporation Commission.  Recently I signed a new trust that is for estate planning.  My new trust includes provisions for the administration of my assets after my death.  How does my new trust become the owner of the LLC currently owned by my Confidential Trust?

Answer:  You now have two trusts, each with their own names and creation dates.  The problem is that the Confidential Trust owns the LLC, but the Estate Planning Trust should own it.  Instead of creating an entirely new estate planning trust you should have kept the same trust name, trustees and trust creation date and just amended and restated the entire trust agreement to contain the language needed for your estate plan.  In other words, you should have converted the Confidential Trust to your estate planning trust with the end result that you would have one trust and it would be the owner of the LLC.

Going forward your choices are:

1.  Transfer ownership of the LLC from the Confidential Trust to the estate planning trust and allow the Confidential Trust to die.  However, if the new estate planning trust has your name in it and you want to continue to keep your name off of the Arizona Corporation Commission’s public records then retain ownership of the LLC in the Confidential Trust and follow the next option.  We charge $545 to do this.  It includes preparing an Assignment of Membership Interest Agreement, Amendment to the Articles of Organization, resolutions of the member and a new membership certificate.

2.  Modify the Confidential Trust to provide that the beneficiary is the trustee(s) of the new estate planning trust.

My recommendation is to do option 1 now because option 2 postpones the need to do option 1 until the creator(s) of the Confidential Trust is/are deceased.

To learn more about how a Confidential Trust can keep your name off the Arizona Corporation Commission’s public records read my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s).”

2013-08-28T06:48:53-07:00August 28th, 2013|FAQs, How Do I, Miscellaneous, Operating LLCs|0 Comments

Arizona LLCs Registered to do Biz in California May be Subject to Its New LLC Law

California adopted a terrible new LLC law that becomes effective on January 1, 2014.  California’s new LLC law appears to say that LLCs formed outside California that register to do business in California will be subject to the new California limited liability company law.  Section 17713.04(a) of the new LLC law provides that, except as otherwise provided in the law, the new LLC law applies to all California formed LLCs existing on or after January 1, 2014, but also to all foreign LLCs registered with the Secretary of State before January 1, 2014, and after December 31, 2013.

California is the state that has the highest annual maintenance fee on LLCs – $800/year minimum.

For more on this topic see “Potential Challenges Associated With California’s Revised Uniform Limited Liability Company Act.”

2018-05-20T08:56:39-07:00August 26th, 2013|Miscellaneous, Operating LLCs|0 Comments

Who Inherits My LLC if I Die?

Question:  “I am an Arizona resident who owns an interest in an Arizona LLC.  Who will inherit my LLC if I die?

Answer:  It depends on whose inheritance plan is used.  If you have a Will or a Trust then you determine who inherits your LLC and other property.  However, if you do not have a Will or a Trust, the State of Arizona’s inheritance plan will govern.  If Arizona’s inheritance plan is the same as yours then the right people or charities will get your property in the proportions you have specified in your Will or Trust.  Unfortunately it is very common for a person’s desired heirs to be different than Arizona’s plan of inheritance.

Do not leave your loved ones unprotected and at the mercy of Arizona’s law of inheritance.  Sign a Will or a Trust and insure that your loved ones will inherit according to your plan, not Arizona’s plan.

For more on this topic see “Who Gets My Property If I Die Without A Will Or Trust?” and “Who Will Inherit Your LLC Membership Interest if You Die?

2016-11-16T08:23:44-07:00August 22nd, 2013|FAQs, Operating LLCs|0 Comments

Richard C. Keyt, JD, Passed California Bar Exam

Congratulations to my son Richard C. Keyt who got the news last Friday that he was one of the 40% who passed the February 2013 California Bar exam.  As soon as Ricky is licensed in California Ricky and I intend to open a branch office in California to form California limited liability companies, prepare estate plans and do elder law.

2015-07-01T21:06:00-07:00May 20th, 2013|Operating LLCs|0 Comments

Five Expensive Mistakes When Forming a New Jersey LLC

New Jersey business litigator Jay McDaniel posted an article on his excellent blog called “New Jersey Business Dissolution Journal” that is a must read for every person who owns an interest in an Arizona limited liability company.  Jay’s article explains the five biggest mistakes people make when they form an LLC.  The mistakes are the same mistakes I caution people against constantly when I form LLCs and advise the owners of existing LLCs.

Jay McDaniel is a business litigator whose opinions are based on years of experience representing business owners in disputes that arise from the ownership of businesses.  Jay wrote:

“Having litigated many of these matters over the years, I see the same mistakes made early in the life of the business surfacing again and again as the source of litigation.”

McDaniel’s point is that the failure to plan when companies are created can be a very expensive blunder when a dispute among owners arises.  Even though I am not a litigator (I never personally represent anybody in litigation), my experience is the same as McDaniel’s.

The list omits the mistake of not having an Operating Agreement.  The following is what McDaniel says about the lack of an Operating Agreement:

“If a business does not have one, sooner or later, it will have problems and without any point of reference whatsoever, the probability of litigation is high.  When that happens and the business is successful, the chances are that you will spend the price of a college education – at a nice private school – on the lawsuit.

Here’s Jay McDaniel’s list of the five biggest LLC formation mistakes (read the article to get the reasoning behind each mistake:

  1. No operational planning
  2. No contingency planning
  3. No valuation planning
  4. No succession planning
  5. No planning for amendments to the Operating Agreement.

Have Estate Planners Hijacked the LLC?

Attorney Tanya Simpson’s article in the Florida State University Law Review is subtitled “How Restrictions on Dissolution have Crippled the LLC as a Viable Small Business Entity.”  Here is her introduction to her article:

“When blushing couples walk down the aisle, they hope to live happily ever after, promising ‘ ’til death do us part.’ Even with such high hopes, many savvy couples sign prenuptial agreements in anticipation of the possibility that the marriage might not turn out as they had planned. Indeed, many individuals will not enter into a marriage without having such an agreement in place. How many would enter into a marriage today if it were possible that their state might not permit them to divorce at all?

When a marriage isn’t going well, all states have a judicial mechanism whereby the unhappy couple can divorce without either spouse having to prove fault, and many states provide the option of proving fault as well.1 However, when the “marriage” is one of members in a Limited Liability Company (LLC), the availability and mechanisms of dissolution vary from state to state. Some states have default rules whereby one member can force a dissolution,2 while other states require the consent of at least a majority of members.3 In states requiring majority consent, a minority member may still be able to obtain judicial dissolution, but to do so, the minority member must not only state that the “marriage” is irretrievably broken but must also prove this assertion to the satisfaction of the court by meeting standards that range from relatively easy to nearly impossible to achieve.4 Furthermore, with the paucity of case law on the subject and the lack of judicial consistency as to which body of law the courts will apply, determining which standards the court will likely apply is a gamble at best–making it difficult for the member to prepare its case appropriately. If the member is unsuccessful in predicting the court’s standards and proving that its case has met them, the member will find itself stuck in the marriage indefinitely, with its capital tied up and no say as to the decisions that affect its investment. This has not always been the case.”

How Do I Loan Money to My LLC?

Question:  I want to loan money to my Arizona limited liability company.  How do I document the loan so it will stand up to a challenge by the IRS, another member of the LLC or a creditor?

Answer:  The lender must take care to prepare and have the appropriate parties sign the following documents:

  • A Promissory Note:  The promissory note must be signed by at least one member of a member managed LLC or one manager of a manager managed LLC.  The promissory note should state the principal amount of the loan, the lender to whom payments will be made, where payments are to be sent, the date of the loan, no interest will accrue or interest will accrue at a specified rate, the repayment terms and a maturity date by which the loan must be repaid in full.
  • Resolutions or Action by Unanimous Consent:  This is a document that shows that the members of the LLC authorize the company to borrow the money on the terms set forth in the promissory note and that specifies which member or manager has the authority to sign the promissory note on behalf of the LLC.

Action by Unanimous Consent:  This is the simplest and easiest way for members to approve the loan.  If all members of the LLC  agree to the loan and its terms, they can sign an Action by Unanimous Consent that contains the resolutions adopted by the members.

Resolutions:  If any member refuses to sign the Action by Unanimous Consent, the members must call a special meeting of the members to consider and vote on the loan and give appropriate notice of the date and time of the meeting to all the members.  The special meeting must be held, the loan discussed, a motion must be made and seconded that the members authorize the company to borrow $X,XXX from <name of lender> on the following terms <state the terms referred to above in the discussion of the Promissory Note> and that <name of member or manager> is authorized to sign the Promissory Note and related documents on behalf of the company.

  • Security Agreement and / or Deed of Trust:  If the lender insists that the Promissory Note be secured by a lien on the LLC’s personal property and/or real property then this is done by having the LLC’s authorized signer sign a Security Agreement (for personal property) and/or a Deed of Trust (for real property).  If the lender gets a Security Agreement the lender must also file a UCC-1 Financing Statement with the Arizona Secretary of State.  If the lender gets a Deed of Trust, the original document must be recorded with the county recorder of the county in which the encumbered property is located.

In addition to the above documents, the lender must write a check payable to the LLC or wire the funds to the LLC’s bank account and the LLC must indicate in its books that it borrowed the funds from the lender.

Purchase Our Do It Yourself Loan Documents

  • Promissory NoteDo-It-Yourself for $47:  A Promissory Note is the legal document signed by a borrower that evidences a promise to repay and the payment terms and conditions.  It specifies the amount owed, if interest will be charged, the interest rate, when payments are due, the amount of payments and the maturity date.  It contains other important terms such as events that can cause a default and allow the holder of the Note to accelerate the entire balance due after a default, late payment charges and increased interest rate after a default.  The Promissory Note is the fundamental loan document, i.e., it is the primary document that evidences the borrower’s legally enforceable promise to repay.  If you are owed money and you do not have a Promissory Note signed by the borrower(s), you are at a great disadvantage if you have to sue to collect the debt.  Suing to collect a debt evidenced by a Promissory Note is one of the easiest types of lawsuits because you only have to prove the borrower gave you a note and didn’t pay in full.  Related Documents:  A Promissory Note can be secured by a lien on personal property (use our Security Agreement for personal property in Arizona) and by a lien on real property (use our Deed of Trust for real property located in Arizona).
  • Limited Liability Company Borrowing ResolutionDo-It-Yourself for $47:  If the borrower or signer on a Promissory Note is limited liability company, the lender must obtain a borrowing resolution from the members of an limited liability company to prevent the company from claiming that the person who signed the Promissory Note or other loan documents did not have the authority to sign for the company and therefore the company is not obligated.  It is prudent business practice to obtain a borrowing resolution.  Commercial lenders almost always require a borrowing resolution as a condition to making a loan.
  • Security AgreementDo-It-Yourself for $47: If a lender wants to secure payment of a Promissory Note with a lien on personal property located in Arizona, the lender must obtain the borrower’s signature on a document that creates the lien. When the lender has a lien on personal property and the borrower defaults under the Promissory Note, the lender can foreclose on the personal property and sell the encumbered property at an auction and apply the proceeds to the debt. The Security Agreement is the document that when signed by a borrower or a guarantor creates a lien on the signer’s personal property that is described in the Security Agreement. My Security Agreement gives you the option to describe specific items of personal property to be encumbered or you can use the all encompassing language that gives the lender a lien on all of the borrower’s personal property. Note: The Security Agreement is not a stand-alone document. This document is intended to be used with a Promissory Note. There must be a debt or obligation created to which the Security Agreement creates a lien. No debt, no lien. Additional Required Document: The lender/secured party must immediately file a UCC-1 Financing Statement with the Arizona Secretary of State to perfect notice to the world that the lender/secured party has a lien on the collateral described in the UCC-1. For more about the UCC-1 and a link to the form, see Richard Keyt’s article that explains the UCC-1 Financing Statement.
  • Deed of TrustDo-It-Yourself for $47: The Deed of Trust is the document that creates a lien on Arizona real property to secure payment of a debt or satisfaction of an obligation. It must be signed by a person, people, entity and/or entities that own the real property to be encumbered. The Deed of Trust is the preferred method of obtaining a lien on Arizona real property. Mortgages can also be used to create a lien on Arizona real property, but the Mortgage is rarely used in Arizona. Common Usage: When a borrower gives a lender a Promissory Note to evidence a promise to pay money to the lender and the lender wants security for the loan, the Deed of Trust is used frequently to create a lien on Arizona real property to secure the obligations contained in the Promissory Note. If the borrower / debtor defaults on the Promissory Note or other contractual obligation secured by a Deed of Trust, the lender / creditor can foreclose the Deed of Trust and cause the real property that is encumbered by the Deed of Trust to be sold at an auction to the highest bidder for cash.

Caution #1: A lender does not have a lien on any of the borrower’s real property simply because the borrower signs a Promissory Note or other document that creates a legal obligation that the lender may enforce. If the lender wants a lien on Arizona real property, the lender must get the owner(s) of the Arizona real property to sign a Deed of Trust (best type of lien) or a Mortgage (rarely used in Arizona).

Caution #2: The lender must record the properly signed and notarized Deed of Trust with the County Recorder of the Arizona county in which the encumbered real property is located.

Caution #3: The Deed of Trust will not be valid unless the owner(s) of the Arizona real property owe a debt or other obligation to the lender / secured party. For example, if Bart Simpson borrows $10,000 to buy a car and Homer and Marge give the lender a Deed of Trust on their home, the Deed of Trust will not be valid because Homer and Marge do not owe money or any obligation to the lender. If the lender wants to be able to foreclose on Homer and Marge’s home if Bart defaults on the loan, the lender must have Homer and Marge sign a Personal Guaranty by which they guaranty Bart’s debt and then the Deed of Trust would secure the satisfaction of Homer and Marge’s obligations under the Personal Guaranty, not under the Promissory Note because they did not sign it.

2016-11-16T08:23:51-07:00December 22nd, 2011|FAQs, How Do I, Operating LLCs|0 Comments

Ohio LLC’s Incentive Compensation Creates Partnership With Former Employee

LLC Law Monitor:  “Business acquirors sometimes give the acquired company’s management financial incentives to enhance the acquired company’s value. These are often structured as bonus compensation for achieving defined milestones, and sometimes include equity in the acquired company or in the buyer.  In a recent Ohio case the buyer of a company’s assets provided incentive compensation to the company’s management, based on the profits of a division of the company. The employee was later terminated, and claimed the company had entered into a partnership with him and then breached its fiduciary obligations.”

KEYTLaw recommendation:  This type of provision should be in a written employment agreement that provides for a compensation bonus in an amount equal to the profits of a specific entity or division of an entity.  Be sure to define profits precisely.  The agreement should state that the provision does not create a partnership, joint venture, ownership interest in the entity or any other arrangement other that the employer / employee relationship and that it does not cause the employer (or the entity if it is not the employer) to owe any fiduciary duties to the employee.

2018-05-22T18:46:19-07:00December 19th, 2011|Lawsuits, Operating LLCs|0 Comments

Court Finds LLC Member Liable for LLC’s Debt because Member Did Not Sign Contract Correctly

If you are the manager of an Arizona manager managed LLC or a member of an Arizona member managed LLC, do you know how to sign contracts on behalf of the LLC?  If not, your ignorance could cost you big bucks.  The recent Pennsylvania case of Hazer v. Zabala, 26 A.3d 1166, 2011 Pa. Super., found that the member of a PA LLC was liable for amounts owed on a lease because the member did not properly sign the lease on behalf of the LLC.  This case is an important lesson for every LLC member and manager.

I have said many times that people who form Arizona limited  liability companies mistakenly believe that once they file the LLC’s Articles of Organization they are automatically protected from the debts and obligations of the LLC.  The primary reason people form an LLC is to shield themselves from the LLC’s activities and liabilities.  Unfortunately, owner protection is not automatic.  There are any number of ways that a member or manager of an LLC can become liable for the LLC’s debts.  For members and managers of an Arizona LLC to obtain the protection from liabilities offered by Arizona’s LLC laws, they must operate the LLC in compliance with applicable LLC law.  Most people who form an Arizona LLC do not know what Arizona LLC law is and therefore frequently cause the LLC to engage in activity that violates Arizona LLC and creates a risk that the members and managers could be found liable for the LLC’s debts.

It goes without saying that it is not likely your LLC will comply with Arizona LLC law if you do not know what the law is.  The primary reason I wrote my 170 page book called the “Arizona LLC Operations Manual” is I want to inform Arizona LLC members and managers about Arizona LLC law so they can cause their LLC to comply with the law.  One important and fundamental aspect of Arizona law is exactly how should a contract be worded so that the LLC rather than a member or manager is liable under the contract?  My Quick Start Guide has sample signature blocks that illustrate exactly how the signature of the LLC should appear in a contract.

Facts in Hazer v. Zabala

The case involved a lease that was signed by a member of Zabala Broker, LLC.  The member, Juan Zabala, signed his name on the lease and underneath is signature he printed “DBA/ZABALA BROKER, LLC.”  The court ruled that Mr. Zabala was personally liable on the lease because he signed it in his name, not as the member or manager of his LLC.

For the signer to avoid personal liability and for the LLC to be the party liable on the lease the contract should have designated the LLC as follows:

The first paragraph of the lease (or any contract) should have read:

Zabala, Broker, LLC, a Pennsylvania limited liability company

The signature block as the end of the lease (or any contract) should have read:

Example 1: For a member managed LLC:

Zabala, Broker, LLC, a Pennsylvania limited liability company

By: _______________________________
Juan Zabala, member

Example 2: For a manager managed LLC:

Zabala, Broker, LLC, a Pennsylvania limited liability company

By: _______________________________
Juan Zabala, manager

Members and managers must know how to designate their LLC properly in contracts because they may become personally liable  on the contract if it is not worded correctly.

How to Purchase the Ebook Version of the Arizona LLC Operations Manual

Click here to purchase the eBook version of our Arizona LLC Operations Manual from our internet store for the incredibly low price of $97.

Can an Arizona LLC Become a PLLC & an Arizona PLLC Become an LLC?

Question:  I have an Arizona LLC, but I want to change it to a professional LLC (a PLLC).  Is it possible and how do I make the change?

Answer:  Yes.  An Arizona LLC can be converted to a PLLC and an Arizona PLLC can be converted to an LLC.  You convert one type of LLC to the other type by filing an amendment to the Articles of Organization with the Arizona Corporation Commission and then publishing the name change in an ACC approved newspaper after the ACC approves the amendment.  The Amendment to the Articles of Organization must be signed by a member of a member managed company or a manager of a manager managed company.  The amendment to the Articles of Organization must satisfy the following requirements:

Converting from an LLC to a PLLC:

The Amendment to the Articles of Organization must contain the following provisions:

1.  A statement of the new name of the company with the correct ending.  Arizona Revised Statutes Section 29-4102.B states:

“A limited liability company organized under a law of this state other than this Article may elect professional limited liability company status by amending its Articles of Organization pursuant to Section 29-3202 to comply with subsection A of this Section and with Section 29-4106.

2. Arizona Revised Statutes Section 29-4106 states:

“The name of a professional limited liability company authorized to transact business in this state shall satisfy the requirements of Section 29-3112, except that the name shall contain the words “professional limited liability company” or the abbreviation “p.l.l.c.”, “p.l.c.”, “pllc” or “plc” in uppercase or lowercase letters.”

2. A statement that the company is a professional limited liability company.

3. A description of the professional service or services that the company is organized to provide.

Converting from a PLLC to an LLC:

The Amendment to the Articles of Organization must satisfy each of the following requirements:

1.  It must contain a statement of the new name of the company with the correct ending.

2.  It must remove the statement in the Articles of Organization that the company is a professional limited liability company.

3. It must remove the statement in the Articles of Organization that describes the professional service or services that the PLLC was organized to provide.

Read “What are the Differences Between an Arizona PLLC vs LLC?

Who Will Inherit Your LLC if You Die?

If you are a member of one or more LLCs, do you know who will inherit your membership interest if you die?  If you do not prepare for your death and designate your heir(s) properly then the state where you live will determine who inherits your LLCs after you die after the LLC membership goes through a costly probate.

Every state has a law called the “law of intestate succession.” This law is the state’s statutory scheme for determining who inherits property when a person dies owning property and the person does not have a valid Will.  Arizona’s intestate succession laws are found in Title 14, Chapter 2, Article 1 of the Arizona Revised Statutes.  Arizona’s law of intestate succession provides for the following inheritance rules for an Arizona resident who dies without a Will:

  • If you die single with no descendants, your estate goes to your parents equally if both survive or to the surviving parent.
  • If you die single with no descendants and both of your parents are deceased, your estate goes to the descendants of your parents or either of them by representation.
  • If you die while married, your entire estate goes to your spouse if you do not have any descendants or if ALL of your descendants are descendants of you and your spouse.
  • If you die while married and have any descendants that are not descendants of you and your spouse, your spouse will inherit one-half of the intestate separate property and none of your community property.

If you are married and have any children with a person who is not your spouse, pay close attention to the last rule listed above because it could create a nightmare for your spouse.

Example: Homer has a son named Bob who is not his wife Marge’s son. Homer and Marge are estranged from Bob. Homer & Marge own 100% of World Wide Widgets Arizona, LLC, as community property. The LLC is worth $500,000. Homer is an Arizona resident and dies without a Will. Homer does not own any separate property. Arizona law provides that Marge inherits nothing, zip, zero, nada other than a spousal homestead allowance of $18,000. Homer’s membership interest in the LLC goes to Bob who now becomes half owner of the LLC with Marge. Not only has Homer’s failure to plan cost Marge $250,000, but Homer left Marge the giant headache of operating a business with Bob who knows nothing about the business and only wants his $250,000.

Arizona law does provide that “The decedent’s surviving spouse and minor children whom the decedent was obligated to support and children who were in fact being supported by the decedent are entitled to a reasonable allowance in money out of the estate for their maintenance during the period of administration. This allowance shall not continue for longer than one year if the estate is inadequate to discharge allowed claims.” This allowance however, does not amount to a lot of money.

If you do not know for a fact that the person or people you want to inherit your ownership interest will actually inherit your LLCs when you die then you need to take action now to protect your loved ones and insure that the LLCs go to your desired heirs. However, if you are happy to do nothing and let the law of intestate succession determine who will inherit your LLCs, your heirs will still be required to open an expensive and public probate proceeding with an Arizona superior court.

Best, but More Expensive Solution

The best solution to make sure that your ownership interest in LLCs goes to your desired heirs is to create a trust and have the trust own the LLC.  When the trust owns the LLC there is no need for a probate because the trust owns the LLC interest before and after your death.  See “How to Transfer an LLC to a Trust” for more on this topic.

Cheapest and Simplest Solution

The simplest way to make sure your Arizona LLCs go to the right person or people after you die is to sign a Transfer of Membership Interest Testament. This simple document not only specifies who inherits your Arizona LLCs, but it also avoids an expensive probate of your LLC interest. To learn more about this important family protection document read my article called “Who will Inherit Your Membership Interest in Your Arizona LLC When You Die?

2017-05-01T07:19:55-07:00August 15th, 2011|Asset Protection, Members, Operating LLCs|0 Comments

Can an Arizona LLC Have Officers Such as a President?

Question:  Can an Arizona limited liability company have a President, Vice President, Chief Executive Officer or personnel with other titles?

Answer: Yes.  Arizona’s statutes that authorize the creation of LLCs do not restrict the titles a company may give to its employees or personnel.

Technically, corporations have presidents and CEO, but Arizona LLCs do not.  Arizona law mentions only three types of people or entities associated with an AZ LLC:  members (owners), managers (equivalent to the president of a corporation) and noneconomic members (neither a member nor a manager, but a special character that is not defined in Arizona law).

You LLC has Articles of Organization.  Corporations have Articles of Incorporation.

Arizona law provides for two types of LLCs:  member managed and manager managed.  Only member managed AZ LLCs have managing members.  In fact, AZ law provides that all members of a member managed LLC are managing members and have management power.

If you have a manager managed AZ LLC and you sign as manager on behalf of the LLC, you are complying with Arizona law and clearly indicating to the other party the capacity in which you sign the document.  This is important to avoid personal liability.

Arizona law does not say that your LLC cannot have a president or a CEO.  It’s your company and as the controlling member you can create any LLC office you desire and call it whatever you want to call it.  The problems with calling somebody the President of your AZ LLC are:

1.  People who understand Arizona law will not accept the signature of a person whose title is President because they know that a member must sign for a member managed Arizona LLC and a manager must sign for a manager managed Arizona LLC.  Prudent people will look up the LLC on the Arizona Corporation Commission’s website to see if the LLC is member managed or manager managed and insist that the contract be signed by the appropriate person named in the LLC’s Articles of Organization on file with the Arizona Corporation Commission.

2.  There is a risk that if the contract results in a lawsuit, the other party could claim they thought they were dealing with a corporation rather than an LLC and therefore your company would be required to prove it complied with AZ corporate law rather than AZ LLC law to get the protection afforded by Arizona law to the owners of those types of entities.

3.  The other party to the contract might also claim the signer misrepresented the signer’s capacity to sign the contract.

Read about the perils of signing contracts on behalf of an entity in my article called “President of Corporation Personally Liable for Signing Contract.”

I do not recommend mixing corporate terms with LLC terms so you avoid the problems mentions above.

2016-11-16T08:23:54-07:00July 9th, 2011|FAQs, LLCs & Corporations, Operating LLCs|2 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.

President of Corporation Personally Liable for Signing Contract

Improperly Worded Company Contracts can Cause Signer to be Liable

One of the primary reasons people form limited liability companies and corporations is to protect the owners from the debts and liabilities of the company.  The general rule of Arizona law is that the members of an Arizona LLC and the shareholders of an Arizona corporation are not liable for the company’s debts.  One of the biggest exceptions to this rule arises when an owner signs a contract and becomes personally obligated to pay the company’s debt.

The Personal Guaranty

The most common type of contract that obligates an owner of a company to pay the company’s debts is called a “guaranty” or “personal guaranty.”  A guaranty is a contract by which the signer/guarantor promises to pay or satisfy the debt of another person (the company).  Guaranties are frequently required by landlords and lenders who know that if the company doesn’t pay, the debt will never be paid.  Arizona law provides that if only one spouse signs a guaranty, then the debt cannot be collected from the community property of the guarantor and his or her spouse.

Contracts that Create Personal Liability

Owners and employees of a company can create contractual personal liability for themselves if they sign a contract on behalf of the company, but the wording of the contract does not make it clear that the signer is signing on behalf of a company.  The Arizona LLC Quick Start Guide that I give every LLC that I form contains actual examples of the exact language that should be used in contracts to prevent the signer from inadvertently becoming personally liable to pay the company’s debt created under the contract.

If the signer of an LLC or corporate contract wants to avoid becoming personally liable for the debts of the company created in the contract, the language in the contract must clearly state that the party is the LLC or corporation and indicate the capacity of the signer.

Iowa limited liability company and corporate attorney Marc Ward reports on a recent Iowa case that where the court found that the person who signed a two page contract on behalf of a corporation was personally liable to pay the corporation’s debt under the contract.

The Iowa Court of Appeals opinion in Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case. On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed. And on the other hand, it is a warning to lawyers that things aren’t as simple as they appear.

Unfortunately for Moyer the contract contained a clause that said “I hereby personally guarantee to pay on demand any and all sums due that my/our company shall fail to pay.”

Mr. Moyer did not sign the signature block for the personal guaranty, but the court found he was liable anyway.

Proper Way to Sign Contracts

Right Way to Designate the Company in a Contract:  World Wide Widgets, LLC, an Arizona limited liability company.  Note the LLC after the name and the written out “limited liability company.”   Make sure both the abbreviation and the full designation are used.  Typically the proper designation of the company should be in the first paragraph and in the actual signature block where the signer signs.  If it is not, the signer should hand write the missing information above where he or she signs and/or on the first paragraph where the company is named.

Right Way to Designate the Capacity of a Signer in a Contract:  Homer Simpson, President (for an Arizona corporation), or Homer Simpson, Manager (for a manager-managed Arizona LLC), or Homer Simpson, member (for a member-managed Arizona LLC).

Wrong Way to Designate the Company in a Contract:  World Wide Widgets

Wrong Way to Designate the Capacity of a Signer in a Contract:  Homer Simpson.

Beware of Personal Guaranty Language in the Contract

If a contract contains any language that would cause the signer to be a guarantor and impose personal liability on the signer, the signer who wants to avoid personal liability must take a pen and cross-out or strike-out all of the guaranty language.  If you are signing a contract, you must read it and strike-out any language you don’t want and write on the document any additional language you want.  You can modify with hand-written changes all pre-printed contracts before signing.

How to Change the Name of a Limited Liability Company

QuestionCan I change the name of my Arizona limited liability company?

Answer:  Yes.  Assuming the members approve the name change, an Arizona limited liability company can change its name by amending its Articles of Organization on file with the Arizona Corporation Commission.  For a detailed explanation of how to change the name, see my article called “How to Change the Name of an Arizona LLC.”

2011-07-14T14:45:57-07:00October 13th, 2009|FAQs, LLCs & Corporations, Operating LLCs|0 Comments

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.

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Option 1 – Telephone

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

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