by Richard Keyt, Arizona LLC attorney
Before you hire anybody to form your Arizona LLC and prepare its Operating Agreement, you should test his, her or its knowledge of Arizona LLC law, federal income tax law and U.S. bankruptcy law. Richard Keyt can answer all of the following questions. Can your document preparer do the same?
- What are the four possible ways an LLC may be taxed under the Internal Revenue Code?
- Can a multi-member LLC owned by a husband and wife be treated as a disregarded entity for federal income tax purposes?
- What is the purpose of an IRS form 8832?
- What is an IRS form 2553 and when must it be filed with the IRS?
- Will your LLC need to file an IRS form 8832 and/or an IRS form 2553?
- What is the significance of the Gregory Leo Ehmann U.S. Bankruptcy Court (Arizona) case and what can be done to avoid its result? All of my Operating Agreements contain provisions intended to avoid the Ehmann problem.
- How does Arizona community property law affect ownership of an Arizona LLC?
- How will the members document the way they hold title to their membership interests? Members of an Arizona LLC hold title one of the following ways: (i) community property, (ii) community property with right of survivorship, (iii) separate property, (iv) tenants in common and (v) joint tenancy. The way a member holds title to the member’s interest in the company determines if a probate will be needed if the member dies, whether a spouse has an interest in the LLC, and if the survivor of a deceased member gets a full stepped up basis (for income tax purposes) on the death of the member.
- How does one spouse acquire ownership of an Arizona LLC as separate property?
- How does a married couple acquire ownership of an Arizona LLC as community property with right of survivorship so that if one spouse dies the survivor automatically acquires the interest of the deceased without going through probate?
- Do both spouses need to sign the Operating Agreement?
- What is the legal significance if the spouse of a married member does not sign the Operating Agreement?
- What is the legal significance of only one spouse signing the Operating Agreement?
- Given that an LLC can be taxed one of four ways, will your document preparer draft your Operating Agreement to correspond to how your LLC will be taxed? Hint: If your document preparer does not ask you how your LLC will be taxed, how can he or she draft an Operating Agreement that complies with your LLC’s method of taxation?
- Does Arizona law require the members or managers of an Arizona LLC to hold annual meetings and document the meetings with minutes?
- Must the Operating Agreement provide that the members will maintain capital accounts as required by Subchapter K of the Internal Revenue Code?
- What is a deficit capital account and how is it created?
- Does the Operating Agreement require members to restore a deficit capital account? Should it?
- What is a guaranteed payment and does your LLC have any guaranteed payments? Hint: This is not when one member guarantees payment of the LLC’s debts.
- Does your LLC make any special allocations of profits or losses? If so, does the Operating Agreement contain the appropriate provisions for the special allocations of profits or losses?
- What is the relationship between Internal Revenue Code Section 704(b) and substantial economic effect?
- What is required for the allocations of profits, losses and distributions to have substantial economic effect?
- What is the significance of the Ashley Albright (scroll down to the discussion about single member LLCs) U.S. Bankruptcy Court (Colorado) case and what can be done to avoid its result? See my article called “Warning: Single Member LLCs Lack Asset Protection” for more on this important topic.
Anybody who forms Arizona limited liability companies should know the answers to all of the above questions. If you take the time to ask a document preparer and many Arizona lawyers to answer the above questions, you will find that most people who form Arizona LLCs have a superficial knowledge of Arizona LLCs and are merely generating fill in the blank forms. A KEYTLaw paralegal plus a KEYTLaw formed LLC is a winning combination.