Two Phases in the Life of an LLC

Two Phases in the Life of an LLC2018-11-11T10:40:58+00:00

by Richard Keyt, Arizona limited liability company attorney

The primary reason people form an Arizona LLC is to limit the liability of the owners (called “members”) of the LLC. Limited liability is not automatic. If the members do not comply with Arizona law, a court may pierce the company veil and hold the members liable for the debts and obligations of the company. If you want your LLC to protect the members from the company’s liabilities, you must understand the two phases in the life of every Arizona LLC and make sure your LLC complies with Arizona law during Phase 2.

There are two phases in the life of an Arizona LLC:

Phase 1: Formation.

Phase 2: Operating the LLC after Phase 1.

Phase 1 is trivial and Phase 2 is critical. Will your LLC get Phase 2 services and information? Every LLC that I form gets both Phase 1 services and the critically and more important Phase 2 services.

Phase 1 is Over Quickly

Phase 1 consists of entirely of filling out a two page document called “Articles of Organization,” giving it to the Arizona Corporation Commission with a check for the filing fee, publishing a Notice of Publication in a newspaper and delivering an Affidavit of Publication to the ACC. THAT’S IT! Phase 1 is over in the blink of an eye and then Phase 2 begins and lasts for the life of the LLC, which could be years.

Anybody who can read and write can form an Arizona LLC in no time. PHASE 1 IS INSIGNIFICANT. If you hire a document preparer or an Arizona lawyer to form your LLC, they will do Phase 1 for you, but will probably leave you totally in the dark as to what you need to do to comply with Arizona LLC law during the months and years your LLC is in Phase 2. The LLC must comply with Arizona law during Phase 2 or the members risk being held liable for the liabilities of the LLC.

If you are inclined to hire somebody whose only services will be to perform the Phase 1 organizational tasks listed above, do not waste your money. Instead, read my article called “How to Form an Arizona LLC” and do it yourself because it is very simple. My article tells you everything you need to do from A to Z to form your Arizona LLC and complete Phase 1. The article is very detailed with many relevant links such as a link to the U.S. Patent & Trademark office to check if your LLC name will infringe on a federally registered trademark, a link to the IRS application to get a federal employer ID number, and the Arizona Corporation Commission website to check to see if your desired LLC name is available in Arizona.

Phase 2 is the Critical Phase

Phase 2 is the important period in the life of an LLC because how the company operates after it is formed determines if the LLC complies with the formalities of Arizona law and is therefore entitled to the general rule of Arizona LLC law that the members and managers of the LLC are not liable for the debts and obligations of the LLC. You must know the Arizona laws that apply to your LLC so that you can make sure the LLC does not violate the law.

Basic LLC Law Knowledge Test

Before you create a “do-it-yourself” Arizona LLC or you hire anybody to form your Arizona LLC and prepare its Operating Agreement, make sure that you or your document preparer can answer all of the following basic knowledge level questions about Arizona LLC law, federal income tax law and U.S. bankruptcy law:

1.  What are the four possible ways an LLC may be taxed under the Internal Revenue Code?

2.  Can a multi-member LLC owned by a husband and wife be treated as a disregarded entity for federal income tax purposes?

3.  What is the purpose of an IRS form 8832?

4.  What is an IRS form 2553 and when must it be filed with the IRS?

5.  Will your LLC need to file an IRS form 8832 and/or an IRS form 2553?

6.  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.

7.  How does Arizona community property law affect ownership of an Arizona LLC?

8.  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.

9.  How does one spouse acquire ownership of an Arizona LLC as separate property?

10.  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?

11.  Do both spouses need to sign the Operating Agreement?

12.  What is the legal significance if the spouse of a married member does not sign the Operating Agreement?

13.  What is the legal significance of only one spouse signing the Operating Agreement?

14.  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?

15.  Does Arizona law require the members or managers of an Arizona LLC to hold annual meetings and document the meetings with minutes?

16.  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?

17.  Does the Operating Agreement require members to restore a deficit capital account? Should it?

18.  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.

19.  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?

20.  What is the relationship between Internal Revenue Code Section 704(b) and substantial economic effect?

21.  What is required for the allocations of profits, losses and distributions to have substantial economic effect?

22.  What is the significance of the Ashley Albright U.S. Bankruptcy Court (Colorado) case and what can be done to avoid its result?

Anybody who forms Arizona limited liability companies for the public 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. P.S. I know the answers.

Richard Keyt Provides Phase 1 and Phase 2 Services

The main reason (besides my low price of $597 for the complete LLC formation service) that people hire me to form their Arizona LLC is because I provide Phase 1 AND Phase 2 services. The following is a list of the Phase 2 services we provide for all LLCs that I form and that you will probably not get from any other source:

1.  Arizona LLC Operations Manual. If you purchase my Silver & Gold LLC formation package you will get a copy of my 170+ page LLC owner’s manual called the “Arizona LLC Operations Manual.” I wrote the OM because I have formed 6,200+ LLCs and people always ask the same Phase 2 questions about how to operate their new LLC. It is unlikely that you will have a question about operating your LLC that is not answered in the OM. The OM explains applicable Arizona LLC law and how to comply with it during Phase 2. It covers 75+ critical topics that affect Arizona LLCs. See the OM’s Table of Contents and you will be amazed that so many important topics are conveniently covered in one place. THIS MUST HAVE LLC OWNER’S MANUAL IS NOT AVAILABLE ANY WHERE EXCEPT FROM RICHARD KEYT.

2.  Operating Agreement. Every LLC gets my 45+ page charging order enhanced TM Operating Agreement custom drafted for the members of the LLC. This agreement names all the members, their percentage ownership, any obligations of a member to contribute money to the LLC, how to hold meetings and other important governing issues. It also includes a disclaimer for non-owner spouses to sign when one married spouse owns all of the membership interest as separate property. Our charging order enhanced TM Operating Agreement is intended to prevent the Operating Agreement from being an executory contract (a bad thing if a member is in bankruptcy court), which is the problem that arose in an Arizona Bankruptcy Court case called In re Ehmann.

3.  Organizational Resolutions. I prepare organizational resolutions to be signed by the members in which the members elect one or more managers, approve the issuance of membership interests to the members and adopt other resolutions related to forming the new LLC.

4.  Membership Certificates. I prepare membership certificates for all members. The membership certificate is similar to a stock certificate. It is numbered and signed by a manager and evidences that an interest in the company was issued to the member named on the certificate.

5.  Arizona LLC Portfolio. I give every LLC I form a professional high-quality three ring binder with seven tabs called the “Arizona Limited Liability Company Portfolio” that contains all of the LLC’s formation documents. The Portfolio contains approximately 150 pages of documents and information that I custom prepare for each LLC. All important LLC documents should be kept in the Portfolio. On the same day I file the Articles of Organization with the ACC or the next business day, I will mail your LLC Portfolio to the LLC.

We Answer LLC Formation Questions for Free

If you have questions about forming an Arizona LLC, contact Arizona LLC lawyers Richard Keyt at 480-664-7478 or his son Arizona LLC attorney and former CPA Richard C. Keyt at 480-664-7472.  We do not charge for entity formation related questions.

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

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

We’ve made it very easy to hire Richard Keyt (6,200+ LLCs formed) and KEYTLaw, LLC, to form your new Arizona LLC.  It’s a simple 5 – 10 minute process.  To hire Richard to form your new LLC select one of the following two options:

Option 1 – Telephone

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

  • KEYTLaw LLC legal assistant Davis Bauer - 480-664-7846

Option 2: Online – Available 24/7

100% Satisfaction Guaranteed

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