Sections 5.1 – 5.7 explain the post-formation tasks that all LLCs should accomplish as soon as possible after filing the Articles of Organization.

Section 5.1 Get an IRS Employer Identification Number for the LLC

Although an LLC may be able to avoid getting an IRS Employer ID number (EIN) if it does not have any employees, we recommend that all LLCs get an EIN for the LLC unless the LLC will never have income, expenses or money to deposit into a bank account.  If your LLC will not have employees it can open a bank account in its name, but the bank will require the social security number of a member.

Your LLC needs an EIN if: (i) it started a new business, (ii) hired or will hire employees, including household employees, or (iii) intends to open a bank account. Any member or manager of the LLC that is a person can use the wizard to get an EIN for the LLC.

The primary reason to get an EIN for your LLC is so that no member has to give the member’s social security number to third parties.  If your LLC does not have an EIN and it hires an independent contractor, the contractor will ask for the LLC’s EIN so it can send the LLC an IRS Form 1099.  If the LLC does not have an EIN it would then be required to give the independent contract the social security number of one of the members of the LLC.

It is actually very easy to obtain an EIN for an LLC by using the IRS’ online EIN wizard.  You answer several questions and within five minutes your LLC’s new EIN is displayed on your screen.  Be sure to print the screen with the new EIN and write the number down and put the EIN in a safe location.

If you lose your EIN, call (800) 829-4933 and select EIN from the list of options. Once connected with an IRS employee, tell that person that you received an EIN from the Internet but can’t remember it. The IRS employee will ask the necessary disclosure and security questions then give you the number.

If you hired us to get your LLC’s EIN, it is actually easier for you to complete the IRS’ online EIN wizard to get the EIN yourself than it is to fill out IRS Form SS-4. We cannot get the EIN unless a person associated with the LLC fills out the Form SS-4, signs it and sends it back to us.

Your LLC’s responsible person must complete and sign and return an IRS Form SS-4 to us before we can get the EIN. If you purchased a Silver or Gold LLC package or if you purchased a Bronze LLC package and paid extra for us to get the LLC’s EIN, a member or manager of the LLC must go to our web page called “IRS Form SS-4” and follow the instructions. This page explains how to complete the IRS Form SS-4 and return it to us. The SS-4 form authorizes our legal assistant to contact the IRS on behalf of the LLC and apply for the EIN.

5.2  Open a Bank Account in the Name of the LLC

If the company expects to have revenue or if it will pay expenses, it must open a bank account in its name. Unlike corporations, there are few legal formalities that an Arizona LLC must follow. One very important legal formality, however, is that the company establish its own separate bank account. It is also very important that the company deposit all of its revenue and capital contributions from members into its bank account and that it pay all of its expenses from its bank account. The members should not commingle their money with the company’s money or pay their expenses with the company’s money. A company that does not maintain its own bank account or that commingles its money with members’ money or pays members’ expenses from its funds risks having a creditor “pierce the company veil” and hold the member(s) liable for the company’s debts.

To open a bank account the company needs two items, an EIN (or the social security number of the member if the LLC is a single member LLC) and a copy of the filed Articles of Organization with the ACC’s received stamp on it. Some banks may also ask for a copy of the company’s Operating Agreement.

5.3 Have all Members Sign an Operating Agreement

Although Arizona LLC law does not require that the members of an Arizona LLC sign an Operating Agreement, we recommend that all Arizona LLCs have an Operating Agreement signed by all of the members.  Without a signed Operating Agreement how can the members prove the share of the LLC owned by each member?  If one or more members are to contribute money or property to the LLC then member(s) their obligation to contribute must be set forth in the Operating Agreement.  Arizona LLC law says that a person is not obligated to contribute money or property to the LLC unless the member agrees to do so in writing.

To learn more about the very important document read my articles called “Your LLC Needs an Operating Agreement” and the “Arizona LLC Operating Agreement FAQ.”

Section 5.4 Books and Accounting

As a matter of sound financial practice, the company should keep accurate financial books and records. Unless somebody in the company has accounting or bookkeeping experience and will keep the books, I recommend that the company purchase QuickBooks software to keep its financial books. The installation process allows you to set up a chart of accounts typical of the type of business.

Unless the company will not write many checks, I also recommend that the company purchase preprinted checks and that it print all checks directly from QuickBooks. Once you configure QuickBooks and if you use it to write all checks, the company will have accurate financial books and outside accounting expenses, if any, will be greatly reduced because the company merely gives its accountant a copy of its QuickBooks file, which the accountant can use to easily prepare any tax returns for the company.

Section 5.5 Hire an Accountant

Proper accounting and bookkeeping is critical both for financial and tax reasons. Whether the company engages in an active business with employees or simply holds title to one rental home, the company must keep proper books and records. Your company’s financial life will be much simpler and less costly if the company hires an experienced accountant from day one to:

a. Assist in setting up a good bookkeeping system with a good accounting software program like QuickBooks,

b. Advise the company within the first 75 days after its formation as to which of the four possible methods of federal income tax (disregarded entity, partnership, C corporation or S corporation) is best for the company and its members,

c. Prepare and file the proper IRS form to elect the method of taxation that is best for the company and its members;

d. Answer bookkeeping and accounting questions from time to time during the year to avoid bookkeeping errors,

e. Prepare and file any required federal and state tax returns.

An all too common method of bookkeeping is the box method where all records and receipts of income and expenses are keep in a box and given to the accountant a week before the due date of the tax return. Accountants hate this method and will charge you more for their services because of the disorganization and the extra time needed to clean up the mess.

The best method of bookkeeping is one that is maintained on a good software program that is overseen by an accountant. Your accountant will reward you with a lower fee when all of your yearly records are in proper order and given to the accountant on a CD as a computer file rather than a mass of unorganized papers in a box.

Section 5.6 Accountants Recommended by Richard Keyt

If you need a referral for a good Arizona Certified Public Accountant, see “Professionals We Like.” Every LLC that has substantial income or expenses must consult with a good CPA and use him or her to prepare the LLC’s federal and state tax returns.

We also recommend that you hire a good bookkeeping service to go over your QuickBooks data on a regular basis and keep it up to date with income and expenses allocated to the proper QuickBooks accounts. For many years KEYTLaw, LLC, has used the bookkeeping services of Joy Tuttle, CPA, of CPA for Hire, P.C., 33755 North Scottsdale Road #130, Scottsdale, Arizona 85266; Phone 480-437-9022 to keep our QuickBooks accounting data in proper order.

Although Joy is a CPA, she and her company do not provide CPA or tax preparation services. CPA for Hire is a QuickBooks and bookkeeping consulting firm. They can do some or all of your actual QuickBooks data entry either remotely over the internet or by sending a bookkeeper to your office. Once a month a CPA for Hire bookkeeper comes to our office and reviews our data entry for the prior month and corrects any data entry errors we have made. If we are not sure how to handle a bookkeeping item at any time, we call our CPA for Hire bookkeeper for the answer.

Once a year shortly after the end of the calendar year Joy Tuttle reviews our books for the just ended year and makes sure everything is ready to give our QuickBooks file to the CPA who prepares our tax return. I highly recommend that you use QuickBooks for small business accounting and CPA for Hire as your part-time professional bookkeeper.

Section 5.7 Recordkeeping Requirements

Arizona Revised Statutes Section 29-607.A requires all Arizona LLCs keep all of the following records at its known place of business: (i) a current list of the full name and last known business, residence or mailing address of each member, (ii) a copy of the Articles of Organization and all amendments, (iii) a copy of its written Operating Agreement, all amendments thereto and any prior written Operating Agreements no longer in effect, (iv) copies of any written agreement that evidences a member’s obligation to contribute capital to the company, (v) copies of the LLC’s federal, state and local income tax returns and reports, if any, for the three most recent years, and (vi) copies of any financial statements of the limited liability company for the three most recent years.

Section 5.8 Members’ Right to Inspect Company Records

Arizona Revised Statutes Section 29-607.B law also gives each member of the company the right to inspect and copy: (i) all of the company’s records mentioned in the preceding Section, and (ii) other information regarding the affairs of the company as is “just and reasonable for any purpose reasonably related to the member’s interest.”

Section 5.9 How the Company Should Sign Contracts

When entering into contracts, use care to indicate that the contracting party is the LLC.  The company’s legal name must appear in the beginning of the contract where the parties names are set forth.  Make sure the LLC’s full legal name appears as the contracting party.  For example, if the LLC were named World Wide Widgets AZ, LLC, then it should be designated as a party to the contract in this way:  World Wide Widgets AZ, LLC, an Arizona limited liability company.

The failure properly designate the LLC as a party to the contract, including in the signature block where the LLC’s representative signs, could cause the signer to become legally liable as the party to the contract.

The following examples illustrate how the signature block for World Wide Widgets AZ, LLC, on legal documents should appear depending on whether the Manager is a person, a company or a trust:

MEMBER MANAGED SIGNATURE BLOCK WHEN A MEMBER IS A PERSON

World Wide Widgets AZ, LLC, an Arizona limited liability company

By: ___________________________
Homer Simpson, Member

If the company has more than one member that is a person, substitute the name(s) of the other member(s) in place of Homer Simpson’s name in the above signature block when another member signs contracts on behalf of the company.

MEMBER MANAGED SIGNATURE BLOCK WHEN THE MEMBER IS A TRUST

Assumption: John Q. Smith as Trustee Is a Member

World Wide Widgets AZ, LLC, an Arizona limited liability company

By: __________________________
John Q. Smith, as trustee of the John Q. Smith Family Trust under Agreement Dated
January 1, 2005, Member

MEMBER MANAGED SIGNATURE BLOCK WHEN THE MEMBER IS A LIMITED LIABILITY COMPANY

Assumption: Big Widgets, LLC, Is a Member

World Wide Widgets AZ, LLC, an Arizona limited liability company

By: Big Widgets, LLC, an Arizona limited liability company, Member

By: _______________________
John Q. Smith
Its: (Manager or Member)

MANAGER MANAGED SIGNATURE BLOCK WHEN THE MANAGER IS A PERSON

World Wide Widgets AZ, LLC, an Arizona limited liability company

By: ___________________________
Homer Simpson, Manager

If the company has more than one manager that is a person, substitute the name(s) of the other manager(s) in place of Homer Simpson’s name in the above signature block when another manager signs contracts on behalf of the company.

MANAGER MANAGED SIGNATURE BLOCK WHEN THE MANAGER IS A CORPORATION

Assumption: Big Widgets, Inc., is the Manager

World Wide Widgets AZ, LLC, an Arizona limited liability company

By: Big Widgets, Inc., an Arizona corporation, Manager

By: _______________________
John Q. Smith
Its: (insert title of signer)

MANAGER MANAGED SIGNATURE BLOCK WHEN THE MANAGER IS A LIMITED LIABILITY COMPANY

Assumption: Big Widgets, LLC, Is a Manager

World Wide Widgets AZ, LLC, an Arizona limited liability company

By: Big Widgets, LLC, an Arizona limited liability company, Manager

By: _______________________
John Q. Smith
Its: (Manager or Member)

MANAGER MANAGED SIGNATURE BLOCK WHEN THE MANAGER IS A TRUST

Assumption: John Q. Smith as Trustee Is a Manager

World Wide Widgets AZ, LLC, an Arizona limited liability company

By: __________________________
John Q. Smith, as trustee of the John Q. Smith Family Trust under Agreement Dated
January 1, 2005, Manager

Caution: Members who are not managers do not have the legal power or authority to sign contracts or cause the company to enter into obligations. Only a manager has those powers. A member who exercises power on behalf of the company not given to the member will be personally liable for the consequences. Arizona Revised Statutes Section 29-652 states:

“All persons who assume to act as a limited liability company without authority to do so are jointly and severally liable for all debts and liabilities incurred by the persons so acting.”

Section 5.10 Can the Company Engage in More than One Activity?

The Articles of Organization do not limit the company’s activities. It can engage in any activity that is not illegal. This means that the company can own and operate any number of unrelated businesses and any number of assets.

It may also operate and own assets or operate a business in any or all of the other forty-nine states in the United States. For example, the company could own five rental homes and operate a nightclub that serves liquor. Whether it is prudent to own and operate multiple businesses and assets is a question you should always consider before you have the company enter into a new business activity or acquire an asset that has substantial value. The company should always consider whether to operate a new business or acquire an asset with substantial value in the company or in a new separate company formed specifically to operate the new business or own the new valuable asset.

Section 5.11 How Should the LLC Hold Title to Assets?

The company should hold title to its assets as follows:

<legal name of the llc>, LLC, an Arizona limited liability company

Section 5.12 Arizona Trade Names

An Arizona trade name is the name under which an Arizona company operates its business in Arizona. When the ACC approves the company’s Articles of Organization, its legal trade name will be <legal name of the llc>, LLC. The company does not have to register its trade name (legal name) with any state agency other than the ACC. Neither the Arizona Corporation Commission nor the Arizona Secretary of State will allow another Arizona company or an out of state entity that wants to do business in Arizona to use a company name or  a trade name that is the same as the company’s legal / trade name.

Section 5.13 Trademarks & Service Marks

If your company will engage in interstate commerce (do business in two or more states) it may need one or more federally registered trademarks or service marks. A trademark identifies a product and a service mark identifies a service. Federally registered marks protect the marks in all fifty states even if the company is only using the marks in two states.

For more information about trademark law see the KEYTLaw trademark website

Section 5.14 Copyrights

If the company will be creating any works such as website content, articles, stories, images, pictures, graphics, music or videos, I urge the company to register the copyright to the works with the U.S. Copyright Office. Without a registered copyright, the company has few, but very expensive options when somebody infringes on its copyrights. It can sue to stop infringement, but cannot get any money unless it can prove lost profits and even if the company wins in court, it cannot get its attorneys fees.

With a registered copyright, however, the company has a very powerful weapon to use against infringers. The company can ask the court to award statutory damages of up to $150,000 for each infringement and get attorneys fees when it wins in court. I urge the company to register all of its copyrights if it wants to protect its intellectual property.

For more information about copyright law go the U.S. Copyright Office website.

Section 5.15 Arizona DBA or “Doing Business As”

Sometimes an Arizona limited liability company may operate its business or hold itself out to the public under a name that is different from its ACC approved legal name (trade name). When this happens, we commonly refer to the operational name as a “doing business as” name or a “DBA” or a “fictitious name.” It the company intends to use a DBA, it should first register the trade name with the Arizona Secretary of State, the state agency that is responsible for overseeing trade names. Registration is not required by Arizona law, but it provides three important benefits:

a. The ACC will not allow another company to form in Arizona with the same trade name or allow a foreign entity to register to do business in Arizona under the same trade name,

b. The Arizona Secretary of State will not allow another person or entity to register the same trade name, and

c. Registration is notice to the world that the company is the owner of the trade name.

To learn more about Arizona trade names go to the Arizona Secretary of State’s Trade name and Trademark Handbook.

Section 5.16 How to Search the Arizona Secretary of State’s Database of Registered Trade name.

To see if a trade name is registered in Arizona or to search for the name of the holder of an Arizona trade name in the Arizona Secretary of State’s trade name database.

Section 5.17 How to Register an Arizona Trade Name / DBA

If your LLC uses one or more trade names that are different from its legal name, the LLC should register the trade name with the Arizona Secretary of State.  Registered trade names give the owner of the trade name the legal right to prevent other parties from using the trade name in Arizona.

Registering a trade name in Arizona is very simple. You merely complete the one page Application for Registration of Trade Name and file it with the Arizona Secretary of State with a check for $10.  In lieu of using the paper trade name application you can register a trade name using the Arizona Secretary of State’s online trade name application system.

Section 5.18 How to Transfer Real Estate to the LLC

If the new limited liability company will hold title to real estate, the current owner(s) of the real estate must sign a deed conveying the property to the LLC and the deed must be recorded with the County Recorder of the county in which the real property is located. The deed must correctly identify the current owner(s) and the legal description of the property.

We can prepare a deed to transfer your land to your LLC.  To hire us to prepare a Special Warranty Deed do the following:

  • Complete our Special Warranty Deed questionnaire and pay for your deed by following the payment instructions at the end of the email message we will send you when you submit the questionnaire.

After paying for your deed and completing the questionnaire real estate attorney Richard C. Keyt will prepare your Special Warranty Deed and email an Adobe .pdf file to you for signing and notarization.  We will also send you a letter to mail to the County Recorder to record the deed.

Warning: Do not use a Quit Claim Deed to transfer real estate to your LLC because it voids the title insurance.  Use a Special Warranty Deed.

Section 5.19 How to Prevent the Loss of Title Insurance on Real Property Transferred to the Company

Most purchasers of Arizona real estate obtain title insurance on the real property that insures that the buyer has good title subject only to the exceptions listed on Schedule B of the policy. If the owner of real property conveys the real property to the company, the company will not be insured under the owner/transferor’s title insurance policy and the valuable insurance coverage of the transferor’s title insurance will be lost to the company unless the company takes appropriate action to preserve coverage.

Before or shortly after recording a deed that conveys real property to the company, the manager of a manager managed LLC or a member of a member managed LLC should contact the title insurance company that insured the title to the real property when it was acquired by the transferor and arrange to obtain an endorsement to the transfer’s title insurance policy that names the company as an additional insured. The endorsement causes the company to become insured under the transferor’s title insurance policy. Without this type of endorsement, the company will not have title insurance for real property conveyed by a member to the company and if there is a title insurance claim, the claim may not be covered by title insurance. This type of endorsement generally costs $75 – $100 and is routinely issued by title insurance companies.

Most title insurance companies will issue the endorsement if a member or manager sends a copy of the recorded deed conveying title to the company to the transferor’s escrow officer with a request that the title insurance company issue an endorsement to the transferor’s title insurance policy that names the company as an additional insured as of the effective date of the transferor’s policy. If, however, the company has members who were not insured under the original title insurance policy, the title insurance company may decline to issue the endorsement without an additional premium.

Important Note About Title Insurance: If the title insurance policy that insures the owner’s title to the real property to be transferred to the company is an American Land Title Association (“ALTA”) 2006 owner’s title insurance policy, this policy expands the definition of the insured. An ALTA 2006 policy expressly includes the insured’s wholly named entity within its definition of insured. Wholly owned means that all members of the LLC are named as insured under the policy. The named insured’s wholly owned entity is entitled to the benefits of the policy without the need for an endorsement to the policy. No longer will the named insured jeopardize their policy benefits by estate planning transfers. A trustee or beneficiary of a trust created by the named insured for estate planning purposes is defined to be an insured. Moreover, transfers between an insured and their wholly owned entity do not jeopardize coverage. No longer will the named insured jeopardize their 2006 title policy benefits by transferring title to a wholly owned entity.

Section 5.20 Title-Insurance Endorsements for Limited Liability Company Transactions

For an excellent article that explains why limited liability companies that own real estate need title insurance for their properties, I recommend that you read John C. Murray’s (Vice President of First American Title Insurance Company) article called “Title Insurance For Limited Liability Company Transactions,” which states:

The best solution may be for the grantee LLC to request an ‘additional insured’ endorsement from the title insurer (in those jurisdictions where it is available), which would be effective as of the date of the conveyance. This endorsement specifically amends the existing owner’s policy to add the LLC as a named insured. The cost of the endorsement is usually nominal ($100 to $300) and many title insurers will routinely issue the endorsement for successor LLCs as well as for trustees for inter vivos trusts, who are acquiring title from the insured owner(s). The title insurer will want to satisfy itself that, from an underwriting standpoint, no greater risk will occur as the result of the transfer. However, the coverage provided by the additional insured endorsement is no greater than that provided under the original policy, and is subject to all the defenses available to the title insurer under the original policy. For example, there is no protection for the additional insured if the conveyancing deed is itself defective.”

I have found that many escrow officers and escrow/title company personnel are not familiar with the fact that an LLC can obtain title insurance after the owner(s) of the LLC convey the real property to the company. If the title insurance person you are dealing claims that LLCs cannot get an endorsement on the owners title insurance policy issued to the original owner(s), give that person a copy of this Section and ask him or her to read John C. Murray’s article linked to above. John C. Murray also wrote:

A more prudent course of action for an LLC . . . may be to obtain a new owner’s title policy at the time of the conveyance. The LLC would clearly become the insured party, the status of title would be identified and insured through the date of closing, the validity of the transfer would be insured, and the property would be insured for its current value. However, obtaining a new owner’s policy may be expensive (although a reissue rate may apply).

C. The Non-Imputation Endorsement.

If the LLC procures a new owner’s policy, it should request a “non-imputation” endorsement from the title insurer if the grantee LLC contains members other than the original grantors. This will prevent any subsequent denial of coverage by the title insurer based on policy defenses for matters “created, suffered, assumed or agreed to” by the insured and for matters not available in the public records or known only to the insured and not to the title company. The non-imputation title endorsement provides assurance that the title insurer will not deny coverage under the policy based on matters known to an outgoing member being imputed to an incoming member by operation of law, or that the title insurer will not deny coverage under the policy based on matters known to the insured LLC being imputed to a new member. In connection with the issuance of this endorsement, the title insurer would require that a non-imputation affidavit be executed by all of the current members of the LLC, certifying to the title company that to the best of their knowledge no matters exist that would affect title to the property.

Title insurance companies that issue CLTA policies can issue CLTA endorsement 107.9, which is the additional insured endorsement issued by title insurance companies that use the CLTA.   See “Do I still have Coverage if I transfer my property to.” This article says “That transfer of ownership, John and Sally Smith conveys (oftentimes through a Quit Claim deed) to a LLC they also own, is not a transfer done through operation at law. To ensure that title insurance coverage continues on the property, John and Sally should contact us to discuss obtaining an additional insured endorsement to the current policy and/or discuss obtaining a new policy depending on the facts and circumstances supporting the transfer. Without doing that, they risk terminating title insurance coverage on the property.”

The endorsement you want added to your current title insurance policy is a CTLA endorsement 107.9.  See also “Title Tip: How to Extend Coverage Under an Owners Policy” and “Transfers after Acquisition:  What Does It Mean for Your Title Insurance Policy?

Section 5.21 Insuring Real Property Acquired by the Company

Whenever the company acquires any real property, the manager must also contact an insurance company or insurance agent and arrange to obtain liability, fire and all other appropriate types of insurance coverage issued in the name of the company effective as of the date the company acquires title. Because the company will be the owner of the real property, it must have adequate insurance in its name. If the company acquires real property and does not have all appropriate insurance coverage in the company’s name (evidenced by a written proof of insurance), the real property and the company will be uninsured.

Section 5.22 Due on Sale Clauses in Real Estate Loan Documents

If real property conveyed to the company is subject to a lien that secures a promissory note or a loan, the note, the lien that secures the debt and/or the loan documents may contain a “due on sale clause,” which is a provision that gives the note holder an option to accelerate the balance due under the note and call the loan if the owner of the real property transfers all or any interest in the real property. Therefore, if any real property to be conveyed to the company is subject to any loan documents that contain a due on sale clause, do not transfer title to the real property to the company unless the transferor and the company get written consent to the transfer from the note holder or lender or unless all parties are willing to assume the risk that the note holder or lender may accelerate the balance owed and require that the debt be paid in full.

Although your loan documents may contain a due on sale or transfer clause in forming 6,400+ LLCs, including 4,000+ LLCs to hold real estate, I am not aware of a single instance where a lender notified my LLC client that it would enforce a due on transfer clause.

Section 5.23 Doing Business Outside Arizona

The company may engage in business in any state in the United States. Before doing so, however, the company should consult with an experienced attorney in the state in which the company proposes to engage in business to make sure the company complies with the laws of the state. Every state requires that a company formed outside its border (a “foreign company”) register or qualify to do business in the state. When a foreign company must register to do business in another state is a question of fact and it may vary from state to state. A foreign company may also have to obtain appropriate licenses and permits from state and local agencies to conduct its business in another state.

The penalties for failing to register as a foreign company to do business in another state can be minor or severe, depending of the state. For example, California charges a $100/day penalty for failing to register. Some states may prohibit a non-registered foreign company from defending itself in a lawsuit filed in a court in the state.

The main reason a state wants foreign companies to register to do business within the state is so that the state can look for tax returns and tax payments from the foreign company with respect to applicable state taxes. By registering to do business in a state, the foreign company becomes a target on the state’s radar scope for tax returns and tax payments.

If you need assistance in registering your company to do business in another state, please call me at 480-664-7478 or call my legal assistant at 602-906-4953, ext. 5. We can obtain, prepare and file the documents needed to register your Arizona limited liability company to do business in any of the other forty-nine states.