The Arizona Limited Liability Company – Why It’s Useful to Entrepreneurs Like You
When you think of a “corporation,” or “entity,” or “investment vehicle,” or “corporate entity,” you are thinking of a corporation. A corporation can be defined as “a legal entity that is separate and distinct from its owners.” This definition is important on two fronts: first, it is separate from the owners. Second, it is distinct from its owners.
As to its separate existence, we tell clients that their corporate entity should be thought of as another person—after all, the root words “corpor” and “corp” come from the Latin “corpus,” meaning “body.” So although you own the corporate entity and run its every day operations, it is a separate corpus from you. Importantly, liability is also (depending on the facts) separate from you. As to the distinctness of a corporate entity from its individual owner(s), the corporate entity must act in such a way so that it follows “corporate formalities” and is truly a separate entity from its individual owner(s). We will discuss those formalities below.
There are four types of for-profit corporate entities available to business owners in Arizona: (1) a general partnership, (2) a limited partnership, (3) a corporation, and the subject of today’s article, (4) a limited liability company (“LLC”).
The LLC was first permitted in Arizona with the passage of the Arizona Limited Liability Company Act, A.R.S. § 29-601, et seq. (“Act”) in 1992. To form a LLC, one must fill out or draft forms setting forth information about the LLC (like, say, the name, among other things), submit these articles of organization with a payment to the Arizona Corporation Commission (“ACC”), which then approves or rejects the articles of organization, and if approved, publish the articles of organization. It’s a fairly simple but important process that tens of thousands of people do yearly. Anyways, the Act allowed the creation of Arizona LLCs, which are quite advantageous with regard to asset protection compared to corporations. Why?
Well, let’s say you get sued in your individual capacity by some jerk, and you lose the lawsuit. You now owe money to the him or her, who is now a creditor. With the judgment against you now, the creditor may proceed to Court and compel you to sell your stock in the corporation. The proceeds of that sale (possibly at auction) then go to the creditor to pay him or her what is owed. To sum it up, when you are the owner of a corporation, creditors can force the sale of your stock—your ownership
That’s not so with LLC’s. That same creditor will not be able to force you, the LLC owner—called a “member”—to sell your membership interest in the LLC. You are protected by statute (specifically, A.R.S. § 29-655). The creditor may be able to get to distributions from the LLC to the individual, but not to the ownership interests in the entity. Rather, the creditor only has the rights of an assignee of the member’s interest via what’s called a “charging order”. One can see, then, that an Arizona limited liability company affords its individual members better asset protection than a corporation.
Another reason why the Arizona LLC is beneficial to its owners as a corporate entity is that there is flexibility in how the members want the company to be taxed. Just as there are four kinds of corporate entities, there are four options for taxation of a LLC: (1) sole proprietorship (but only if there is but one member, or just two members, who are husband and wife); (2) under subchapter K of the Internal Revenue Code (“IRC”) (this is “partnership” taxation, which requires that there must be at least two members; (3) under subchapter S of the IRC; or under subchapter C of the IRC. You’ll want to talk to an attorney or your CPA to decide which is best for you. So, besides the fact that LLC’s provide more asset protection, they allow for flexibility in deciding how to be taxed.
Now, remember how important it is for your LLC to be an entity distinct from its owner(s)? Well the way you go about doing that is to follow what the courts call “corporate formalities.” Without these corporate formalities in place, the LLC is just a “shell,” out of which the owner(s) buy groceries, diapers and other personal items. Well if your LLC does not follow corporate formalities, and is considered a “shell,” then creditors can get to the assets by “piercing the corporate veil” of the weak LLC. So, what are the corporate formalities? Well, for an LLC the members should have in place a separate EIN and checking account (we help you get both); hold annual meetings of shareholders; hold annual meetings of the board of directors, take minutes; document meetings; file an annual report with the ACC (remember them?) and pay the yearly $45 fee. And, remember, only use corporate funds for corporate purposes!
If you have an idea, and you believe that idea can earn you money, once you decide to go forward and take action you’ll want to form your corporate entity. Beyond that, you should take pride in it, make it profitable, and grow it.
We at Neal Law Firm have represented hundreds of clients in the formation of their Arizona LLCs. Sure, people will tell you it’s simple and easy, but it is also easy to forget a step, or a corporate formality, and leave yourself wide open to liability. Please call us at (480) 699-7992 to discuss how an Arizona limited liability company can protect you.
