by Richard Keyt, Arizona LLC attorney who has formed 9,500+ AZ LLCs

I formed my first Arizona limited liability company for a client the first day Arizona’s LLC law became effective in October of 1992.  Since then I have formed 9,500+ Arizona LLCs.  People love my LLC formation services, which is why I have 400 five star Google and Facebook reviews.  See the contents of my three LLC formation packages: Bronze ($497), Silver ($897) & Gold ($1,397), the confidential LLC. Our Gold LLC is for people who do not want their name and address on the Arizona Corporation Commission’s public records.  To buy your LLC complete my online LLC formation questionnaire or call me and give me your LLC info.

If you have questions about forming an Arizona LLC call me, Richard Keyt, at 480-664-7478 or go to www.keytlaw.com/rk to book a free phone, in office or Zoom video meeting.  You can also call my son Arizona LLC attorney and former Arizona CPA Richard C. Keyt at 480-664-7472 or book a free consultation at www.keytlaw.com/rck  We don’t charge to answer questions about LLCs

In practicing Arizona LLC law since 1992, I have seen people make the same LLC mistakes over and over.  Unfortunately, for some LLC owners, when they come to me with a problem, it is too late to fix the problem easily.  The purpose of this article is to alert you to the top 15 mistakes LLC owners make that can bite an LLC owner in the owner’s economic butt so you will not make any of the mistakes with your LLC.  I recommend that you also read my article called “10 Critical Facts Every LLC Owner Must Know.”

Arizona LLC Attorney Richard Keyt’s List of 15 Common LLC Mistakes

Here are the reasons this is a bad idea:

(a)  Minors do not have the legal capacity to sign contracts, including the LLC’s Operating Agreement.  It is possible that third parties the LLC deals with such as a lender, a bank, or a title insurance company may want to see a signed copy of the Operating Agreement, but the only way the minor can sign the Operating Agreement is if a parent gets a court order that appoint the parent as the conservator of the child’s assets.  This could easily cost $2,500 – $5,000 in attorneys fees and court costs.

(b)  The child would actually own the membership interest under Arizona’s Uniform Gifts to Minors Act, which means that at age 18 the child becomes the sole owner of the membership interest.  This means after age 17 the child could sell or transfer the membership interest or the child could get sued and have his or her creditor attack the membership interest.  If the child were to marry the child could convert the membership interest to community property and the new spouse would then own one-half of what the child owned.

If you think the child’s membership interest currently has or might one day have a substantial value, the better way to give the interest to the child is to create an irrevocable trust for the benefit of the child.  This is an especially wonderful gift and estate tax-saving device.  Wouldn’t it be wonderful to give ten percent of your new LLC with little value to an irrevocable trust you create for the child so that one day when the 10 percent interest is worth a million dollars you would have avoided the gift and estate taxes that would otherwise have been incurred if you made a lifetime gift or a post-death gift of the same amount to the child?  If you need one of these trusts,  call me.  I am also an Arizona estate planning attorney.

The LLC must maintain proper accounting and bookkeeping records.  The lack of good books will be used against the LLC’s owner if somebody sues to pierce the veil and hold the owner liable for the LLC’s debt.  Good books are needed to prepare the LLC’s tax return or to prepare the Schedule E for owners who report income and deductions on their IRS Form 1040.  This is really a no brainer.  Buy Quickbooks as soon as you form your company.  Get somebody like Joy Tuttle, CPA, 33755 North Scottsdale Road #130, Scottsdale, Arizona 85266; Phone 480-437-9022, to set up your Quickbooks and show you how to use it.  Every year you will be able to make a tax preparer’s file to give to your tax preparer who will use the information in the Quickbooks file to prepare the tax return.  The bookkeeping can quickly get out of hand if you fail to set up your bookkeeping software from day one and faithfully enter all income and expense information into it.

This is another common problem I see.  If your LLC owns your rental property and the house burns down the insurer will deny coverage unless the LLC is the named insured on the policy, an additional insured named in the policy or there is some language in the policy that causes the LLC’s real estate to be covered.  Don’t rely on that last possibility.  If your LLC owns real estate or any other valuable asset talk to several business insurance agents to get their recommendations as to the type of policies, coverage amounts, and other policy issues, and then purchase the appropriate amount of insurance.

Arizona LLC law says that a member of an Arizona LLC is not required to make any contributions of money or property to the LLC unless the member agrees to do so in a written document signed by the member.  I have seen many companies where one or more members refused to contribute money to the company despite the begging and pleading of another member or other members.  The most common situation where this arises is when two families decide to purchase a home to fix and flip or to rent.  One family gets a loan to purchase the home, but the other family is not on the hook for that loan.  Things don’t work out and the second family stops contributing one-half of the money needed to pay the negative cash flow.  The family that borrowed the money is obligated to make the mortgage payments without any help from the second family.  If you want to create a legal obligation on a member to contribute money or property to the LLC then put the payment amounts and dates in an Operating Agreement and get all the members to sign it.

The solution to this problem is to include each owner’s future capital contribution amounts and due dates in the LLC’s Operating Agreement and have all the owners sign it. Once signed each owner can be sued for breach of contract and be liable for the unpaid contribution amount plus attorney fees and costs.  Important Note:  I know from talking to many LLC owners that if the Operating Agreement with the contribution requirements is not signed immediately after the formation of the LLC it is unlikely to ever be signed in which case no owner will be legally obligated to pay any money or give any property to the LLC.

Solution:  Purchase Richard Keyt’s Operating Agreement customized for your LLC.  We will include language in the Operating Agreements that obligates some or all members to contribute money or property to the LLC.  We charge $297 for an Operating Agreement for a single-member LLC or a husband and wife-owned LLC and $797 for an Operating Agreement for a multi-member LLC.

Problem:  Arizona married residents incorrectly think that if they form an LLC by filing Articles of Organization that does not name their spouse as a member the married person named as a member in the AOO will own his or her interest in the company as separate property.  Wrong!  Arizona community property law provides that all property acquired during marriage by a married person who is a resident of Arizona is community property unless the property is acquired by gift or from an inheritance.  This means that the spouse who is not named in the Articles of Organization or any other LLC document as a member automatically owns an undivided one-half community property interest in the total amount of the company owned by the spouse who is named in the documents as a member.

If an Arizona resident who is married wants to own his or her interest in an Arizona LLC as separate property that person must prepare a Disclaimer of Membership Interest and get the non-owner spouse to sign the document.  By signing the disclaimer the non-owner spouse acknowledges that the other spouse owns all of the membership interest as separate property.

If you need a Disclaimer of Membership Interest go to our secure online store and purchase our downloadable Disclaimer of Membership Interest fill in the blanks form.

One of the reasons people create a revocable living trust is to avoid probate.  More often than not when I ask clients with a trust and an LLC if their trust is the owner of their LLC they say no.  The trust must be the owner of the LLC to avoid probate on the death of a trustmaker.  This means the person(s) who is the owner of the LLC has to:

(a)  Sign a document that assigns the LLC membership interest to the trust.

(b)  File an amendment to the Articles of Organization on file with the Arizona Corporation Commission to change the member from the person to the trust.

(c)  Amend the Operating Agreement to show that the member is the trust, not the person and have the trust and all the other members sign the amended Operating Agreement.

To hire us to prepare one or all of the documents needed document a transfer of a membership interest from one owner to new owner or to the LLC, go to our secure online store and purchase your desired services.

All people who own an interest in an LLC will die.  Almost every person who owns an LLC would like his or her spouse, family or loved ones to inherit the company when the owner dies.  Unfortunately, few LLC owners plan for death and the orderly transfer of their LLC ownership to their desired heir(s).  The transfer can be simple (the LLC is owned by a trust) or the transfer can be a time-consuming, expensive, and public probate.

The day I wrote this article a lawyer on a list serve I follow said she had a client whose father died owning an Arizona LLC that had a bank account.  The bank refused to give control of the account to the deceased father’s daughter, his only heir.  The daughter will have to spend money to do a probate to get herself appointed personal representative of the estate so she will have the legal power to get control of the bank account.

Do your loved ones a big favor and plan for your death so you will know for sure that your desired heir(s) will inherit your LLC automatically without the need for a probate.  For more on this important topic read “3 Ways Your Loved One Will Be Harmed If You Own an LLC & Do Not Prepare for Death” and “Who Will Inherit Your Membership Interest in Your Arizona LLC When You Die?“

Solution for Arizona Residents Who Own an LLC:  Create a trust to own your LLC and other assets.  We are estate planning lawyers who prepare wills and trusts.  See the contents and prices of our estate plan with a trust.

LLC owners rarely document properly transfers of money and property to and from the company.  The member is free to transfer funds into the LLC at will, but the failure to characterize and document transfers can have too very bad consequences for the LLC and its owner.  If Homer Simpson wants to write a check to his LLC for $10,000 he can do so at any time.  Legally, the payment is either a capital contribution or a loan, but if the owner and the company do not properly characterize the payment as one or the other the IRS or a court may do so in a way that is adverse to the owner.

If the payment is a loan, the LLC should sign a promissory note with repayment terms and the members of the company should sign an Action by Unanimous Consent that contains a resolution approving the loan transaction.  The payment should also be reflect on the LLC’s books as a loan.  If the payment is a capital contribution, then the LLCs books should reflect that fact.  Whether a payment of money by the owner to the company is a loan or a capital contribution can have tax consequences.  Loan repayments are not taxable to the owner.  Owners need to properly document loans to prevent the IRS from taking the position that the payment by the owner to the LLC was a capital contribution.

The failure to properly document payments by LLC owners to the company can also be used by a court as one factor in favor of a finding that the company did not follow the formalities of Arizona LLC law and that the veil should be pierced to allow a creditor of the LLC to impose a debt of the LLC on its owner.  If you are ever sued and the plaintiff is trying to pierce the veil and hold you liable for your LLC’s debt to win you must prove that your LLC followed most of the legal formalities used by the jury or the court in ruling yes or no on the issue.

I see this all the time.  The primary reason owners of investment rental property need an LLC is because they do not want to be the defendant in a lawsuit arising from a breach of the lease, somebody being killed or injured or any other claim that might arise from the property.  It is fundamental that the protection offered by the LLC does not apply and the LLC is a complete waste of money if the real estate is never transferred to the LLC.

Instant replay of the preceding mistake.  If the LLC has title to the real estate and the landlord on the lease is the owner of the LLC guess who is will be the defendant on a breach of lease lawsuit?  You got it.  The owner.  The lease must be between the LLC as landlord and the tenant.  If the owner signed a lease before the real estate was transferred to the LLC then the owner needs to prepare a new lease that is identical to the old lease except it names the LLC as the landlord and has a new start date and says the old lease is cancelled.  The owner should then tell the tenant there is a new owner of the land, i.e., the LLC, that all future rent checks must be payable to the LLC and get the tenant to sign the replacement lease.

I recommend that every multi-member LLC (other than a husband and wife owned LLC) have a Buy Sell Agreement signed by all of the owners.  The Buy Sell Agreement contains the owner’s exit strategy.  Without an exit strategy the members of a multi-member LLC are stuck together for life.  Arizona’s LLC law does not provide any way for LLC owners to carry out a member divorce other than through a very expensive court dissolution procedure that will kill the LLC.  We know that about one half of the people who marry will get divorced.  The statistics for business divorces is higher.  The lack of an exit strategy is one of the most common causes of a very expensive lawsuit between LLC owners who want a company divorce.  For more on this subject read “A Multi-Member LLC’s Most Important Document” and my Buy Sell Agreements website.

An LLC can be taxed one of four ways for federal income tax:

  1. A sole proprietorship if it has one member or two members who are married to each other and own their interests as community property.  This is the default tax method for single-member LLCs.
  2. A partnership if it has two or more members.  This is the default tax method for LLCs that have two or more members.
  3. S corporation if the member file a timely IRS form 2553 with the IRS.
  4. C corporation if the members file an IRS form 8832 with the IRS.

Many times one of these four ways is best, but if the members don’t consult with a knowledgeable tax advisor the company may not be taxed the way that will save the most federal and state income taxes.  Consult with an experienced tax advisor immediately after forming a new LLC.

This is the most common mistake I see over and over again.  The single most important legal formality of an Arizona LLC is the requirement that all of the LLC’s income must go into its bank account and all of its expenses must be paid out of the LLC’s bank account.  If the LLC is short of cash, the owner(s) should write a check payable to the LLC and deposit the funds in the LLC’s bank account so the LLC can use the funds to pay its expenses.  Don’t forget to document properly that the transfer of funds is either a capital contribution or a loan.

The reason this is potentially the worst LLC mistake is because in a lawsuit brought by a plaintiff to pierce the veil and hold the owner liable for the debts of the LLC the failure to follow this rule could be the primary reason the court pierces the veil and holds the owner liable for the LLC’s debts.  Here are the rules and take care to always follow them:

(a)  All income payable to the LLC must be deposited into the LLC’s bank account.

(b)  No income payable to the LLC should be paid to the owner and deposited into the owner’s bank account.

(c)  The LLC must pay all of its expenses from its bank account.

(d)  The owner may not pay any of the LLC’s bank account with the owner’s funds.

(e)  If the LLC needs money, the owner should pay the funds to the LLC as a loan or a capital contribution.

(f)  If the owner needs money and the LLC has excess funds, the LLC should write a check payable to the owner and the owner should deposit the check in the owner’s bank account.  The LLC must reflect on its books that the payment is either a return of capital, a distribution of profits or a repayment of a loan.

Arizona LLC law does not require Arizona LLCs or PLLCs to have an Operating Agreement, but we recommend that the members of ALL Arizona LLCs sign an Operating Agreement that eliminates all of the 20 harms described in our article called “Protect Yourself: 20 Ways You Can Be Harmed if Your Arizona LLC Lacks a Well Written Operating Agreement.

Do yourself a favor and read this article to learn why well drafted LLC Operating Agreements are so important.  The issue is not does your LLC have an Operating Agreement?  The issue is does it have a well-written Operating Agreement that eliminates all of the harms described in the article.

What is an LLC Operating Agreement?

An LLC Operating Agreement is a contract between the LLC and all of its owners (called members) and managers (if the LLC is manager managed) that names all members and managers, the percentage of the LLC that each member owns, if a member is required to contribute money or property to the LLC, how meetings are called and when action cannot be taken without the approval of a majority or a super majority of the members or all of the members.  The Operating Agreement sets the rules for governing the LLC.

Hire Us to Prepare a  Custom Arizona LLC Operating Agreement

We want to prepare a custom Operating Agreement for your company for $297 (single member and married couple LLCs) or $797 (multi-member LLCs).  To hire us complete our online Operating Agreement questionnaire.  We will send an email to all members that has the Operating Agreement attached so each member can digitally sign the OA using DocuSign.  When all members have signed DocuSign will send an email to all members that has the fully signed Operating Agreement attached.

Two Easy Ways to Hire LLC Attorney Richard Keyt to Form Your Arizona LLC

First go to our LLC package comparison page to see the services we provide with our three LLC packages.  We’ve made it very easy to hire Richard Keyt (9,500+ 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

Most people hire us to form their new LLC by calling one of the people listed below and giving their LLC and credit card information over the phone.

  • Richard Keyt – 480-664-7478
  • Richard’s son LLC attorney and former CPA Richard C. Keyt – 480-664-7472
  • KEYTLaw LLC legal assistant Amanda Duran - 480-664-7846

Option 2 – Online 24/7

Call 480-664-7478 NOW if you want an LLC to: (1) prevent creditors of your business or investment real estate from taking your personal assets, and (2) asset protect your personal assets from debts, liabilities and lawsuits.