LLC Law Blog

Virginia Supreme Court Rules Death of LLC Member Transferred only Rights to Profits, Not Management or Voting Rights

Every person who is a member of an LLC will die, but few people take action while alive that will insure that the right person or people or entity inherits their membership interest in their LLC or that their heir(s) will become full members of the LLC after the LLC member dies. A November 5, 2011, Virginia Supreme Court case illustrates the problem that arises when the deceased member failed to take action to insure that his daughter would become a member of the LLC of which he owned 80%.

The case of Ott v. Monroe involves a dispute between a 20% member and the daughter a deceased member who inherited the deceased member’s 80% interest in the LLC. This case is an excellent teaching tool for everybody who is a member of an LLC. The court ruled that the daughter who inherited the 80% LLC interest inherited only the right to receive 80% of the profits and distributions from the LLC and that she did not become a member of the LLC with any voting rights. The bottom line is that after the death of the 80% member the 20% member became the sole member of the company and the only person able to vote and control the LLC.

A member’s interest in an LLC consists of two types of interests. The first interest is a control interest, which is the member’s right to participate with other members in the management of the LLC’s affairs. The second interest is a financial interest, which is the member’s right to a share of the LLC’s profits and losses and right to receive distributions from the LLC. The general rule of Virginia and Arizona law is that a member may transfer only the member’s financial interest. The control interest in an LLC is personal to the member and cannot be transferred to another person or entity by the unilateral act of the member. Arizona Revised Statutes Section 29-732.A provides:

“The assignment of an interest in a limited liability company does not dissolve the limited liability company or entitle the assignee to participate in the management of the business and affairs of the limited liability company or to become or to exercise the rights of a member, unless the assignee is admitted as a member as provided in section 29-731. An assignee that has not become a member is only entitled to receive, to the extent assigned, the share of distributions, including distributions representing the return of contributions, and the allocation of profits and losses, to which the assignor would otherwise be entitled with respect to the assigned interest.” Emphasis added.

The failure to plan caused the minority member to obtain control of the LLC when the majority member died. This is a wake call for all people who are majority owners of an LLC. The failure of the majority member to plan could cause the loved one(s) who inherit the majority owners interest in the LLC to lose control of the company when the majority owner dies. Does your LLC’s Operating Agreement provide that the control interest of a deceased member transfers automatically to the member’s heirs(s)? Should it? The members of every multi-member LLC must decide if the control interest will or will not transfer automatically to an heir when a member dies. If the control interest is to transfer automatically after a death, the only way to cause it to happen is by having all of the members sign a document (preferably an Operating Agreement) that provides for the automatic transfer of the control interest when a member dies.

Do you know who will inherit your membership interest in your LLCs if you were to die? Will your heirs have to waste time and money in probate court? For more on this topic read my article called “Who Will Inherit Your Membership Interest in Your Arizona LLC When You Die?“

P.S. The Operating Agreement I prepare for every Arizona LLC I form contains a section entitled “Transfer of a Membership Interest on Death of a Member by a Transfer of Membership Interest Testament,” which provides in part:

“Notwithstanding anything herein to the contrary, if a Member dies after making a valid Transfer of Membership Interest Testament that names one or more people or entities (“Heirs”) to inherit all or a portion of the deceased Member’s Membership Interest, the following shall occur after the death of the Member:

a. Each Heir shall inherit the portion of the deceased Member’s Membership Interest stated in the Transfer of Membership Interest Testament.

b. An Heir inherits the right to receive profits, losses and distributions attributable to the inherited Membership Interest, but shall not become a Member and have any other rights of a Member unless and until all of the requirements of Section 7.1 other than subsection (i) are satisfied.”

Do you know what your LLC’s Operating Agreement says about transfers of the financial interest and the control interest after the death of a member? If not, do your loved ones a favor and read your Operating Agreement or if your LLC does not have an Operating Agreement, take action to have all of the members adopt an Operating Agreement that deals with what happens to a member’s interest after death.

The text of Ott v. Monroe follows.

OTT v. MONROE
Janet M. OTT v. Lou Ann MONROE, et al.
Record No. 101278.No. 101278.
November 04, 2011

PRESENT: All the Justices.

I. BACKGROUND AND MATERIAL PROCEEDINGS BELOW

Admiral Dewey Monroe, Jr. (“Dewey”) and his wife Lou Ann Monroe (“Lou Ann”) formed a Virginia limited liability company, L & J Holdings, LLC (“the Company”), which was governed by an operating agreement they executed in April 2003 (“the Agreement”). The Agreement provided that Dewey and Lou Ann were the sole members and that they held an 80% membership interest and a 20% membership interest, respectively. It also provided that Lou Ann would be the managing member and Joseph G. Monroe (“Joseph”) would serve as the successor managing member in the event of her death, disability, removal, or resignation.

Paragraph 2 of the Agreement provided that “

[e]xcept as provided herein, no Member shall transfer his membership or ownership, or any portion or interest thereof, to any non-Member person, without the written consent of all other Members, except by death, intestacy, devise, or otherwise by operation of law.” Paragraph 10(B) provided in relevant part that “[n]o Member shall, directly or indirectly, transfer, sell, give, encumber, assign, pledge, or otherwise deal with or dispose of all or any part of his Membership Interest now owned or subsequently acquired by him, other than as provided for in this Agreement.” Paragraph 10(C) provided in relevant part that, Paragraph 10(B) notwithstanding, “any Member ․ may transfer all or any portion of the Member’s Interest at any time to ․ [o]ther Members [or][t]he spouse, children or other descendants of any Member.”

Dewey died in 2004. Through a will executed prior to the formation of the Company, he bequeathed his entire estate to his daughter, Janet. After the will was admitted to probate, Janet asserted that Dewey’s bequest transferred his membership in the Company to her. She called a meeting of the Company, sending notice to Lou Ann, with the intent to remove Lou Ann and Joseph from their positions as managing member and successor managing member, respectively. Lou Ann responded that Janet had inherited only Dewey’s right to share in profits and losses of the Company and to receive distributions to which he would be entitled.

Janet proceeded with the meeting and putatively removed Lou Ann and Joseph, electing herself as the Company’s new managing member and electing Susan Shackelford as successor managing member in the event of her death, disability, removal, or resignation. Thereafter, Janet filed a complaint in the circuit court seeking declaratory judgment that she had inherited her father’s full membership in the Company and Lou Ann and Joseph had been validly removed from their positions. Lou Ann and Joseph filed a demurrer, again asserting that Janet had inherited only Dewey’s right to share in profits and losses and to receive distributions.

The court denied the demurrer and the case proceeded to a bench trial. At its conclusion, the court held that Dewey was dissociated from the Company upon his death by operation of Code § 13.1–1040.1(7)(a). Consequently, the court concluded that all his rights as a member to participate in the control of the Company’s affairs terminated and only the right to share profits and losses and to receive distributions survived to be inherited by Janet through his will. Accordingly, the court ruled that Janet was not a member of the Company and thus lacked the authority to remove Lou Ann and Joseph from their positions. We awarded Janet this appeal.

II. ANALYSIS

This appeal assigns error to the circuit court’s interpretation of the Agreement and the relevant statutes. Accordingly, we review the judgment de novo. Uniwest Constr., Inc. v. Amtech Elevator Servs., 280 Va. 428, 440, 699 S.E.2d 223, 229 (2010).

When interpreting a contract, we construe it as a whole. When its terms are clear and unambiguous, we give them their plain meaning. We harmonize its provisions and give effect to each of them when it reasonably can be done. Id. Similarly, we construe statutes as a consistent and harmonious whole to give effect to the overall statutory scheme. Virginia Electric & Power Co. v. Board of County Supervisors, 226 Va. 382, 388, 309 S.E.2d 308, 311 (1983). We apply the plain meaning of a statute unless its terms are ambiguous or doing so would lead to an absurd result. Covel v. Town of Vienna, 280 Va. 151, 158, 694 S.E.2d 609, 614 (2010).

Janet argues that the circuit court erred in ruling that Dewey was dissociated upon his death by operation of Code § 13.1–1040.1(7)(a) because that provision is preceded by the proviso, “[e]xcept as otherwise provided in the articles of organization or an operating agreement.” She asserts that Paragraph 2 of the Agreement constitutes such an exception and supersedes dissociation under the statute. FN 1. We disagree.

A. THE VIRGINIA LIMITED LIABILITY COMPANY ACT

We begin our analysis by examining the statutory framework governing Virginia limited liability companies, the Virginia Limited Liability Company Act, Code § 13.1–1000 et seq. (“the Act”). “The [limited liability company] is a hybrid entity, borrowing from both the corporate and partnership models” to combine a corporation’s limited liability for its owners with a partnership’s pass-through treatment for income tax purposes. S. Brian Farmer & Louis A. Mezzullo, The Virginia Limited Liability Company Act, 25 U. Rich. L.Rev. 789, 790 (1991). When the Act was enacted in 1991, federal tax regulations denied the pass-through treatment afforded partnerships if a business entity possessed three of the four principal characteristics of corporations: (1) perpetual existence, (2) central management, (3) limited liability of owners, and (4) free transferability of ownership interests. Id. at 813–15, 694 S.E.2d 609. Because limited liability was an indispensable characteristic of limited liability companies, the provisions of the Act were drafted to avoid the three remaining corporate characteristics. Id. at 815–21, 694 S.E.2d 609. Thus, the transferability of a member’s interest in a limited liability company is analogous to the transferability of a partner’s interest in a partnership.

When the Act was enacted in 1991, the Uniform Partnership Act expressly provided that

[a] conveyance by a partner of his interest in the partnership does not ․ entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled.

Former Code § 50–27(1) (Repl.Vol.1989). FN 2.

Implicit within this language was the recognition that a partner’s interest in a partnership comprises two distinct and divisible components. The first component, the control interest, encompasses the partner’s entitlement to participate with the other partners in the administration of the partnership’s affairs. The second component, the financial interest, encompasses only the sharing of profits and losses of the partnership and receipt of distributions from its accumulated income and assets. Under the statute, only the financial interest is alienable. Thus, the control interest in a partnership is personal to the partner and cannot be bestowed on another by the unilateral act of a partner even if the words of his conveyance do not expressly limit its scope.

The division of a partner’s interest into a control interest, which may not be transferred unilaterally, and a financial interest is mirrored in the Act. Both when the Company was formed and when Janet inherited through Dewey’s will, Code § 13.1–1039 provided that

[u]nless otherwise provided in the articles of organization or an operating agreement, a membership interest in a limited liability company is assignable in whole or in part․ An assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member. Such an assignment entitles the assignee to receive, to the extent assigned, only any share of profits and losses and distributions to which the assignor would be entitled. FN 3.

Thus, an assignee of a financial interest has no control interest in a limited liability company without becoming a member. Code § 13 .1–1040(A) provides the means by which the assignee of a financial interest may become a member: “Except as otherwise provided in writing in the articles of organization or an operating agreement, an assignee of an interest in a limited liability company may become a member only by the consent of” a majority of those members exercising the direct management of the company.

In light of this statutory background, we turn to Janet’s argument.

B. DIRECT INHERITANCE OF MEMBERSHIP IN A LIMITED LIABILITY COMPANY BY DESCENT OR DEVISE

Janet argues that she inherited Dewey’s membership directly by operation of his will. She asserts the Agreement permitted her to inherit directly because Paragraph 2 superseded Code § 13.1–1040.1(7)(a). However, Paragraph 2 merely prohibits any member from transferring any part of his membership except (a) where specifically allowed under the terms of the Agreement, (b) with the consent of all the other members, or (c) upon death, intestacy, devise, or otherwise by operation of law. It does not address statutory dissociation and does not state an intent to supersede Code § 13.1–1040.1(7)(a). Consequently, it lacks specific language that would constitute an exception to the rule of dissociation set forth in Code § 13.1–1040.1. Dewey thus was dissociated from the Company upon his death and Janet became a mere assignee by operation of Code § 13.1–1040.2, entitled under Code § 13.1–1039 only to his financial interest.

Even if Paragraph 2 had superseded dissociation under Code § 13.1–1040.1, it is not possible for a member unilaterally to alienate his personal control interest in a limited liability company. Code § 13.1–1039(A). The words “[u]nless otherwise provided in the articles of organization or an operating agreement” in Code § 13.1–1039 make it possible for a limited liability company to restrict the assignment of members’ financial interests because they modify the remainder of the sentence, which continues “a membership in a limited liability company is assignable in whole or in part.” The words “[u]nless otherwise provided in the articles of organization or an operating agreement” do not make it possible for a limited liability company to allow a member to assign his control interest because they do not modify the separate sentence, which states that “[a]n assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member.” Additionally, Code § 13.1–1023(A) provides that an operating agreement may not contain provisions inconsistent with the laws of the Commonwealth. Thus it was not within Dewey’s power under the Agreement unilaterally to convey to Janet his control interest and make her a member of the Company upon his death because the Agreement could not confer that power on him.

III. CONCLUSION

For the foregoing reasons, the circuit court did not err in holding that Janet inherited only Dewey’s financial interest in the Company—the right to share in profits and losses and to receive distributions. Because she was not a member, the circuit court did not err in holding that she lacked authority to remove its managing member and successor managing member. Accordingly, we will affirm the judgment of the circuit court.

Affirmed.

FOOTNOTES

1. Janet also asserts that statutory dissociation is preempted by Paragraph 10(A), which states that “no Member shall have any right to voluntarily resign or otherwise withdraw from the Company ․ without the prior written consent of all remaining Members of the Company. Any attempted resignation or withdrawal without the requisite consent shall be null and void and have no legal effect.” Nothing in the record of this case establishes that Dewey’s death was a voluntary attempt to resign or otherwise withdraw from the Company. Paragraph 10(A) therefore is not implicated.

2. This limitation was preserved in Code § 50–73.106 when Chapter 1 of Title 50 was repealed and replaced upon the enactment of the Virginia Uniform Partnership Act in 1996. 1996 Acts ch. 292.

3. Code § 13.1–1039 was subsequently amended and reenacted to add a new subdivision not relevant to this appeal. 2006 Acts ch. 912.

OPINION BY Justice WILLIAM C. MIMS.

Richard Keyt2016-11-16T08:23:51-07:00November 22nd, 2011|Lawsuits, Members|0 Comments

Rankings of Domestic Asset Protection Trust Jurisdictions

Nevada asset protection trust guru and attorney Steve Oshins published an update to his ranking of the best states to form a domestic asset protection trust. He ranks the 13 states that have DAPTs in the following order:

Nevada
Alaska
South Dakota
Delaware
Tennessee
Rhode Island
New Hampshire
Hawaii
Wyoming
Utah
Missouri
Oklahoma
Colorado

Richard Keyt2016-11-16T08:23:52-07:00November 15th, 2011|Asset Protection|0 Comments

Court Finds LLC Member Liable for LLC’s Debt because Member Did Not Sign Contract Correctly

If you are the manager of an Arizona manager managed LLC or a member of an Arizona member managed LLC, do you know how to sign contracts on behalf of the LLC? If not, your ignorance could cost you big bucks. The recent Pennsylvania case of Hazer v. Zabala, 26 A.3d 1166, 2011 Pa. Super., found that the member of a PA LLC was liable for amounts owed on a lease because the member did not properly sign the lease on behalf of the LLC. This case is an important lesson for every LLC member and manager.

I have said many times that people who form Arizona limited liability companies mistakenly believe that once they file the LLC’s Articles of Organization they are automatically protected from the debts and obligations of the LLC. The primary reason people form an LLC is to shield themselves from the LLC’s activities and liabilities. Unfortunately, owner protection is not automatic. There are any number of ways that a member or manager of an LLC can become liable for the LLC’s debts. For members and managers of an Arizona LLC to obtain the protection from liabilities offered by Arizona’s LLC laws, they must operate the LLC in compliance with applicable LLC law. Most people who form an Arizona LLC do not know what Arizona LLC law is and therefore frequently cause the LLC to engage in activity that violates Arizona LLC and creates a risk that the members and managers could be found liable for the LLC’s debts.

It goes without saying that it is not likely your LLC will comply with Arizona LLC law if you do not know what the law is. The primary reason I wrote my 170 page book called the “Arizona LLC Operations Manual” is I want to inform Arizona LLC members and managers about Arizona LLC law so they can cause their LLC to comply with the law. One important and fundamental aspect of Arizona law is exactly how should a contract be worded so that the LLC rather than a member or manager is liable under the contract? My Quick Start Guide has sample signature blocks that illustrate exactly how the signature of the LLC should appear in a contract.

Facts in Hazer v. Zabala

The case involved a lease that was signed by a member of Zabala Broker, LLC. The member, Juan Zabala, signed his name on the lease and underneath is signature he printed “DBA/ZABALA BROKER, LLC.” The court ruled that Mr. Zabala was personally liable on the lease because he signed it in his name, not as the member or manager of his LLC.

For the signer to avoid personal liability and for the LLC to be the party liable on the lease the contract should have designated the LLC as follows:

The first paragraph of the lease (or any contract) should have read:

Zabala, Broker, LLC, a Pennsylvania limited liability company

The signature block as the end of the lease (or any contract) should have read:

Example 1: For a member managed LLC:

Zabala, Broker, LLC, a Pennsylvania limited liability company

By: _______________________________
Juan Zabala, member

Example 2: For a manager managed LLC:

Zabala, Broker, LLC, a Pennsylvania limited liability company

By: _______________________________
Juan Zabala, manager

Members and managers must know how to designate their LLC properly in contracts because they may become personally liable on the contract if it is not worded correctly.

How to Purchase the Ebook Version of the Arizona LLC Operations Manual

Click here to purchase the eBook version of our Arizona LLC Operations Manual from our internet store for the incredibly low price of $97.

Richard Keyt2017-02-26T08:53:41-07:00November 4th, 2011|Asset Protection, Lawsuits, Operating LLCs, Why People Need an LLC|0 Comments

I Already Formed My LLC – Can I Purchase Your Complete LLC Package at a Discount?

Question: I formed my Arizona LLC so I don’t need your complete LLC Formation package. Can I purchase the parts of the complete LLC package I need at a reduced price in light of the fact I already filed the Articles of Organization, paid the Arizona Corporation Commission filing fee and published the Notice of Publication in a newspaper?

Answer: Yes. We offer an Arizona LLC touch up service for $497 that includes the following items:

Operating Agreement: This is Richard Keyt’s state of the art 45 page Operating Agreement developed over 35 years as an Arizona business lawyer who has formed thousands of Arizona corporations, nonprofit corporations, limited partnerships, limited liability limited partnerships and limited liability companies.

Arizona LLC Operations Manual: This is Richard Keyt’s “everything you wanted to know about operating Arizona LLC’s” 170 page book that is a must read for everybody that is a member of an Arizona LLC. The OM includes a sequence of events checklist in Chapter 3 that lists 34 tasks that should be performed in the first 75 days after the date the Articles of Organization was filed with the Arizona Corporation Commission. See the OM’s table of contents. The Operations Manual is an online ebook that requires a username and password to access it.

Organizational Resolutions: This document is to be signed by all of the members and contains resolutions authorizing the issuance of the membership interests, opening a bank account in a bank selected by the manager (if manager managed) or a member (if member managed), filing of an IRS form 2553 to cause the LLC to be taxed as an S corporation at the option of the manager (if manager managed) or a member (if member managed), election of the manager(s) if the LLC is manager managed and authorizing the LLC to be a signer on the Operating Agreement.

Membership Certificates: We prepare a Membership Certificate for each member to evidence the fact the person or entity is a member of the LLC and owns X% of the LLC as of the date the membership interest was acquired.

Arizona LLC Portfolio: This is our red LLC book with tabs behind which we put all of the items above that you purchase.

To learn more about the contents of our LLC package, watch Kate Keyt, the KEYTLaw Girl, as she demonstrates the above items and our Arizona LLC portfolio.

How to Purchase Our LLC Touch Up Package

To hire us to provide our LLC Touch Up services click on the $497 Touch UP LLC Order Form to go to our secure online store and pay with your major credit card. After paying you will be taken to our Touch Up LLC Questionnaire.

Richard Keyt2023-10-24T10:08:06-07:00October 31st, 2011|Why People Need an LLC|0 Comments

KEYTLaw Girl Featured in Phoenix New Times Story

On October24, 2011, the Phoenix New Times ran a nice story about Katie Leavitt and her blog Running on Happiness.

Richard Keyt2017-10-22T15:15:23-07:00October 26th, 2011|Ask the KEYTLaw Girl|0 Comments

Alaska Asset Protection Trust Funded By Solvent Settlor Completely Fails To Protect Assets In Bankruptcy Against Future Creditors

Forbes: “In 2005, an Alaska resident, Mortensen, who was solvent and liquid at the time, settled a self-settled Alaska Domestic Asset Protection Trust (“DAPT” or “APT”) for his own benefit and the benefit of his heirs, and contributed a $60,000 piece of property to the trust, along with $80,000 in cash that was a gift from his mother. . . . the Mortensen opinion basically says that under Bankruptcy Code section 548(e), Asset Protection Trusts do not provide protection in bankruptcy for a period of at least 10 years from the date the Trust was settled, where a purpose of the trust was to protect the trust assets from creditors of the settlor/beneficiary.”

Nationally recognized Nevada domestic asset protection trust lawyer Steve Oshins says this about the Mortenson case:

” I have looked through the facts of the case carefully and there is absolutely no doubt in my mind that the judge would have been crazy to have ruled differently than he did. Other than some subtle inner-issues regarding how the judge looked at the 10-year bankruptcy clawback, this case was really a non-issue for DAPTs. We all knew since 2005 that there’s a bankruptcy clawback. One of the reasons Bob and I are doing the teleseminar is to make sure the public doesn’t misinterpret the case as being meaningful. With the viral effect of the Internet, those who don’t do DAPTs could easily misinterpret this case. I think it is important for people to take note of what was done wrong in the case which is helpful because “what not to do” is a good training tool. “

Read “Trust Experts Say Judge Made “Bad Law” in Landmark Asset Protection Case,” which states:

“But trust companies that rely on asset protection as a selling point say the ruling is a fluke that won’t affect truly well-constructed vehicles of this type — and the estate planners who know most about the field agree. . . .’If there was ever an illustration of how extreme facts contradict the law, this might be it,’ says Wisconsin estate planner Bob Keebler. ‘The sky is not falling on domestic asset protection trusts,’ he says. ‘This is really not a surprise to anyone’.”

The case is Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011.

Richard Keyt2011-12-03T10:37:33-07:00October 22nd, 2011|Asset Protection, Charging Orders|0 Comments

Can an Arizona LLC Become a PLLC & an Arizona PLLC Become an LLC?

Question: I have an Arizona LLC, but I want to change it to a professional LLC (a PLLC). Is it possible and how do I make the change?

Answer: Yes. An Arizona LLC can be converted to a PLLC and an Arizona PLLC can be converted to an LLC. You convert one type of LLC to the other type by filing an amendment to the Articles of Organization with the Arizona Corporation Commission and then publishing the name change in an ACC approved newspaper after the ACC approves the amendment. The Amendment to the Articles of Organization must be signed by a member of a member managed company or a manager of a manager managed company. The amendment to the Articles of Organization must satisfy the following requirements:

Converting from an LLC to a PLLC:

The Amendment to the Articles of Organization must contain the following provisions:

1. A statement of the new name of the company with the correct ending. Arizona Revised Statutes Section 29-4102.B states:

“A limited liability company organized under a law of this state other than this Article may elect professional limited liability company status by amending its Articles of Organization pursuant to Section 29-3202 to comply with subsection A of this Section and with Section 29-4106.

2. Arizona Revised Statutes Section 29-4106 states:

“The name of a professional limited liability company authorized to transact business in this state shall satisfy the requirements of Section 29-3112, except that the name shall contain the words “professional limited liability company” or the abbreviation “p.l.l.c.”, “p.l.c.”, “pllc” or “plc” in uppercase or lowercase letters.”

2. A statement that the company is a professional limited liability company.

3. A description of the professional service or services that the company is organized to provide.

Converting from a PLLC to an LLC:

The Amendment to the Articles of Organization must satisfy each of the following requirements:

1. It must contain a statement of the new name of the company with the correct ending.

2. It must remove the statement in the Articles of Organization that the company is a professional limited liability company.

3. It must remove the statement in the Articles of Organization that describes the professional service or services that the PLLC was organized to provide.

Read “What are the Differences Between an Arizona PLLC vs LLC?“

Richard Keyt2021-01-02T16:19:00-07:00October 22nd, 2011|Articles of Organization, FAQs, How Do I, Operating LLCs, PLLCs|0 Comments

KEYTLaw has Video Testimonials from Satisfied LLC Clients

Today I added our first video testimonials on our LLC Testimonials page. Several people for whom I formed one or more Arizona LLCs explain why they hired me, what they liked about my service and that they would recommend my LLC formation services to their friends. If you are shopping for someone to form your Arizona LLC, you should watch one or more of the video testimonials.

P.S. If I formed your Arizona LLC and you would consent to let my videographer film your LLC testimonial, send an email message to me at [email protected].

Richard Keyt2021-12-04T11:17:59-07:00October 20th, 2011|Forming LLCs|0 Comments

How Do I Form an Arizona LLC without Disclosing My Name?

Question: I know that Arizona LLC law requires that the names and addresses of all members of a member managed Arizona limited liability company be disclosed in the Articles of Organization filed with the Arizona Corporation Commission. I also know that anybody who searches my LLC’s name or my name on the ACC’s website will find me and my LLC if I am named in the Articles of Organization. How can I form an Arizona LLC without disclosing that I am the ultimate owner of the LLC?

Answer: The cheapest and easier way to form an Arizona LLC without disclosing your name and address is to have your trust own the membership interest in the LLC instead of you. For this to work, two requirements must be satisfied:

The name of the trust must not include your name or anything that would tie the trust to you.
In the LLC’s Articles of Organization you name the trust as the member or manager and do not put your name in the document.

You should not put an address in the Articles of Organization for the company, a member or a manager that is an address that somebody could tie to you. Instead, get a Post Office box or a UPS mailbox.

For more on this topic read my article called “The Confidential LLC – How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s).”

How to Hire Richard Keyt to Prepare a Confidential Trust

If you want me to prepare a Confidential Trust for you, the simplest and least expensive way is to hire me to form your Arizona LLC ($597) and prepare the Confidential Trust for $297, a $200 discount off the $497 price charged if I do not form your LLC.

If you do not hire me to prepare your LLC and you want to hire me to prepare your Confidential Trust for $497, complete my online Confidential Trust Preparation Agreement then print, sign and deliver the signed agreement to me per the instructions on the last page of the form. You can pay online in our web store or call KEYTLaw legal assistant Michelle Watkins at 480-664-7413 and give her your information over the phone.

Richard Keyt2015-10-31T11:31:51-07:00October 15th, 2011|FAQs, How Do I|0 Comments

Arizona Corporation Commission Sues LLCs & their Members and Managers for Securities Fraud

The Arizona Corporation Commission sued multiple related Arizona limited liability companies and their members and managers for allegedly violating Arizona securities laws and defrauding many investors. The defendants in the Arizona Corporation Commission vs. Samuels lawsuit are Terry L. Samuels, Elizabeth Samuels, James F. Curcio, Jill L. Curcio, 3-CG, LLC, Choice Property Group, LLC, Azin Investor Group, LLC, Azin Investor Group II, LLC, Azin Investor Group III, LLC, Azin Investor Group IV, LLC, Combined Holdings IV, LLC and Combined Holdings V, LLC.

The Securities Division (“Division”) of the ACC alleged that the defendants engaged in acts, practices, and transactions that constituted violations of the Securities Act of Arizona, A.R.S. Section 44-1801 et seq.(the ‘Securities Act”). The Division alleged that Terry L. Samuels (“Samuels”) and/or James F. Curcio (“Curcio”) directly or indirectly controlled all entities named as defendants within the meaning of A.R.S. Section 44-1999 and that Samuels and/or Curcio are each jointly and severally liable with, and to the same extent as those entities, for the entities’ violations of the anti-fraud provisions of the Securities Act. The spouses of Samuels and Curcio were named as defendants under A.R.S. Section 44-203 1 (C) solely for purposes of determining the liability of the marital communities.

The Division alleges that Samuels and Curcio and Arizona LLCs they created and owned offered and sold securities, including membership interests in the LLCs, without complying with Arizona’s Securities Act. The defendants allegedly misrepresented material facts and failed to disclose material facts when the solicited money from investors in connection with the entities’ fix and flip real estate business. The Division alleges:

Although SAMUELS formed additional, shell entities for the purpose of limiting liability, SAMUELS operated the Business’s entities as if they were a single company. For example, SAMUELS and his employees held meetings for the Business as a whole, not for each separate entity. Also, there were no written agreements between the entities.

The early investors were treated as lenders who received a promissory note and a deed of trust on an Arizona home to secure repayment of the loan. These notes were not registered as securities with the Division. The Division alleges:

“In the spring of 2007, SAMUELS and CURCIO shifted the Business’s strategy away from having investors select, invest in and receive as collateral an interest in a specific property in the form of a DOT with the investor as the beneficiary. The new strategy consisted of creating several limited liability companies (LLCs) that served as investor pools of approximately $lM each. The investors in these LLCs received LLC memberships in exchange for their investments. SAMUELS and CURCIO then pooled the funds received from these investors (collectively referred to as the “AZIN Investors”) and transferred the funds to CPG and/or 3-CG. Those entities then used these funds as determined by the Business’s managers, i.e. SAMUELS and CURCIO. The AZIN Investors did not participate in the selection of properties or management of the Business.”

“At or around the time they formed the first two AZIN Entities, SAMUELS and CURCIO began soliciting investors to purchase membership interests in the AZIN Entities (the “Membership Interests”). The Membership Interests were not registered as securities with the Commission to be offered or sold within or from Arizona.”

“SAMUELS and CURCIO solicited potential investors, in part, by conducting in person presentations to small groups of potential investors. These groups ranged in size from one
to about ten persons. SAMUELS and CURCIO held these presentations in several states including Arizona, Indiana and New York.”

“SAMUELS and CURCIO provided potential investors with detailed brochures and newsletters (each a “Prospectus” and collectively the “Prospectuses”) that described the benefits of
investing in the Business, current investment opportunities, and the positive opportunities available to Respondents in the Phoenix-area real estate market.”

“SAMUELS and CURCIO encouraged offerees and investors to re-direct their retirement accounts toward purchasing the Membership Interests. A Prospectus titled “3-CG News; Issue # 1 1-2008” provided by SAMUELS and CURCIO to existing and potential investors contained a section written by CURCIO titled “Jim’s Corner.” This section describes how investors could roll over their existing IRA/401(k) funds to purchase LLC memberships and that funds would be invested in a newly-formed LLC with the investor “listed on ‘Title’ to the properties as security” (quotation marks in original).”

“For all practical purposes, the AZIN Investors had no say in the management of the AZIN Entities. Under the terms of the Operating Agreement, the manager of each entity (CURCIO) had almost absolute control over the entity. Additionally, the AZIN Investors lacked experience in real estate investment and management. Thus, they could not have effectively managed the AZIN Entities even if they had any authority to do so.”

“In connection with the offer or sale of securities within or from Arizona, Respondents iirectly or indirectly: (i) employed a device, scheme, or artifice to defraud; (ii) made untrue statements if material fact or omitted to state material facts that were necessary in order to make the statements nade not misleading in light of the circumstances under which they were made; or (iii) engaged in transactions, practices, or courses of business that operated or would operate as a fraud or deceit upon offerees and investors.”

“SAMUELS and/or CURCIO directly or indirectly controlled respondents 3-CG, CPG, and the AZIN Entities within the meaning of A.R.S. 6 44-1999. As a result, SAMUELS and/or
CURCIO are jointly and severally liable with, and to the same extent as 3-CG, CPG and the AZIN Entities for their violations of the anti-fraud provisions of the Securities Act set forth above.”

The lesson to be learned from the case is that the offer and sale of membership interests in a limited liability company can be the offer and sale of securities that must be done in a way that satisfies federal and state securities laws. If your LLC or corporation intends to take any action that solicits money from a person or entity and says to the investor in effect “sit back on your couch and we will make a profit from your investment” then your LLC will be offering to sell a security. Before offerring or selling a membership interest in an LLC that is a security you should consult with an experienced securities law attorney and do what must be done to comply with federal securities laws and the securities laws of each state in which an investor resides.

Richard Keyt2016-11-16T08:23:52-07:00October 2nd, 2011|AZ Corporation Commission, Lawsuits, LLCs & Securities Laws|0 Comments

EEOC Files Second Lawsuit against Phoenix-based Casey Jones Grill

Phoenix Business Journal: “The U.S. Equal Employment Opportunity Commission (EEOC) today filed its second lawsuit against Phoenix bar and restaurant Casey Jones Grill, on allegations of sexual harassment of female servers. The restaurant is operated by Los Muchachos LLC.“

Richard Keyt2018-05-31T17:09:18-07:00October 1st, 2011|Lawsuits, Why People Need an LLC|0 Comments

Can a Single Member LLC be Taxed as a Partnership?

Question: Can a single member limited liability company be taxed as a partnership for federal income tax purposes?

Answer: No. The following text from the IRS’ website answers the question:

“Over the years, there has been confusion regarding Single Member Limited Liability Companies in general and specifically, how they can report and pay employment taxes.

An LLC is an entity created by state statute. The IRS uses tax entity classification, which allows the LLC to be taxed as a corporation, partnership, or sole proprietor, depending on elections made by the LLC and the number of members. An LLC is always classified under federal law as one of these types of taxable entities.

A multi-member LLC can be either a partnership or a corporation, including an S corporation. To be treated as a corporation, an LLC has to file Form Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation. A multi-member LLC that does not so elect will be classified under federal law as a partnership.

A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity.” Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a “disregarded entity” which is taxed as a sole proprietor for income tax purposes.”

IRS Form 8832 is the form used by an entity to elect a method of federal income taxation that is different from the IRS’ default method (sole proprietorship or disregarded entity for single members LLCs and partnership for multi-member LLCs). This form is also known as the “check the box” form because an entity can elect a tax method by checking the box on the form. IRS Form 8832, question 3 reads:

“Does the eligible entity have more than one owner?

Yes. You can elect to be classified as a partnership or an association taxable as a corporation.

No. You can elect to be classified as an association taxable as a corporation or to be disregarded as a separate entity.”

See the IRS article called “Single Member Limited Liability Companies.”

Richard Keyt2017-10-07T07:32:40-07:00September 24th, 2011|FAQs, Tax Issues|0 Comments

Arizona Jury Gives Volunteer Worker Injured in a Fall from a Ladder $5.9 Million

Phoenix Business Journal: “A Maricopa County jury has awarded $5.9 million to a Valley man who suffered brain and severe back injuries after falling 10-feet off of a ladder while helping build a church roof in Rocky Point, Mexico.” The plaintiff was Ronald Day who sued the Central Christian Church and Amor Ministries. See “Valley church wants new trial after $5.9M verdict in volunteer fall case.”

This case is a perfect example of why people need to operate a business or own investment real estate in an entity that protects the owners of the entity from things that go wrong. If you are doing fix and flips without the protection of a limited liability company, you will be the defendant in the lawsuit if a worker gets hurt on the job and all of your life savings will be at risk.

This case is also a perfect example of why you should not rely solely on insurance, including an umbrella policy, as your only line of defense if something goes wrong. A lot of people acquire a $5 million dollar umbrella policy, but if the judgment is $5.9 million, you have a $900,000 problem. Insurance should be your first line of defense, but the LLC is the second line of defense.

Things happen so you need to form your LLC before the worker falls from the ladder or causes the car accident.

Richard Keyt2011-09-23T01:19:04-07:00September 22nd, 2011|Lawsuits, Why People Need an LLC|0 Comments

EEOC Sues Outback Steakhouse over Firing of Brain-injured Waiter

In September of 2011 the Phoenix office of the Equal Employment Opportunity Commission sued a Phoenix area Outback Steakhouse restaurant for allegedly firing a waiter because of his disability, a traumatic brain injury that has slowed his thinking, impaired his speech and causes him to wear prism glasses. The EEOC claims the employer violated the Americans with Disability Act.

A protected person who believes he or she has been the victim of an employer who violated the ADA may file a complaint with the EEOC. The EEOC then becomes the alleged victim’s knight in shining armor who spends federal time, money and resources to take action against the employer who allegedly violated the ADA. Even if the employer has the law and the facts on its side, the employer has to make a choice between negotiating the best settlement possible or spending $50,000 or more on attorneys fees defending a lawsuit.

The ADA is a trial lawyer’s dream and an employer’s nightmare. It is also a perfect example of the law of unintended consequences. This federal law was intended to protect employees who have disabilities from being fired. The law may accomplish that purpose in some cases, but it has also had the unintended consequence of making it much more difficult for handicapped people to obtain a job. Employers know that the risk of being sued by an employee is off the charts if they hire a handicapped person so they rarely hire the handicapped. Read “The Unintended Consequences of the Americans with Disabilities Act,” which states:

“The employment provisions of the Americans with Disabilities Act (ADA) exemplify the law of unintended consequences because those provisions have harmed the intended beneficiaries of the Act, not helped them. ada was enacted to remove barriers to employment of people with disabilities by banning discrimination and requiring employers to accommodate disabilities (e.g., by providing a magnified computer screen for a vision-impaired person). However, studies of the consequences of the employment provisions of ada show that the Act has led to less employment of disabled workers.

Why has ADA harmed its intended beneficiaries? The added cost of employing disabled workers to comply with the accommodation mandate of ada has made those workers relatively unattractive to firms. Moreover, the threats of prosecution by the Equal Employment Opportunity Commission (EEOC) and litigation by disabled workers, both of which were to have deterred firms from shedding their disabled workforce, have in fact led firms to avoid hiring some disabled workers in the first place.”

The ADA prohibits discrimination on the basis of disability in employment, State and local government, public accommodations, commercial facilities, transportation, and telecommunications. To be protected by the ADA, one must have a disability or have a relationship or association with an individual with a disability. An individual with a disability is defined by the ADA as a person who has a physical or mental impairment that substantially limits one or more major life activities, a person who has a history or record of such an impairment, or a person who is perceived by others as having such an impairment. The ADA does not specifically name all of the impairments that are covered.

Title I of the ADA requires employers with 15 or more employees to provide qualified individuals with disabilities an equal opportunity to benefit from the full range of employment-related opportunities available to others. For example, it prohibits discrimination in recruitment, hiring, promotions, training, pay, social activities, and other privileges of employment. It restricts questions that can be asked about an applicant’s disability before a job offer is made, and it requires that employers make reasonable accommodation to the known physical or mental limitations of otherwise qualified individuals with disabilities, unless it results in undue hardship.

The Obama administration’s EEOC recently filed a lawsuit that illustrates the absurdity of the ADA. The EEOC sued Old Dominion Freight Line, Inc. because it refused to allow a recovering alcoholic to drive any of its 18 wheeled commercial trucks. Consider the employer’s dilemma: does it take the risk and allow a recovering alcoholic to drive its vehicles and possibly drink and drive and cause an accident that kills or injures somebody or does it risk a lawsuit from the employee and the EEOC? What would you do? Do we really want federal law and the federal government putting drivers who drink on the road to kill and maim?

Read “Trucking Companies Told to Hire Alcoholics by Obama Administration.” It’s only a matter of time before the EEOC sues an airline because it won’t let a recovering alcoholic fly an airliner with 300 passengers.

The ADA and the EEOC are examples of why all businesses that have employees should operate through an entity like a limited liability company that protects the owner’s life savings against debts and liabilities of the business.

For more on the ADA, read the EEOC’s “A Guide to Disability Rights Law” and “A Primer for Small Business.”

See “John Woods, Brain-Injured Former Umpire, was Wrongfully Fired by Outback Steakhouse, Says EEOC Complaint; Claims by the Disabled on Rise” and “EEOC Sues Outback Steakhouse over Firing of Brain-injured Waiter.” For more about Mr. Woods and his injury read “Umpire making a comeback on and off the baseball field” and a lengthy story in the Arizona Republic called “Phoenix umpire perseveres after near-fatal crash.”

Richard Keyt2019-03-21T18:52:31-07:00September 11th, 2011|Lawsuits, Why People Need an LLC|0 Comments

Nevada Attorney Steve Oshins Discusses Nevada’s New Law that Protects Single Member LLCs

Provident Trust: “Steve Oshins is a nationally acclaimed estate planning and asset protection attorney . . . renowned for his efforts at providing innovative solutions for the asset protection concerns of clients. He has played a unique role in designing legislation that has made Nevada a leading trust and asset protection jurisdiction. According to Forbes Magazine, Nevada has the most favorable asset protection trust laws of any state in the country. Recently, Mr. Oshins was instrumental in the drafting of the part of Senate Bill 405, signed into law on June 16, 2011, that specifies charging order protection as the exclusive remedy for creditors of a debtor who is the sole member of a single member limited liability company (SMLLC).”

Richard Keyt2017-10-07T07:38:04-07:00August 28th, 2011|Asset Protection, Charging Orders|0 Comments

Do Single Member LLCs Provide any Asset Protection?

Question: Some people, including some lawyers, say that a single member limited liability company does not give the member/owner any asset protection. Is that true?

Answer: No. People say this to me all the time. I also see a lot of articles on the internet that make the same erroneous statement. I even know of lawyers who spread this myth.

People who claim single member LLCs do not provide any asset protection are ignorant of both asset protection law and LLC law. If a person or entity forms a single member Arizona LLC to operate a business or to own investment real estate and if the LLC is operated in compliance with applicable laws, the LLC gives its owner the same protection from the LLC’s debts and obligations that Arizona law gives to multi-member LLCs and single shareholder corporations.

Example 1: Homer Simpson forms an Arizona LLC and owns it as his sole and separate property. He is the only member. Homer writes a check to the LLC for $50,000 that the LLC uses to buy a rental home. The tenant’s mother slips on stairs in the home and dies. Victim’s family sues the LLC and Homer and attempts to pierce the company veil and hold both the LLC and Homer liable for the family’s damages. If Homer’s LLC has complied with applicable laws and if Homer did not have anything to do with causing or knowing of the problem with the stairs, Arizona law should protect Homer from any judgment rendered against the LLC that owns the home. If you think this example is ridiculous, see Kerege v. Viscount Hotel Suite, one of the ten largest Arizona jury awards in 2010 that involved an elderly woman who fell down carpeted stairs in a hotel atrium and died. The jury awarded the plaintiff $3,000,000.

I am not aware of any Arizona court case that has found the owner of a single member Arizona LLC liable under the fact pattern described above. If you know of such a case, please send it to me.

I am not saying that the owner of a single member LLC cannot be liable for causing harm in connection with the LLC’s activities. Never forget this important fact of life:

A person is always liable for harm caused by the person’s acts or omissions even if the acts or omissions arise while acting on behalf of a limited liability company.

Example 2: Same facts as in Example 1 above except Homer installed the carpeting on the stairs and his installation made a bump on the stairs that caused the tenant’s mother to trip when her foot hit the bump. Homer’s botched installation job caused the accident so he will be liable for the harm he caused and so will the LLC because he was acting on behalf of the LLC when he installed the carpet.

The result in Example 2 does not mean that a single member LLC does not provide any asset protection. Homer would not have escaped liability for causing the accident if the LLC had been a multi-member LLC. The number of members of the LLC is irrelevant in this scenario because Homer’s liability arises because of his bad act.

What is the Source of this Myth?

The reason some people mistakenly claim the single member LLC does not offer any asset protection arises from a misunderstanding of the legal implications of a famous (in LLC lawyer circles) bankruptcy case called “In re Albright,” No. 01-11367 (Colo. Bkrpt. April 4, 2003). This case involved a woman who was the only member of an LLC that had assets. She argued that the bankruptcy court could not give the assets of the LLC to her creditors because Colorado LLC law provided that the creditors’ remedy for claims against its sole member was a charging order. The bankruptcy court rejected that argument and allowed the bankruptcy trustee to sell the LLC’s assets and give the proceeds to Albright’s creditors.

The court made some statements that it may not have liquidated the LLC if it had multiple members. It said:

“To the extent a debtor intends to hinder, delay or defraud creditors through a multi-member LLC with ‘peppercorn’ co-members, bankruptcy avoidance provisions and fraudulent transfer law would provide creditors or a bankruptcy trustee with recourse.”

This off the cuff statement (called “dictum”*) are the basis on which the nonbelievers claim that single member LLCs do not provide any asset protection.

*Latin for “remark,” a comment by a judge in a decision or ruling which is not required to reach the decision, but may state a related legal principle as the judge understands it. While it may be cited in legal argument, it does not have the full force of a precedent (previous court decisions or interpretations) since the comment was not part of the legal basis for judgment. The standard counter argument is: “it is only dictum (or dicta).”

The Albright case did not involve a claim made against the LLC that arose from the LLC’s activities. I call this type of claim a bottom up creditor claim. Instead, the Albright case involved claims MADE AGAINST THE SOLE MEMBER ARISING FROM THE MEMBER’S ACTS OR OMISSIONS. IT DID NOT INVOLVE A CLAIM THAT AROSE FROM THE ACTIVITIES OF THE LLC AND AN ATTEMPT BY THE CREDITOR TO PIERCE THE VEIL AND HOLD THE SOLE MEMBER LIABLE FOR THE DEBTS OF THE LLC. See my graphical depiction of bottom up and top down creditors.

It takes quite a leap of ignorant faith to conclude from In re Albright that it stands for the proposition that single member LLCs lack asset protection. Nationally known asset protection attorney Jay Adkinson says the following about single member LLCs, In re Albright and asset protection on his great website called “Asset Protection Book:”

“Based on Albright, sometimes I hear planners blurt out, “Single Member LLCs provide no asset protection!” This is wrong. The lack of charging order protection is a far cry from concluding that SMLLCs are “worthless” as asset protection vehicles. SMLLCs may still provide substantial protection for owners against the liabilities of the entity itself, which are so-called “internal liabilities”.

For example: SMLLC owns a strip mall and is successfully sued by one of the tenants. If the SMLLC is adequately capitalized, is not the alter ego of the sole member, and is not used to perpetuate a fraud, the tenant may not assert liability against the member.

There is no reason that a SMLLC should be treated much differently from a sole shareholder corporation. Historically, sole shareholder corporations have contained liability within the entity and shielded the liability away from its owners.

To summarize, even if SMLLCs do not offer the same charging order protection as multiple-member LLCs, they can still be very valuable business planning vehicles. Certainly, it is preferable from a liability standpoint to own one’s business in a SMLLC than to run it as a sole proprietorship. But of course, where external liability is a concern and it is feasible to add another member, that should be done so that charging order protection arises.”

To learn more about this topic and attacks by creditors on the charging order protection offered by LLC laws in states outside Arizona, read my article called “Beware of the Single Member LLC.”

For People Who Want to Form an LLC Themselves

If you think you might want to create a do-it-yourself Arizona LLC you must read Arizona LLC attorney Richard Keyt’s article called “Step by Step Guide: How to Form Arizona LLC 2019 in (6 Easy Steps).”

Richard Keyt2019-10-26T15:22:13-07:00August 27th, 2011|Asset Protection, Charging Orders, FAQs, Veil Piercing|0 Comments

How Much Compensation must an Entity Taxed as an S Corporation Pay to Owners to Keep the IRS Happy?

The Tax Advisor: “S corporation shareholders [and owners of LLCs taxed as S corporations] generally prefer dividend distributions of their S corporations’ [or LLC’s] profits over compensation payments from the S corporations [LLCs] because the compensation payments are subject to payroll taxes and dividend distributions are not. To prevent S corporations and their shareholders from avoiding payroll taxes by maximizing distributions and minimizing compensation payments, the IRS requires S corporations to pay shareholders who provide substantial services reasonable compensation. Disputes between the IRS and taxpayers have required courts to determine on a regular basis whether an S corporation has paid reasonable compensation to its shareholder(s).

On the Net2018-05-22T19:06:15-07:00August 23rd, 2011|Tax Issues|0 Comments

Stupid New Arizona Notary Law Creates a Legal Nightmare for Attorneys, Notaries & the Public

The “we are from the government and are here to help you” people in the Arizona legislature passed a terrible law that became effective in Arizona on July 20, 2011. Arizona Senate Bill 1230 added new and outrageous notary requirements that will affect all documents notarized by an Arizona notary after July 19, 2011. The new law will invalidate tens of thousands of documents notarized by Arizona notaries because of ignorance of the law and simple mistakes.

The new law added the following provisions to Arizona Revised Statutes Section 41-313:

B.  Notaries public shall perform the notarial acts prescribed in subsection A of this section only if:

1.  The signer is in the presence of the notary at the time of notarization.

2.  The signer signs in a language that the notary understands.

3.  Subject to subsection D, the signer communicates directly with the notary in a language they both understand or indirectly through a translator who is physically present with the signer and notary at the time of the notarization and communicates directly with the signer and the notary in languages the translator understands.

4.  The notarial certificate is worded and completed using only letters, characters and a language that are read, written and understood by the notary public.

C.  If a notary attaches a notarial certificate to a document using a separate sheet of paper, the attachment must contain a description of the document that includes at a minimum the title or type of document, the document date, the number of pages of the document and any additional signers other than those named in the notarial certificate.

D.  A notary may perform a notarial act on a document that is a translation of a document that is in a language that the notary does not understand only if the person performing the translation signs an affidavit containing an oath or affirmation that the translation is accurate and complete.  The notarized translation and affidavit shall be attached to the document and shall contain all of the elements described in subsection C.

Arizona Revised Statutes Section 41-328 was amended by adding the following text:

C. Subject to section 41-320, a notary public shall not perform a notarization on a document if the notary is an officer of any named party, if the notary is a party to the document or if the notary will receive any direct material benefit from the transaction that is evidenced by the notarized document that exceeds in value the fees prescribed pursuant to section 41-316.

Problems Created by Revised ARS Section 41-313

What Does “a notary attaches a notarial certificate to a document” Mean?

The new law is a time bomb for anybody who creates, signs or notarizes documents that are notarized by an Arizona notary. For example, what does “If a notary attaches a notarial certificate to a document using a separate sheet of paper” mean? Consider the following scenarios and if the new language applies to any or all of them:

1. Attorney, document preparer or do-it-yourself person prints a document that has a notary certificate on the same page as the page on which the signer signed.

2. Attorney, document preparer or do-it-yourself person prints a document that has a notary certificate on a page that is not the page on which the signer signed.

3. Attorney, document preparer or do-it-yourself person creates a document that does not contain a notary certificate so the notary prepares his/her notary certificate on a separate piece of paper and attaches it to the end of the document.

4. Attorney, document preparer or do-it-yourself person creates a document that does not contain a notary certificate so the notary prepares his/her notary certificate on a separate piece of paper, but the attorney, document preparer or do-it-yourself person rather than the notary actually attaches the notary certificate to the end of the document.

5. The person who creates the document in scenarios 1 & 2 is also the notary who notarizes the document.

A literal reading of the statute would seem to require compliance with the new law only in the case of scenarios 3 & 5, but we will not know for sure until an Arizona appellate court tells us what this phrase means years from now.

Practical Tip #1: The notary certificate should contain a statement that the notary certificate was or was not attached to the document by the notary.

Practical Tip #2: If the notary is the same person who prepared the document, the document preparer should play it safe and assume that Section 41-313.C will apply and include the required information in the notary certificate.

Mistakes & Omissions in the Notary Certificate

This new notary law is a very bad law because it demands attention to detail and creates many opportunities for the document preparer and the notary to inadvertently invalidate a notarized document. The new law says that when it applies, the notary block must contain “the title or type of document, the document date, the number of pages of the document and any additional signers other than those named in the notarial certificate.” This new require gives the notary a lot of ways to create an incorrect notary certificate.

The new law does not give us any guidance on the legal significance of the notarized document if one or more of the following errors occurs in the notary certificate:

1. The title or type of document stated in the notary certificate is different from the actual title or type of document? For example, what if the title of the document is “Promissory Note,” but the notary certificate refers to a “Note”? What if the name or title is correct, but misspelled?

2. The document date is incorrect? What if the document date is off by one day, a month or the year is incorrect?

3. The number of pages in the document is incorrect? The new law does not tell us how we calculate the number of pages in a document. In counting the number of pages does the notary count a cover page, the pages in a table of contents and pages in schedules or exhibits? The document preparer, the signer and the notary should actually count all of the pages of the document because I do not recommend relying on the page numbers on the last page of the document.

4. The name of one or more additional signers is not spelled correctly.

5. An additional signer’s name is omitted?

Does this law create new liability for lawyers, especially estate planning lawyers whose practice involves many notarized documents? Apparently Arizona lawyers can now be sued years after a document was signed when the client or family is told the notary certificate failed to comply with Section 41-313 and therefore the document is invalid.

Practical Tip #3: In addition to stating how many pages are in the document, the notary certificate should “itemize” page numbers. For example, the notary certificate should say “The

[document name] is 25 pages consisting of a 1 page cover page, a 3 page table of contents, 19 pages of document text and a 2 page Exhibit A” or The [document name] consists of three pages and it does not have a cover page, a table of contents or any exhibits or schedules.”

The Law Should Cause all Arizona Notaries to Cease Providing Notary Services

As a practical matter, why would anybody want to be a notary in Arizona with this law? Aren’t all notaries now liable for damages if they fail to satisfy Section 41-313? If you are an Arizona notary, do you want to take the chance of being sued because a document you notarized fails to comply with Section 41-313.C? Can a notary get insurance for this type of liability? If so, what are the coverage limits?

Most notaries do not charge for their services, but they may. Arizona Revised Statutes Section 41-316 states that “The secretary of state shall establish fees that notaries public may charge for notarial acts.” The Arizona Secretary of State’s rule R2-12-1102 allows Arizona notaries to charge as much as $2 for each notary. The compensation that an Arizona notary might receive for notarizing a document does not justify the risk of being sued for committing “notary malpractice.”

Tens of Thousands of Documents Will Be Invalid

Consider what this new law means for the tens of thousands of do-it-yourselfers who don’t have a clue about this law. There are going to be a lot of estate planning documents created by 99% of the public, including Arizona notaries, who will be clueless about the requirements of revised Section 41-313. The good news is that the vast majority of third parties who view a notarized document won’t know of Section 41-313 so they won’t question the validity of the document.

Bottom Line

This new law is a wonderful revenue generator for Arizona lawyers, especially estate planning lawyers like me. Every document notarized by an Arizona notary should be reviewed by an Arizona attorney who is experienced with Section 41-313. For example, nobody should ever create their own last Will & Testament without having it reviewed by an Arizona “notary law attorney” because the family will not know until after the signer dies that the Will is invalid.

Arizona Revised Statutes Section Section 41-313.C is a trial lawyers dream, but a nightmare for the unsuspecting public, lawyers and Arizona notaries.

Tell Your Arizona Legislators To Repeal or Fix This New Law

Senate Bill 1230 was sponsored by Republican Representative Michelle Reagan. Her contact information is: Phone Number: (602) 926-5828; Fax Number: (602) 417-3255; [email protected]. I suggest you send her a letter or email message alerting her to the problems with the new law and ask that she repeal or fix the new law. Do the same for your state senator or representative. See the names and contact information for Arizona senators and house members.

Richard Keyt2017-02-23T23:00:15-07:00August 21st, 2011|Lawsuits|0 Comments

Lessons to be Learned from Sheriff Joe’s Bad Example

Maricopa County Sheriff Joe Arpaio and his wife formed an Arizona limited liability company in December of 2010 called “Ava Investments, LLC.” In June of 2011 they transferred eight parcels of land into Ava Investments, LLC.

Apparently Joe and Ava were not concerned about confidentiality because their home address is listed in the Articles of Organization and on the Arizona Corporation Commission’s website as well as their names. I can’t fault Sheriff Joe, however because he didn’t have a chance to read my article called “The Confidential LLC – How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s)” because the article was written after the Arpaios formed Ava Investments, LLC.

Lesson 1: If you want to keep your ownership of an Arizona limited liability company confidential and not on public display, do not be a member or manager of an Arizona LLC or use your home address for any purpose in the LLC’s Articles of Organization.

Apparently the purpose of Ava Investments, LLC, is to hold the Arpaio’s investment real estate. I searched the Maricopa County Recorder’s website for Ava Investments, LLC, and found the following deeds:

June 6, 2011, Special Warranty Deed recorded on June 14, 2011, was signed by Joe and Ava as grantors conveying two parcels of land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investments Corporation, not Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio who acknowledged that she was “duly sworn on oath . . . that the foregoing statement is a true and correct of the facts pertaining to the transfer of the above described property.” These two parcels are located at 10635 & 10637 North 71st Place, Scottsdale, Arizona. Problems: The price listed is $75,00, but the deed transferred two parcels. What is the price of each parcel? Is $75,000 the total price? Who was the seller? The deed was signed by the Arpaios, not Ava Investment Corporation. The Affidavit of Value states that the seller was the corporation. If the property is/was owned by the corporation then the deed signed by the Arpaios did not transfer the title to the LLC.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10614 North 71st Place, Scottsdale, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10610 North 71st Place, Scottsdale, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 16733 East Palisades Blvd., Fountain Hills, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $75,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10632 North 71st Place, Scottsdale, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Ava Investment Corporation as grantor conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Ava Investment Corporation, (ii) the sales price was $325,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is a single family residence and used for commercial or industrial use.” Note: The Affidavit says to check only one box to indicate the type of property, but two boxes were checked. The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 16743 East Palisades Blvd., Fountain Hills, Arizona.

June 6, 2011, Special Warranty Deed recorded on June 15, 2011, was signed by Joe and Ava as grantors conveying land to Ava Investments, LLC. The Affidavit of Value recorded with this deed says that: (i) the seller was Joe and Ava, (ii) the sales price was $60,000, (iii) the method of financing was “exchange or trade,” and (iv) the property is for commercial or industrial use.” The signature on the Affidavit appears to be that of Ava Arpaio. This property is located at 10630 North 71st Place, Scottsdale, Arizona.

Lesson 2: Diversity – do not put all of your eggs or assets in one basket. We all know what happens when you drop your basket, you lose all of your eggs or real estate if you have all of your real estate eggs in one basket. The Arpaios have 8 parcels of real property in one LLC. If somebody gets killed or injured on one property and there is a large lawsuit against the LLC, all the properties could be lost. For maximum asset protection, put each parcel of real estate in a separate LLC so in the worst case scenario, you only lose the equity you have in that one LLC. Do not put multiple parcels of valuable real estate in the same limited liability company because you could lose everything if something goes wrong with one of the properties. For more on this topic see my article called “How Many LLCs Should I Form for My Properties?“

The paper trail raises some interesting issues that everybody who transfers land into an LLC should consider before making the transfer.

Lesson 3. Always Consider Income Tax Consequences When Transferring Property. The total purchase price of all the properties stated on the Affidavits of Value is $995,000. The Affidavits of Value indicate that all the transfers involved an exchange or trade to satisfy the purchase price. Therefore the newly formed Ava Investments, LLC, must have been funded with property valued at $995,000 that was used to exchange or trade with the sellers of the properties. Did the Arpaios fund their LLC with a loan of property or make capital contributions of property valued at $995,000. If the latter, the LLC’s basis in the property would be a carry over basis. Would the exchange / trade be a taxable transaction? Income tax law (Internal Revenue Code Section 1031) does provide for tax-free exchanges of real estate for real estate, but not real estate for personal property or money. It is possible that one or more of the transactions could have created taxable events for buyer and seller. Hopefully the Arpaio’s consulted with an experienced tax advisor before they consummated the transfers and taken steps to eliminate or mimimize any adverse income tax consequences.

Lesson 4. Document & Track the Tax Basis of the Property Going into the LLC. The LLC should document the income tax basis of property it acquires so it can deduct the basis from any amount realized on a later sale of the property. If the LLC buys the property from the seller for its fair market value then the tax basis of the purchased property is the amount paid to acquire the property. If the property is contributed to the LLC by a member, the LLC takes the same tax basis in the property that the member had in the property.

Lesson 5. Document the Affect the Contribution of the Property to an LLC Has with respect to the Contributing Member’s Capital Account. This is especially important when the LLC is a multi-member LLC other than a two member husband and wife LLC. If a member contributes money or property to a multi-member LLC, the member’s capital account should be increased by the amount of money contributed or the value of the property contributed. This is an important concept for multi-member LLCs. Documenting or failing to document the value of members’ contributions added or not added to a their capital account has real economic consequences to the all the members. All of the members should sign a document in which they agree to the value of contributed property and the amount that will be added to the contributing member’s capital account. Think of a member’s capital account as similar to a bank account. If you contribute real estate to a multi-member LLC that has $50,000 of equity, you want your capital account to increase by $50,000 because for every dollar that does not get credited to your capital account you will lose $1 or real money at some time in the future.

Lesson 6. How Do You Determine Property Values? It is unusual for two parcels of real estate to have the same value. The purchase price of two of the parcels was $60,000, three parcels were priced at $75,000 and two were $325,000. What a co-inky-dink! How did the Arpaios determine the values of the properties?

See “Sheriff Joe Arpaio and His Fiesta Bowl Freebie.”

Richard Keyt2018-05-31T17:09:28-07:00August 19th, 2011|Articles of Organization, Asset Protection, Real Estate Issues, Tax Issues|0 Comments

Who Will Inherit Your LLC if You Die?

If you are a member of one or more LLCs, do you know who will inherit your membership interest if you die? If you do not prepare for your death and designate your heir(s) properly then the state where you live will determine who inherits your LLCs after you die after the LLC membership goes through a costly probate.

Every state has a law called the “law of intestate succession.” This law is the state’s statutory scheme for determining who inherits property when a person dies owning property and the person does not have a valid Will. Arizona’s intestate succession laws are found in Title 14, Chapter 2, Article 1 of the Arizona Revised Statutes. Arizona’s law of intestate succession provides for the following inheritance rules for an Arizona resident who dies without a Will:

If you die single, your estate goes to your descendants by representation.

If you die single with no descendants, your estate goes to your parents equally if both survive or to the surviving parent.

If you die single with no descendants and both of your parents are deceased, your estate goes to the descendants of your parents or either of them by representation.

If you die while married, your entire estate goes to your spouse if you do not have any descendants or if ALL of your descendants are descendants of you and your spouse.

If you die while married and have any descendants that are not descendants of you and your spouse, your spouse will inherit one-half of the intestate separate property and none of your community property.

If you are married and have any children with a person who is not your spouse, pay close attention to the last rule listed above because it could create a nightmare for your spouse.

Example: Homer has a son named Bob who is not his wife Marge’s son. Homer and Marge are estranged from Bob. Homer & Marge own 100% of World Wide Widgets Arizona, LLC, as community property. The LLC is worth $500,000. Homer is an Arizona resident and dies without a Will. Homer does not own any separate property. Arizona law provides that Marge inherits nothing, zip, zero, nada other than a spousal homestead allowance of $18,000. Homer’s membership interest in the LLC goes to Bob who now becomes half owner of the LLC with Marge. Not only has Homer’s failure to plan cost Marge $250,000, but Homer left Marge the giant headache of operating a business with Bob who knows nothing about the business and only wants his $250,000.

Arizona law does provide that “The decedent’s surviving spouse and minor children whom the decedent was obligated to support and children who were in fact being supported by the decedent are entitled to a reasonable allowance in money out of the estate for their maintenance during the period of administration. This allowance shall not continue for longer than one year if the estate is inadequate to discharge allowed claims.” This allowance however, does not amount to a lot of money.

If you do not know for a fact that the person or people you want to inherit your ownership interest will actually inherit your LLCs when you die then you need to take action now to protect your loved ones and insure that the LLCs go to your desired heirs. However, if you are happy to do nothing and let the law of intestate succession determine who will inherit your LLCs, your heirs will still be required to open an expensive and public probate proceeding with an Arizona superior court.

Best, but More Expensive Solution

The best solution to make sure that your ownership interest in LLCs goes to your desired heirs is to create a trust and have the trust own the LLC. When the trust owns the LLC there is no need for a probate because the trust owns the LLC interest before and after your death. See “How to Transfer an LLC to a Trust” for more on this topic.

Cheapest and Simplest Solution

The simplest way to make sure your Arizona LLCs go to the right person or people after you die is to sign a Transfer of Membership Interest Testament. This simple document not only specifies who inherits your Arizona LLCs, but it also avoids an expensive probate of your LLC interest. To learn more about this important family protection document read my article called “Who will Inherit Your Membership Interest in Your Arizona LLC When You Die?“

Richard Keyt2017-05-01T07:19:55-07:00August 15th, 2011|Asset Protection, Members, Operating LLCs|0 Comments

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