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LLC Law Blog

After 7 Years of Drafting a Small Group of Lawyers Wants to Replace Arizona’s LLC Law

by Richard Keyt, an Arizona LLC attorney who has formed 9,200+ Arizona LLCs

Most of us know that if it is not broken we don’t need to fix it.  Unfortunately a few Arizona lawyers want to “fix” Arizona’s LLC law even though it is not broken.  These lawyers have spent seven years writing and rewriting a uniform law called the Revised Uniform Limited Liability Company Act (RULLCA).  They intend to ask the Arizona legislature to adopt their revised version of RULLCA during the next legislative session.

I was a member of this Arizona State Bar subcommittee for three years, but quit after the subcommittee voted 11 – 3 to eliminate the charging order as the sole remedy of a creditor who gets a judgment against a member of an Arizona LLC.  The charging order sole remedy is one of the reasons Arizona’s current LLC law causes Arizona to be included in the small list of states that have what I call “good” LLC law.  I told the group that instead of replacing Arizona’s good LLC law we should seek to modify it to make it better.  They disagreed.

The Uniform Law Commission adopted a 2013 version of RULLCA, but the subcommittee based its rewrite on the out of date 2011 version of RULLCA instead of the latest version.  The American Bar Association also has a model LLC law, but the subcommittee ignored it.

Since RULLCA was first proposed in 2006, eighteen states have adopted it.  These states are Alabama, California, Connecticut, District of Columbia, Florida, Idaho, Illinois, Iowa, Minnesota, Nebraska, New Jersey, North Dakota, Pennsylvania, South Dakota, Utah, Vermont, Washington, Wyoming.  Note:  The fact California adopted RULLCA tells me Arizona should not make that mistake.

For scholarly articles that explain in detail why RULLCA sucks read “An Analysis of the Revised Uniform Limited Liability Company Act.”  Law Professor Larry Ribstein said the following about RULLCA in his article called “An Analysis of the Revised Uniform Limited Liability Company Act:”

“In general, these provisions raise significant questions and threaten to impose substantial risks and costs on limited liability companies. The article concludes that there is little reason for states to adopt the Act, and that practitioners should be wary about advising clients to form under it”

I have not yet studied the subcommittee’s revised version of the 2011 RULLCA.  I intend to do so in the next few weeks and write my analysis.  If you want to stay up to date on this total rewrite of Arizona’s LLC law then enter your email address in the right column under the text “Subscribe to LLC Law Blog.”  If you know other people that are members of an Arizona LLC send them a link to this article. If I conclude that the proposed LLC law should be trashed then I will be organizing a campaign to notify our legislators that they should not adopt it and I will need your help.

Below are two versions of the subcommittee’s seven year masterpiece.  The first document is the clean version of the new law proposed by the subcommittee.  The second document is a redlined version of the same law that shows the additions and deletions the subcommittee made to the 2011 version of RULLCA.

Clean Version of the Subcommittee’s Revised 2011 RULLCA

Redlined Version of the Subcommittee’s Revised 2011 RULLCA

 

 

2019-01-31T07:50:29-07:00July 1st, 2017|Proposed LLC Law|0 Comments
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What Arizona Employers Need to Know about New Employee Sick Pay Time Law Effective July 1, 2017

Proposition 206, the Fair Wages and Healthy Families Act (the “Act”), was a ballot initiative approved by Arizona voters on November 8, 2016. The Act established a new Arizona state minimum wage effective January 1, 2017, and entitles employees to accrue earned paid sick time.  Effective July 1, 2017, employers of Arizona employees must accrue and provide paid sick leave for all employees except exempt employees.  Earned paid sick time is sick time accrued by an employee that is compensated at the same hourly rate and with the same benefits, including health care benefits, as the employee normally earns during hours worked.

Employees can begin accruing earned paid sick time at the commencement of employment or July 1, 2017, whichever is later. Employees may use earned paid sick time for themselves or for family members (see Arizona Revised Statutes § 23-373 to see who qualifies as a family member) in the following circumstances:

  • Medical care or mental or physical illness, injury, or health condition;
  • A public health emergency; (see Arizona Revised Statutes § 23-373 for more information about what qualifies as a public health emergency) ; and
  • Absence due to domestic violence, sexual violence, abuse, or stalking.

For employers with 15 or more employees: Employees must accrue a minimum of one hour of earned paid sick time for every 30 hours worked, but employees are not entitled to accrue or use more than 40 hours of earned paid sick time per year, unless the employer selects a higher limit.

For employers with fewer than 15 employees: Employees must accrue a minimum of one hour of earned paid sick time for every 30 hours worked, but they are not entitled to accrue or use more than 24 hours of earned paid sick time per year, unless the employer sets a higher limit.

An employee who earns sick time is every person who performs work for compensation, whether full-time, part-time, or on a temporary basis, as an employee. For purposes of determining the number of employees, an employer has 15 or more employees if it maintained 15 or more employees on the payroll for some portion of a day in each of 20 different calendar weeks (the weeks do not have to be consecutive) in the current or preceding year.

Earned paid sick time shall be carried over to the following year, subject to usage limitations based on employer size. Alternatively, in lieu of carry over, an employer may pay an employee for unused earned paid sick time pursuant to Arizona Revised Statutes Section § 23-372(D)(4).  An employee of an employer with 15 or more employees may carry over to the following year a maximum of 40 hours of unused earned paid sick time. An employee of an employer with fewer than 15 employees may carry over to the following year a maximum of 24 hours of unused earned paid sick time.

Employers Must Give Employees Notices of Accrued Sick Time

Employers must give employees written notice of the following at the commencement of employment or by July 1, 2017, whichever is later:

  • Employees are entitled to earned paid sick time;
  • The amount of earned paid sick time that employees are entitled to accrue;
  • The terms of use guaranteed by Arizona’s earned paid sick time laws;
  • That retaliation against employees who request or use earned paid sick time is prohibited;
  • That each employee has the right to file a complaint if earned paid sick time is denied by the employer or the employee is subjected to retaliation for requesting or taking earned paid sick time; and
  • Contact information for the Industrial Commission.

See the Industrial Commission’s 2017 model earned paid sick time employee notice.

Employer’s Record-keeping Requirements

Unless otherwise exempted from the record-keeping requirements, employers subject to Arizona’s earned paid sick time laws are required to comply with notice, posting, and record-keeping requirements pertaining to earned paid sick time. The requirements include:

(1) posting earned paid sick time notices in the workplace;

(2) providing employees with the employer’s business name, address, and telephone number in writing upon hire;

(3) providing employees with a notice that informs them of their rights and responsibilities under the Fair Wages and Healthy Families Act; and

(4) maintaining payroll records in accordance with Arizona’s statutes and rules.

For more information about which employers are subject to Arizona’s earned paid sick leave laws, see Which employers are subject to earned paid sick time laws?

Download and print the Industrial Commission’s 2017 model earned paid sick time notice.

Note:  The Industrial Commission is currently proposing rules that would exempt small employers (defined as a corporation, proprietorship, partnership, joint venture, limited liability company, trust, or association that has less than $500,000 in gross annual revenue) from the Act’s posting requirements.

Paycheck Notice Requirement

An employer must also provide employees either in or on an attachment to the employee’s paycheck:

  • The amount of earned paid sick time available to the employee;
  • The amount of earned paid sick time taken by the employee to date in the year; and
  • The amount of pay time the employee has received as earned paid sick time.

An employee may use earned paid sick time as soon as it is accrued. However, an employer may require an employee hired after July 1, 2017, to wait 90 calendar days after the start of employment before using accrued earned paid sick time.

Employers’ Recommended Reading Assignment

If you or your company is an employer that employees people who are covered by the Act then the employer must comply with the Act.  All employers should read one of the following:

Posters Employers Must Post for Employees

Arizona law requires employers to post SIX notices, or “posters,” and each notice must be posted in a conspicuous place where employees will see it.  Go to the Industrial Commission’s required notices page to see the list of required notices and download each notice.

2017-06-29T10:05:22-07:00June 29th, 2017|Miscellaneous|0 Comments
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Richard C. Keyt Spoke on 4 Topics at an Estate Planning Seminar

I am very proud of my son Richard C. Keyt for speaking on four topics at a two day seminar called “Estate Planning and Administration: the Complete Guide” offered by the National Business Institute (NBI).  Ricky, who is licensed to practice law in Arizona and California and who was a CPA in a national accounting firm before he went to ASU’s law school, spoke on the following subjects on June 26 & 27, 2017:

  • Common trust structures and when they are used
  • Tax consequences of trusts
  • Post-mortem tax planning options
  • Marshaling assets and dealing with creditors

Ricky and I work together to prepare wills, trusts and estate plans for people.  We are co-authors of a book called “Family Asset Protection.”  The purpose of our book is to answer common questions people have about estate planning and explain what you need to do to protect your most valuable assets, your loved ones.  Get free access to Family Asset Protection.

2017-06-27T19:21:10-07:00June 27th, 2017|Asset Protection, Miscellaneous|0 Comments
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Arizona Secretary of State’s Trade Name Application is Now Online

The Arizona Secretary of State supplemented its old fashioned hard copy trade name application pdf form and with an online electronic trade name application.  The fee remains $10.  The Arizona Secretary of State says the following about Arizona trade names:

“Filing a trade name registers a business name for public record. A trade name is similar to a ‘doing business as’ (‘DBA’) name, and is not legally required but is an acceptable business practice. A trade name does not grant exclusive rights to a business name, nor is a trade name similar to a corporation or limited liability company (‘LLC’).”

If your Arizona business is using a DBA that is different from the legal name under which the entity was formed, the business should register the DBA, aka trade name, with the Arizona Secretary of State.

2023-10-24T10:25:59-07:00May 17th, 2017|Operating LLCs|0 Comments
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Our Clients May Use DocuSign to Digitally Sign LLC Operating Agreements

KEYTLaw continues to use cutting edge technology that benefits our clients. We are now creating Operating Agreements and other contracts that use a state of the art digital signing service called “DocuSign.”

Digitally signed documents are legally binding. The United States has enacted laws that provide electronic contracts the same legal validity and enforceability as traditional pen-and-paper contracts. DocuSign is the trusted and secure solution for obtaining electronic signatures that fulfill key requirements of the Electronic Signatures in Global and National Commerce (E-SIGN) Act and the National Conference of Commissioners on Uniform State Laws’ Uniform Electronic Transactions Act (UETA). The world’s largest companies rely on DocuSign, and users have executed millions of contracts using DocuSign.

There is a significant movement toward signing legal documents electronically. You can sign legally binding contracts online and even from your phone. DocuSign allows LLC members to sign their LLC’s Operating Agreements faster, cheaper, and more securely than the old-fashioned method of signing paper documents.

DocuSign makes signing the Operating Agreement of a multi-member LLC a piece of cake compared to the old fashion way of signing contracts.

The Old Fashioned Method of Signing Contracts

Hopefully the LLC has at least one member who takes on the thankless task of getting all the members to sign the Operating Agreement. I’ll call that member the “Responsible Member or RM.” Unfortunately some multi-member LLCs do not have a responsible member, which means the LLC’s Operating Agreement will never be signed.

  • The RM must take the ball and be in charge of getting members to sign the the Operating Agreement.
  • The RM gets all other members together to sign the Operating Agreement or circulates the Operating Agreement among the members for their signature.
  • The RM collects the fully signed Operating Agreement from the other members. Hopefully this happens, but sometimes it does not.
  • The RM makes copies of the signed Operating Agreement and distributes a signed copy to all of the other members. Hopefully this happens, but sometimes it does not.
  • The RM saves the fully signed Operating Agreement in a safe place for future reference. Hopefully this happens, but sometimes it does not.

I hope your multi-member LLC has a responsible member who accomplishes all of the tasks listed above.  Unfortunately too many multi-member LLCs don’t have a responsible member or the responsible member does not complete all of the necessary steps to get the Operating Agreement fully signed and distributed.

 

KEYTLaw’s New Technology Digital Signature Method of Signing Contracts

  • KEYTLaw emails to each member a DocuSign configured pdf version of the Operating Agreement.
  • Each member digitally signs the Operating Agreement and sends the digitally signed agreement back to DocuSign.  DocuSign makes it quick and easy to sign (you can even use your phone to sign) and once signed the document is automatically returned to DocuSign.
  • If a member does not sign the Operating Agreement DocuSign bugs the heck out of the member until the member signs the Operating Agreement.
  • When all members have signed and returned the Operating Agreement to DocuSign it automatically sends the fully signed Operating Agreement to all of the members.

Another Reason to Hire Us to Form Your Arizona LLC

The fact we use DocuSign for Operating Agreements of multi-member LLCs is another reason why you should hire us to form your LLC. Members of multi-member LLCs (other than members of an LLC owned only by a married couple) that purchase our Silver ($597) or Gold ($997) LLC Formation Packages will be sent email messages that ask them to digitally sign their LLC’s Operating Agreement.

2019-06-15T06:51:02-07:00May 16th, 2017|Operating Agreements|0 Comments
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LLC Documents Needed by Title Insurer & Escrow Agents

Question:  My limited liability company is the buyer on a contract to purchase Arizona real estate.  What LLC documents will the title insurance company or the escrow agent want?

Answer:  When a limited liability company is the buyer or seller of real property the title insurance company and escrow agent will require the LLC to supply copies of the following documents:

  • The LLC’s Articles of Organization approved by the Arizona Corporation Commission.  If we formed your LLC we would have sent this document to you as a pdf file attached to an email and given you a hard copy of the AOO in your red LLC portfolio (Silver & Gold LLC purchasers only).  Many times the title insurer and escrow agent will get a copy of the ACC approved Articles of Organization by doing a search of the LLC’s name on the ACC’s LLC online database and then printing the AOO that is linked to on the LLC’s page.
  • The LLC’s Operating Agreement signed by all of the LLC’s members.  This is an important document because it should state who can sign contracts for the LLC and authorize that person to enter into contracts to buy and sell real estate.  If we formed your LLC we would have sent you the LLC’s Operating Agreement as a pdf file attached to an email and given you a hard copy of the OA in your red LLC portfolio (Silver & Gold LLC purchasers only).  If your LLC doesn’t have an Operating Agreement hire us to prepare a custom Operating Agreement.
  • Some title insurers and all prudent buyers and sellers will require the LLC to deliver a copy of resolutions signed by the members that approve the LLC entering into the contract to buy or sell and that names the member of a member managed LLC or the manager of a manager managed LLC who has the authority to sign the contract and other documents on behalf of the LLC.  If you need resolutions purchase our do-it-yourself LLC member resolutions form for $37.
  • If a trust is the member of your LLC then you will also need to give the title insurer and escrow agent a copy of the trust agreement or a certificate of trust in lieu of giving the entire trust agreement.
2019-06-15T06:51:13-07:00May 2nd, 2017|FAQs, Real Estate Issues|0 Comments
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Beware of Real Property Deed Scams

If you own real property in Arizona do not fall for the “you need to get a copy of your deed” rip off.  Companies send real property owners official looking letters that contain language intended to convince the reader that it is important to have a copy of their deed.  One of the letters says:

“The U.S. Government Federal Citizen Information Center website recommends that property owners should have an official or certified copy of their deed. If you don’t already have this important document, you may obtain one now. This document provides evidence that your property was transferred to you.”

Each letter offers to send you a copy of your deed for a price 2 – 5 times the cost of purchasing the deed directly from the county recorder.

If you get one of these letters throw it in the trash.  If you own real estate you would have gotten the original deed when you acquired the real estate.  If you need a copy of your deed you can get a copy at no cost from the county recorder’s website or from the county recorder’s office for a nominal fee if the county does not have its documents available on the internet.  To get a copy of a deed from the Maricopa County Recorder, go to the recorder’s excellent website.

Three companies that send out these letters are:

  • First Documents
  • Local Records Office
  • National Record Service Inc.
2017-03-23T21:54:29-07:00March 23rd, 2017|Miscellaneous|0 Comments
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Does Your LLC’s Operating Agreement Say What Happens if a Member or the LLC Gets a Judgment Against a Member?

Homer Simpson and Ned Flanders owned 60% and 40%, respectively, of World Wide Widgets, LLC, an Arizona limited liability company.  WWW manufactures and sells widgets.  Without WWW’s knowledge or consent Ned began working for Arizona Widgets, LLC, a competitor of World Wide Widgets, LLC.

WWW sued Ned for breach of fiduciary duty and misappropriation of trade secrets by disclosing information to Arizona Widgets, LLC.  The Arizona court awarded WWW a judgment for $100,000 and ordered that Ned transfer his entire membership interest in the LLC to the LLC.

WWW can use the collection process to collect the money from Ned’s non-WWW assets, but can WWW acquire Ned’s membership interest in the LLC if Ned does not voluntarily transfer his membership interest to the LLC?  Arizona Revised Statutes Section 29-655 states:

“On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member’s interest in the limited liability company with payment of the unsatisfied amount of the judgment plus interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest. . . . This section provides the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the judgment debtor’s interest in the limited liability company.”

Emphasis added.

Section 29-655 seems to prevent WWW from forcing Ned to transfer his membership interest to the LLC because the charging order is WWW’s sole remedy.

The WWW fact pattern is similar to the facts in a recent Texas LLC case called “Gillet v. ZUPT LLC,” Houston 14th Court of Appeals, Case No. 14-15-01033-CV, 2/23/17.  In this case ZUPT, LLC, got a judgment that required its member Joel Gillet to transfer his entire membership interest to ZUPT, LLC.  Like Arizona, Texas LLC law provides that the charging order is the sole remedy of a creditor who gets a judgment against a member of a Texas LLC.

The Texas Court of Appeals ruled that the charging order exclusive remedy statute did not prevent a court order that Gillet transfer his membership interest to the LLC.  The Court stated:

“We hold that requiring turnover of a membership interest under these circumstances is proper for two reasons. First, the reasoning behind requiring a charging order as the exclusive remedy is inapposite when the judgment creditor seeking the membership interest is the entity from which the membership interest derives. Second, unlike a case in which a judgment creditor seeks to collect on its money judgment by forcing a sale of a membership interest, this case involves an explicit award of the membership interest itself from one party to the other as part of the judgment. For these reasons, we conclude that a charging order was not the exclusive remedy available to ZUPT, and the trial court did not abuse its discretion by ordering turnover of Gillet’s 45 percent interest in ZUPT.”

Unfortunately for Homer and World Wide Widgets, LLC, no Arizona appellate court has issued an opinion similar to the ZUPT, LLC, vs. Gillet opinion.  WWW will be forced to litigate the issue and hope to get an order at the appellate level requiring transfer of the membership interest to WWW.

Warning for Multi-Member Arizona LLCs

The lesson to be learned from the ZUPT, LLC, vs Gillet case is that all multi-member LLCs should have provisions in their Operating Agreements that provide appropriate remedies if a member of the LLC or the LLC get a judgment against another member.  The Operating Agreement should have language that creates remedies that allow the member or the LLC with the judgment  to get around the exclusive remedy of Section 29-655.  The remedies include a requirement that money be distributed to the creditor from funds payable to the debtor member and a requirement that the debtor member forfeit the debtor member’s membership interest in the LLC.

In an article called “Yet Another Intra-Member Dispute in ZUPT” debt collection attorney Jay Adkisson wrote:

“The decision by the Texas Court of Appeals is, in my humble opinion, right on target, but it by no means reflects (yet) anything like a majority rule or a judicial re-writing of the cold, hard language of the charging order statutes.

Practitioners who are drafting LLC and partnership agreements need to recognize this issue, and confer with the members as to what they want the outcome to be. If one member becomes indebted to the other members or the LLC, do they want to be restricted by a charging order or not? It should be relatively easy to draft around this issue, but in my experience almost nobody does so.”

As a result of ZUPT, LLC, vs Gillet and Jay Adkisson’s advice I have amended my multi-member LLC Operating Agreement to provide special remedies if a member or the LLC get a judgment against another member.

2017-10-07T08:01:42-07:00March 11th, 2017|Charging Orders, Lawsuits, Member Disputes, Operating Agreements|0 Comments
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How to Change the Statutory Agent of an Arizona LLC or Corporation

This video demonstrates how to prepare and file the Arizona Corporation Commission’s LLC Statement of Change of Know Place of Business Address or Statutory Agent form to notify the ACC that an Arizona LLC changed its statutory agent.

Links mentioned in the video are:

For more videos on forming and operating Arizona limited liability companies and how to use the Arizona Corporation Commission’s forms and online services  see the KEYTLaw Youtube channel.  Please click on the subscribe icon and the bell symbol to the right of the subscribe icon to get a notice when we upload a new video.

2023-10-24T10:26:18-07:00March 3rd, 2017|ACC How to Videos, How Do I, Our Videos|0 Comments
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IRS’ Dirty Dozen Tax Scams of 2017

On February 17, 2017, the Internal Revenue Service announced the conclusion of its annual “Dirty Dozen” list of tax scams. The annual list highlights various schemes that taxpayers may encounter throughout the year, many of which peak during tax-filing season. Taxpayers need to guard against ploys to steal their personal information, scam them out of money or talk them into engaging in questionable behavior with their taxes.

“We continue to work hard to protect taxpayers from identity theft and other scams,” said IRS Commissioner John Koskinen. “Taxpayers can and should stay alert to new schemes which seem to constantly evolve. We urge them to do all they can to avoid these pitfalls – whether old or new.”

Perpetrators of illegal schemes can face significant fines and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them. Taxpayers should keep in mind that they are legally responsible for what is on their tax return even if it is prepared by someone else.

Here is a recap of this year’s “Dirty Dozen” scams:

Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or refund. Don’t click on one claiming to be from the IRS. Be wary of emails and websites that may be nothing more than scams to steal personal information. (IR-2017-15)

Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2017-19)

Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. Though the agency is making progress on this front, taxpayers still need to be extremely cautious and do everything they can to avoid being victimized. (IR-2017-22)

Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. There are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. (IR-2017-23)

Fake Charities: Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. (IR-2017-25)

Inflated Refund Claims: Taxpayers should be on the lookout for anyone promising inflated refunds. Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records or charges fees based on a percentage of the refund. Fraudsters use flyers, advertisements, phony storefronts and word of mouth via community groups where trust is high to find victims. (IR-2017-26)

Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses. (IR-2017-27)

Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation to falsely inflate deductions or expenses on their returns to pay less than what they owe or potentially receive larger refunds. Think twice before overstating deductions such as charitable contributions and business expenses or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit. (IR-2017-28)

Falsifying Income to Claim Credits: Don’t invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers are sometimes talked into doing this by con artists. Taxpayers should file the most accurate return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing large bills to pay back taxes, interest and penalties. In some cases, they may even face criminal prosecution. (IR-2017-29)

Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2017-31)

Frivolous Tax Arguments: Don’t use frivolous tax arguments to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims even though they have been repeatedly thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000. (IR-2017-33)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program  to enable people to catch up on their filing and tax obligations. (IR-2017-35)

2017-02-24T19:19:15-07:00February 24th, 2017|Tax Issues|0 Comments
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How to Determine if an Arizona LLC is Member or Manager Managed

A client sent me an email in which he said, “the “Arizona Department of Real Estate is asking for ‘a copy of the resolution signed by members stating: whether management of LLC is established as manager/member controlled’.”

This is the first time in the 34 years I’ve been forming Arizona LLCs that anybody ever asked that question.  If that is really what the Department of Real Estate wants then it/they are ignorant of Arizona LLC law and are asking for an irrelevant document that does not actually prove the LLC’s type of management.

The type of management of an Arizona LLC is not determined by resolutions signed by the members.  Management type is stated in the Arizona LLC’s Articles or Organization filed with the Arizona Corporation Commission.  Arizona Revised Statutes Section 29-3201.B.4 states:

“The Articles of Organization must state . . . whether the company is a manager-managed limited liability company or a member-managed limited liability company.”

The Articles of Organization filed with the Arizona Corporation Commission to create an Arizona LLC contains a statement that the LLC is manager managed or member managed.  Anybody who wants to verify the type of management of an Arizona LLC should look up the LLC on the ACC’s website (enter the name of the LLC in the search box on the top right) then click on the link to the Articles of Organization and read the management type set forth in the Articles.

2020-08-29T08:36:52-07:00February 15th, 2017|Articles of Organization, Miscellaneous|0 Comments
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Beware the Personnel Concepts Letter

Because my firm, KEYTLaw, LLC, is the statutory agent for 2,000+ Arizona LLCs and we form a lot of LLCs (448 in 2016) we get a lot of mail addressed to our LLC clients.  We get a lot of letters addressed to our LLC clients from Personnel Concepts.

If you get a letter from Personnel Concepts, throw it in the trash.  The letter looks like an official government letter because the sender wants to fool you into buying a labor poster your company doesn’t need.

A bona fide business poster company says this about these types of letters:

“All in One Poster Company, Inc would like to warn its customers as well as other small business owners to avoid mass mailer scams informing them that their labor law posters are outdated while pressuring them to purchase an overpriced product for their employee and business.  These mailers are false, misleading, deceptive and even threatening. . . . Even when posting is required, the individual notices are provided at no charge by the U.S. Department of Labor as well as various agencies within your state’s labor department.

See the 178 reviews on Yelp giving this company one star out of five stars and the 20 Facebook reviews that give the company 1.4 stars out of five stars.

Here’s the Personnel Concepts envelope.

 

What follows below is the actual text of the very official looking letter.

2017-02-08T20:37:55-07:00February 8th, 2017|Miscellaneous|0 Comments
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IRS Issues Proposed Regulations for New Partnership Tax Audit Rules

The IRS recently issued proposed regulations (REG-136118-15) that will, if implemented, govern the new partnership audit rules created by Section 1101 of the Bipartisan Budget Act of 2015, P.L. 114-74, and amended by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113.  These new rules apply to partnerships and limited liability companies that are taxed as a partnership for federal income tax purposes.

The new partnership audit rules  allow the IRS to assess and collect income tax at the partnership level rather than from individual partners.  The new audit rules replace the partnership audit procedures created under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The new audit rules apply to tax years beginning January 1, 2018.

The Bipartisan Budget Act of 2015 replaced the TEFRA tax matters partner with a partnership representative that must be a person or entity that has a “substantial presence” in the United States.  If the partnership or LLC taxed as a partnership fails to designate a partnership representative the IRS may name the partnership representative.  This is one of the reasons LLCs taxed as partnerships must amend their Operating Agreement or adopt an Operating Agreement, i.e., to name a partnership representative in the Operating Agreement to prevent the IRS from doing so.  The LLC taxed as a partnership cannot change its designated partnership representative without the IRS’s consent.

The partnership representative can be an entity or a person.  The partnership representative does not have to be a member of the LLC.  After being appointed by the partnership or LLC, the partnership representative must then be designated on the partnership’s or LLC’s tax return.

Take care when appointing a partnership representative because the partnership representative has the sole authority to deal with the IRS on behalf of the partnership or LLC and all of its partners or members with respect to the following matters: (i) settling a tax audit, (ii) agreeing to a final partnership tax adjustment, (iii) making an Internal Revenue Code Section 6226 election to pay a partnership liability at the partner level, and (iv) agreeing to a Section 6235 extension of the period for making partnership adjustments.

The new audit rules take effect January 1, 2018.  There are three important take a-ways to be learned from the new partnership audit rules:

  • All existing partnerships and limited liability companies taxed as partnerships that have an Operating Agreement need to amend their Operating Agreements to add provisions dealing with the new partnership audit rules and to designate a partnership representative.
  • All existing partnerships and limited liability companies taxed as partnerships that do not have an Operating Agreement need to adopt an Operating Agreement that contains provisions dealing with the new partnership audit rules and that designates a partnership representative.
  • All new partnerships and limited liability companies taxed as partnerships should adopt an Operating Agreement with the new partnership audit provisions and should designate a partnership representative.

Hire Me to Amend or Prepare an Operating Agreement that Has Partnership Tax Audit Provisions and Designates a Partnership Representative

I’ve made it very easy to hire me to amend an existing LLC Operating Agreement or prepare a new Operating Agreement.  The first step to hire me is to complete my online Operating Agreement questionnaire.

If you have questions about adopting or amending an LLC Operating Agreement, call me at 480-664-7478 or send an email to me at [email protected].

2017-05-29T09:24:57-07:00January 21st, 2017|Operating Agreements, Tax Issues|0 Comments
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Imposter Signs & Files False Articles of Termination & ACC Terminates the LLC

This week I learned about a now defunct Arizona LLC that was terminated by the Arizona Corporation Commission (the “ACC”) without the prior knowledge or consent of the sole member and manager of the LLC.  The Articles of Organization filed with the ACC to create the LLC named Homer Simpson (not the member’s real name) as the member and manager of the manager managed LLC called World Wide Widgets, LLC (not real LLC’s name).

Sometime in 2015 somebody filed Articles of Termination to terminate World Wide Widgets, LLC.  The document was not signed by Homer Simpson.  It was signed by Bob Faker (not the real name of the signer) who signed as the manager of the LLC.  The ACC approved the filing and terminated World Wide Widgets despite the fact Bob Faker was not listed on the records of the ACC as a member or a manager of the LLC.

I notified the ACC about the fraudulent termination of the LLC and this is its response:

“We accept filings at face value, and do not request any verification of authority to act.  As you know, we are just a filing agency, not an enforcement agency.  We do not investigate or have any authority to enforce any laws with respect to allegations of fraud.  We are unable to assist with reinstating this entity.  If you were to get a court order requiring reinstatement, we would follow that order”

The fraudulent termination of an LLC could have extremely negative consequences for the members of the terminated LLC.  Here are just a few problems that the termination causes:

  • The termination would cause the IRS to take the position that the termination caused all of the assets of the terminated LLC to be distributed to the members in the year of the termination.  If the value of the distributed assets exceeds the member’s tax basis in the LLC the member has taxable income equal to the value of the distributed assets minus the tax basis.  For example, if the LLC’s only asset is a parcel of real property valued at $200,000 and the  sole member of the LLC has a tax basis of $100,000, the member has taxable income of $100,000 in the year of the fraudulent termination.
  • If the LLC owns assets that have a title, there is no document that evidences a transfer of ownership from the LLC to the member.  In the example above, the member would be the beneficial owner of the real estate, but there is no deed signed by the terminated LLC that transfers the title to the land to the member.  Because the LLC was terminated, it is not possible for it to sign a deed that transfers title.  The member will be forced to file a quiet title lawsuit to get the title changed from the LLC to the member.
  • If the terminated LLC has intellectual property such as patents or trademarks those assets will be in limbo.
  • The financial history of the terminated LLC will be lost.  The member can form a new LLC with the same name, but could not say that the new LLC has been in business since 1995.

I am sure there are many additional problems a fraudulent termination can cause.

Consequence of Filing a False Document with the ACC

Arizona LLC law provides that it is a felony to file a false document with the ACC.  Arizona Revised Statutes Section 29-613.A states:

“A person who . . . signs any articles, statement, report, application or other document filed with the [Arizona Corporation] commission that is known to the person as false in any material respect is guilty of a class 4 felony.”

Solution to the Problem

The issue becomes what, if anything, can the members of the terminated LLC do to correct the problem.  The answer alluded to by the ACC’s response above is for the members of the LLC to file a lawsuit and ask the superior court to issue an order to the ACC that the ACC reinstate the existence of the terminated LLC and correct its records to reflect that the fraudulent termination of the LLC never occurred.

This sad story reinforces something I have been telling my LLC clients for years:  YOU MUST CHECK THE ACC’S WEBSITE AT LEAST ONCE EVERY THREE MONTHS TO CONFIRM THAT ALL THE INFORMATION ABOUT YOUR LLC IS CORRECT.  If you find that your LLC was fraudulently terminated then you can file your lawsuit to correct the problem sooner rather than later.

If your LLC was fraudulently terminated, call me at 480-664-7478 or send me an email message at [email protected]

Go the the ACC’s ecorp website to search for your LLC and confirm it exists and all information is correct.

2021-12-04T11:01:11-07:00January 15th, 2017|AZ Corporation Commission, Lawsuits, Miscellaneous|0 Comments
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How Does My LLC become an S Corporation?

Question:  My accountant says that I need to turn my LLC into an S corporation.  How do I do that?

Answer:  First you need to understand that the term “S corporation” refers to a method of income tax under the Internal Revenue Code of 1986.  S corporation is one of four federal income tax methods that can apply to a limited liability company.

You do not have to convert your LLC into a corporation.  Instead, the LLC simply makes an election with the IRS to have the LLC taxed as an S corporation by having all members of the LLC sign an IRS Form 2553 and then file the signed Form 2553 with the IRS.  See the Instructions to IRS Form 2553.  If you want your LLC to be taxed as an S corporation for the tax year beginning January 1, 2022, the members must sign and file IRS Form 2553 with the IRS not later than March 15, 2022.

Caution:  There are certain requirements that must be satisfied for an LLC to eligible to elect to be taxed as an S corporation. An LLC may to elect to be an S corporation only if it meets all the following tests.

  • It is (a) a domestic corporation, or (b) a domestic entity such as an LLC eligible to elect to be treated as a corporation, that timely files Form 2553. If Form 2553 is not timely filed, see Relief for Late Elections, later.
  • It has no more than 100 shareholders. You can treat an individual and his or her spouse (and their estates) as one shareholder for this test. You can also treat all members of a family (as defined in section 1361(c)(1)(B)) and their estates as one shareholder for this test.
  • Its only shareholders are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).
  • It has no nonresident alien shareholders or members.
  • It has only one class of stock (disregarding differences in voting rights). Generally, a corporation or LLC is treated as having only one class of stock if all outstanding shares of the corporation’s stock or LLC’s membership interests confer identical rights to distribution and liquidation proceeds.

There are other requirements, but the major requirements are listed above.  For more about S corporations and LLCs read my blog post called “S Corporation Ignorance.”

P.S.  Besides the S corporation federal income tax method, an LLC can also be called taxed as a sole proprietorship (if it has one member or two members who are married and own their membership interests as community property) partnership (if it has two or more members), a C corporation.

2022-01-31T07:50:17-07:00January 10th, 2017|FAQs, How Do I, Operating LLCs, Tax Issues|0 Comments
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How Do I Transfer Real Estate to My LLC?

Question:  I own Arizona real estate that I rent to tenants.  I don’t want to be sued personally if somebody gets hurt on the property so I formed an Arizona limited liability company to own my investment real estate.  If a tenant or guest is injured on the property and he or she wants to sue the owner the defendant will be the LLC not me because the LLC will own the land.  What do I have to do to transfer the land to the Arizona LLC?

Answer:  Forming an LLC to own the real estate and to shield you from liability if something goes wrong with the real estate is definitely a good idea.  The plan, however, will not work unless you actually transfer ownership of the land from the current owner(s) to the LLC.  To transfer the land to the LLC the owner(s) must sign a deed and the deed must be recorded with the county recorder of the county in which the real estate is located.

Warnings:

1. Title Insurance Issue #1.  Example:  After the LLC acquired title it discovers that the property is encumbered by a $25,000 lien.  The title insurance policy acquired by the prior owner(s) did not list the lien as an exception from title insurance coverage.

Quit Claim Deed Bad Example.  Because the LLC acquired title by a Quit Claim Deed the title insurance policy will not pay the $25,000 lien.  A Quit Claim Deed does not contain any title warranties. This means that if a title defect is discovered while the LLC owns the land the LLC does not have a claim against the prior owner for breach of a title warranty.  Because the LLC does not have a claim against the prior owner for breach of a title warranty the prior owner’s title insurance policy does not cover the $25,000 lien.  The LLC must pay the lien or risk losing the property in a foreclosure.

Warranty Deed or Special Warranty Deed Good Example.  A Warranty Deed and a Special Warranty Deed both contain title warranties that if breached give the new owner a claim against the prior owner(s).  If a properly drafted Warranty Deed or Special Warranty Deed had been used to transfer title to the LLC the deed would contain a warranty that the land was not subject to the $25,000 lien.  The breach of this title warranty gives the LLC a claim against the prior owner(s).  Because the LLC has a claim against the prior owner(s) for breach of the title warranty the prior owner(s) could then make a claim under the prior owner(s) title insurance policy and the title insurance company would pay off the $25,000 lien.

2. Title Insurance Issue #2.  The LLC should contact the title insurance company that issued the prior owner(s) title insurance and purchase an endorsement to the title insurance policy that names the LLC as an additional insured under the original title insurance policy issued to the prior owner(s) as of the date the prior owner(s) acquired the title insurance.  With the endorsement the LLC can make a claim on the title insurance policy directly to the title insurer rather than against the prior owner(s) for breach of a title warranty.  This type of endorsement typically costs $75 – $125.

3. Insurance Issue.  When the LLC acquires title to the land be sure to contact your insurance company and notify it that the LLC owns the property and arrange for the LLC to be the named insured under the policy or added to the policy as an additional insured.  If the property burns to the ground you don’t want the insurance company to deny coverage because it insured the prior owner(s) not the LLC.  Make sure the LLC acquires all types of insurance that is appropriate for the property and its use.

4. Due on Sale Clause Issue.  If the property is encumbered by a lien, the lender may have an option to call the loan if the borrower(s) transfers title to the LLC.  This type of option is called a “due on sale clause.”  If you ask the lender for permission to transfer the land to your LLC the lender will always say no.  I’ve formed thousands of LLCs that acquired real estate subject to due on sale clauses.  I’ve never had a client tell me that their lender called their loan when they transferred their land to their LLC.  If you transfer your land to an LLC and your lender calls your loan, please let me know.  The good news with respect to Arizona real estate encumbered by a Deed of Trust is that Arizona Revised Statutes Section 33-813.A allows the prior owner(s) to cure the default and stop a trustee’s sale under a Deed of Trust by deeding the property from the LLC back to the prior owner(s) who must also pay the lender its foreclosure costs.

Purchase a Do-It-Yourself Special Warranty Deed

If you need to transfer Arizona real estate to a limited liability company, purchase one of my editable do-it-yourself Word documents for $47.  Each deed comes with instructions on how to complete the deed and record it with the appropriate Arizona county recorder.  Purchase a deed in my legal forms web form store.

2023-10-24T10:26:50-07:00January 8th, 2017|Asset Protection, FAQs, How Do I, Real Estate Issues|0 Comments
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How to Add or Remove a Manager of an Arizona LLC

This video demonstrates how to amend the Articles of Organization of an Arizona LLC to add or remove a manager.

Links mentioned in the video are:

For more videos on forming and operating Arizona limited liability companies and how to use the Arizona Corporation Commission’s forms and online services  see the KEYTLaw Youtube channel.  Please click on the subscribe icon and the bell symbol to the right of the subscribe icon to get a notice when we upload a new video.

2023-10-24T10:27:11-07:00January 3rd, 2017|ACC How to Videos, How Do I, Our Videos|0 Comments
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Should a Corporation Own Real Estate?

Question:  I intend to buy a commercial real estate property.  Should I form a corporation to own the real estate?

Answer:  No. Nope. Absolutely not.  No way. Negative. Are you kidding? Ix nay.  Uh-uh.  Nah. Not on your life.  No way.  No way José.  Ixnay.  I hope you don’t misunderstand my position.

An article in Forbes called “Why You Should Never Hold Real Estate In A Corporation” states:

“Take, for example, the client who contemplates the type of entity that should be used to hold a piece of real estate. For most tax practitioners, this would elicit the following Pavolovian reaction:  ‘You should NEVER put real estate inside a corporation.’  And while there are very few NEVERS in the tax world, this one is pretty darn accurate.”

See also “The Perils of Holding Real Estate in a Corporation,” which discusses the federal income tax reasons it is a bad idea for a corporation to own real estate.

 

 

2018-05-22T18:46:34-07:00January 1st, 2017|Forming LLCs, LLCs & Corporations, Tax Issues|0 Comments
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Keyts Formed 448 Arizona LLCs in 2016

My son Richard C. Keyt and I formed 448 Arizona limited liability companies in 2016, which exceeds the 414 LLCs we formed in 2015.  Sixteen LLCs were IRA LLCs in which IRA owners used IRA funds to make self-directed investments in real estate or other assets.  Our best year was 2012 when we formed 530 Arizona LLCs.  I formed my first LLC in October of 1992 the day Arizona’s LLC law became effective.  Since I started counting in 2002 I have formed 5,321 Arizona LLCs.

2016-12-31T11:59:58-07:00December 31st, 2016|Forming LLCs|0 Comments
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