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Enforcing Charging Order on Foreign LLC

Arizona, like Nevada, provides that the sole remedy of a creditor that gets a judgment against a member of an LLC formed in the state is to serve a charging order on the LLC.  The charging order is a court order that if money or property is to be distributed or paid to the debtor/member the money or property must be paid to the creditor instead.

The Kaplan vs. Miller case below illustrates how a creditor can win a judgment in state A against a member of an LLC formed in state B and get a court in state B to issue the charging order against the LLC.  The creditor domesticates the judgment in the state where the LLC was formed and then asks a court in state B to issue the charging order.

STEPHEN KAPLAN, P.C., Plaintiff(s),
v.
CAMERON L. MILLER, Defendant(s).

Case No. 2:15-CV-1395 JCM (PAL).
United States District Court, D. Nevada.
March 24, 2016.

ORDER

JAMES C. MAHAN, District Judge.

Presently before the court is plaintiff Stephen Kaplan, P.C.’s (“Kaplan”) motion for charging order. (Doc. # 6). Defendant Cameron L. Miller, who has not made an appearance in this matter, has not responded. The time for doing so has passed.

On March 6, 2015, plaintiff recovered a judgment against defendant in the U.S. District Court for the Northern District of Texas. (Doc. # 6-1). Plaintiff initiated the present matter by domesticating that judgment in this district. It filed a motion for a writ of execution with this court (doc. # 4), which the court granted. (Doc. # 5).

Plaintiff, as a judgment creditor, now moves the court for an order charging defendant’s ownership interests in two Nevada limited liability companies (“LLCs”) with the domesticated judgment. (Doc. # 6). Plaintiff represents that after conducting discovery of various public records, it has determined that Mr. Miller, as judgment debtor, has ownership interests in RW AND ASSOCIATES, LLC and CLM DEVELOPMENT SERVICES, LLC. Plaintiff attached search results from the Nevada Secretary of State’s website that indicate defendant holds one or more officer positions in each entity. (Doc. ## 6-2, 6-3).

Under Nevada Revised Statute (“NRS”) 86.401, a judgment creditor of a member of an LLC formed under Nevada law may apply to a court of competent jurisdiction for an order charging “the member’s interest [in the LLC] with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest. See NRS 86.401(1) (emphasis added).

The statute provides the exclusive remedy by which a judgment creditor of a member of such an LLC may satisfy a judgment out of the debtor’s interest in the LLC. See NRS 86.401(2)(a). A charging order issued under NRS 86.401 does not give the judgment creditor any rights in the assets, management, or control of the LLC. See Weddell v. H20, Inc., 271 P.3d 743, 750 (Nev. 2012).

The judgment creditor-defendant in this matter appears to possess ownership interests in both of the above-referenced LLCs. He has not appeared in the case, despite apparently being properly served, and has therefore not presented any evidence to the contrary. Accordingly, the court will charge any ownership interests the judgment debtor-defendant owns in either LLC with satisfaction of the March 6, 2015, Texas judgment under NRS 86.401. See Weddell, 271 P.3d at 750.

Accordingly,

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that plaintiff Stephen Kaplan, P.C.’s motion for charging order (doc. # 6) be, and the same hereby is, GRANTED.

IT IS FURTHER ORDERED that defendant Cameron L. Miller’s ownership interests in RW AND ASSOCIATES, LLC be, and the same hereby are, CHARGED with satisfaction of the March 6, 2015, judgment (doc. # 6-1) against him pursuant to NRS § 86.401(1).

IT IS FURTHER ORDERED that defendant Cameron L. Miller’s ownership interest, if any, in CLM DEVELOPMENT SERVICES, LLC be, and the same hereby are, CHARGED with satisfaction of the March 6, 2015, judgment (doc. # 6-1) against him pursuant to NRS § 86.401(1).

2016-04-02T13:49:07-07:00April 2nd, 2016|Charging Orders|0 Comments
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Can I be the President of My LLC?

Question: I am the sole member of my Arizona limited liability company.  Can I tell the public that I am the President of my LLC?

Answer:  Yes, but I don’t recommend you use that term because some people may mistakenly think they are dealing with a corporation rather than an LLC.  Arizona LLC law refers only members and managers of an Arizona limited liability company.  The term “member” means a person or entity that holds an ownership interest in the LLC.  The term “manager” means a person or entity of a manager managed AZ LLC that is a manager of the LLC.  FYI:  If your Arizona LLC is member managed, then it does not have any managers.

Although the terms President, Vice President, Secretary and Treasurer are most commonly used when referring to officers of a corporation, an Arizona LLC could elect to use any or all of those terms when referring to people who are associated with the LLC.  If you own the LLC you can call people associated with the LLC anything you desire, but if the term is not member or manager it has no legal significance unless the term is defined.

If you insist on using a corporate term to describe somebody associated with your LLC I recommend that the LLC’s Operating Agreement specify the terms to be used and that it describe the duties and powers applicable to each position.  For example, if your Arizona LLC is manager managed and you want to call the manager the “President” of the LLC, add the following text to the LLC’s Operating Agreement:

The manager of this Company may be referred to as the Company’s President both internally and in matters dealing with the public.  The duties and powers of the President are identical to the duties and powers of the manager of this Company.

2016-11-16T08:23:41-07:00January 31st, 2016|FAQs, How Do I|0 Comments
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Should I Create a C Corporation?

Question:  We discussed forming an LLC, but I’ve had some people recently tell me that I should create a C Corporation instead of an LLC. They said that the C Corporation gives the best tax advantages. I read on your website, that “Arizona recognizes that corporations may be formed for profit or not-for-profit, but not as C or S corporations.”   So maybe what I’m hearing from these other people is that they are in other states and their laws are different from Arizona law regarding C corporations?

Answer:   If a person tells  you that you should form a C corporation you should run away as fast as possible because that person doesn’t know what he or she is talking about.  No state in the U.S. has something called a C corporation.  All states have for profit corps and nonprofit corps.  The term C corporation refers to one of four methods of income tax under the Internal Revenue Code of 1986.  The person that says form a C corp or form an S corp is confusing the type of entity formed under state law with the method of federal income tax under the Internal Revenue Code.

There is something in the Internal Revenue Code called subchapter S, which provides for how an entity that elects to be taxed under subchapter S is taxed.  There is another subchapter called subchapter C, which provides how entities taxed under that chapter are taxed.

Before you form an entity the first question is what type of entity should you form under the law of a particular state.  The types of entities are LLCs, LPs, LLPs, LLLPs, general partnerships, for profit corps and nonprofit corps.  In Arizona, the LLC replaced the for profit corporation as the best entity to form.  For an in depth discussion of whether to form a corporation or a limited liability company in Arizona to operate a business see my article called, “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?”

After you form the entity under the law of the chosen state the next question is how should the entity be taxed?  An LLC can be taxed as a C corporation under subchapter C by filing an IRS Form 8832 with the IRS.  When the LLC files the Form 8832 you can then say the LLC is taxed as a C corporation, but the entity remains an LLC.

To learn more about the four ways an LLC can be taxed read KEYTLaw attorney and former CPA Richard C. Keyt’s article called “How are LLCs Taxed?“

2016-11-16T08:23:41-07:00January 28th, 2016|FAQs, Tax Issues|0 Comments
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How Can I See If My Desired LLC Name is Available?

Question:  I intend to form a new Arizona limited liability company.  I know that the Arizona Corporation Commission will reject my Articles of Organization if my desired LLC name conflicts with the name of an existing Arizona entity or an Arizona trade name issued by the Arizona Secretary of State. How can I insure that my desired LLC name will not be rejected by the ACC?

Answer:  Actually, the latest version of the ACC’s online database has an easy to use name checker that will tell you if your desired name will be accepted or rejected.  Here’s how to check a prospective LLC name.

  • Go the the Arizona Corporation’s name checker website.
  • Enter the desired name in the field called Entity Name:
  • Click on the Name Availability Check icon on the bottom center of the page to start the search.

The ACC’s database will then tell you if the desired name is available.

Name Reservation Warning:  I don’t recommend that you waste $45 to reserve a name unless there is a lot of money riding on the name.  Before purchasing a name reservation ask yourself this question:  Given that the desired name has been available from the beginning of time up to the moment you checked the name, what are the chances somebody will use your desired name before you file your Articles of Organization?

Hire Us to Form an LLC

We’ve formed 9,200+ and have 349 five star reviews on Google and Birdeye because people love our low-priced LLC formation services.  See the prices and contents of our three LLC packages.  To hire us submit our online LLC formation questionnaire.

For free answers to questions about forming and operating Arizona LLCs and PLLCs call LLC attorneys Richard Keyt (the father) at 480-664-7478 or his son Richard C. Keyt at 480-664-7472.

2020-06-06T10:14:03-07:00January 28th, 2016|Articles of Organization, AZ Corporation Commission, FAQs, Forming LLCs, How Do I|0 Comments
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KEYTLaw Formed LLC’s Documents Stored in the Cloud

We are proud to announce that when Richard Keyt forms a Silver or Gold LLC KEYTLaw will upload and save all of the LLC’s documents to a secure folder in the cloud hosted by the Citrix ShareFile service.  We are very excited to offer this new service that has the following features:

  • We send an email message to all LLC members notifying them that their LLC’s documents have been saved in the LLC’s ShareFile folder.
  • When the member clicks on the link in the Welcome email the member is taken to a ShareFile page that tells the member ShareFile sent the member an email message that contains an access code.  The member is asked to check his or her inbox, copy the access code in the follow up email and paste the access code on the ShareFile web page.
  • When the member inserts the access code and clicks on the login button the member is taken to a secure web page on which the member enters a password, a confirmation of the password, first name and last name.
  • When the member saves the information the member is taken to a ShareFile folder in which all of the LLC’s documents are saved in Adobe .pdf format.
  • When logged in to the LLC’s ShareFile folder the member can: (1) download a document, (2) copy a document, (3) upload documents, and (4) share a file with another person.

ShareFile Security

ShareFile is a state of the art secure online document storage service.  ShareFile’s security features include the following:

Data Protection During File Transfer

  • File transfer: ShareFile employs SSL/TLS protocols to protect client authentication, authorization and file transfers.
  • High-grade encryption: ShareFile secures files in transit with no less than 128-bit encryption using industry-standard encryption protocols.
  • File integrity: ShareFile employs a keyed hashed message authentication code (HMAC) to authenticate and ensure the integrity of intra-system communications. ShareFile verifies file size and file hash to ensure integrity.
  • Link generation: ShareFile download links are uniquely and randomly generated using strong hash-based message authentication codes. ShareFile provides technical countermeasures to protect links from guessing attacks.

Data Protection During Storage

  • Datacenters: ShareFile uses SSAE 16 Type II accredited or ISO 27001 certified datacenters to host the SaaS application and metadata. All files are stored in SSAE 16 Type II (SOC1), SOC2 and ISO 27001 accredited datacenters with high availability and durability ratings.
  • Encryption: ShareFile stores client files at rest using AES 256-bit encryption, a Federal Information Processing Standards (FIPS) encryption algorithm.
  • Firewalls: Files are processed using systems protected by securely configured firewalls that effectively limit and control access to network segments.
  • Redundant storage: Files are stored in replicate with leading Infrastructure-as-a-Service (IaaS) providers that ensure high file durability and availability.
  • Backup: Files are backed up according to configurable file-retention and versioning settings

We look forward to providing members of LLCs we form and clients with state of the art online document storage.

2017-08-25T14:54:40-07:00October 18th, 2015|Forming LLCs, Members, Miscellaneous|0 Comments
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Keyts Finish Teaching LLC Class at Arizona Summit Law School

Today my son Richard C. Keyt and I finished teaching a class on Arizona LLC law to second and third year law students at Arizona Summit School of Law.  It’s the fourth year I’ve taught the class and Ricky’s third year.  I always get charged up by interacting with young people who will soon graduate and become lawyers in this new era of the practice of law dominated by technology.

2015-10-09T19:32:01-07:00October 8th, 2015|Miscellaneous|0 Comments
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Arizona LLCs Can Now Be Formed Online

The following is the text of a September 30, 2015, press release issued by the Arizona Corporation Commission:

Creating an LLC in Arizona just got a lot easier. The Arizona Corporation Commission is accepting online filings for the first time. Before the online efiling became available earlier this month, someone wishing to create a limited liability company had to either come to a Commission office or mail in the paperwork.

LLC formation is one of the commission’s most important missions, Commission Chairman Susan Bitter Smith said. Shortening the amount of time it takes to file the paperwork and making sure all necessary information is submitted up front allows a business to start functioning sooner.

‘I’m proud the commission now allows for a secure and easy way to create an LLC,’ Bitter Smith said. ‘This innovation makes it faster for people to start the businesses of their dreams.’

Last year, more than 52,000 Arizona businesses were formed as LLCs, many of those coming from people who drove to a commission office to submit paperwork. Filing for an LLC online can be done here http://ecorp.azcc.gov/Entity or by going to the commission’s home page www.azcc.gov

The ability to create an LLC through online filings won praise from the business community.

‘Electronic filing of LLC documents has been long awaited by the business community and I applaud the Commission for taking this bold step. Innovation such as this will make starting businesses in Arizona easier, more efficient, and timely,’ Greater Phoenix Chamber of Commerce President and CEO Todd Sanders said. ‘We look forward to the Commission expanding electronic services even further in the future.’

Commissioner Doug Little said the Commission is sending an important message to the business community.

‘I believe this innovation by the Commission will dramatically improve and streamline the process of establishing an LLC in Arizona,’ Little said. ‘This is exactly what we need to be doing to support Governor Ducey’s initiative to let people know that Arizona is ‘open for business.’”

2018-05-31T16:52:03-07:00October 4th, 2015|Articles of Organization, AZ Corporation Commission, Forming LLCs|0 Comments
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ACC Stops $4.9 Million Investment Scam

The following is the text of a February 3, 2015, Arizona Corporation Commission press release:

The Arizona Corporation Commission today ordered Tucson residents Michael and Betsy Feinberg and their affiliated company, Catharon Software Corporation, to pay $4,926,559 in restitution and a $250,000 administrative penalty for defrauding investors with an unregistered investment program. The Commission found that the Feinbergs, formerly of Sedona, represented that they had created and owned a patented computer language technology named “V∆Delta”that would enable Catharon to compete with Microsoft and other computer language systems manufacturers.

While not registered to offer or sell securities in Arizona, the Feinbergs induced investors to purchase Catharon stock by repeatedly representing that Catharon would launch its technology within months of the investors’ investment, Catharon would generate $2 billion in revenue within three years and investors would receive returns of between 400 and 1,572percent.  The Commission found, however, that the Feinberg never launchedCatharon’s technology.

The Commission found, and the Feinbergs admitted, they did not have any reasonable factual basis for the projected launch dates, the projected $2 billion revenue figure and investment returns, or their representations that Catharon would compete with Microsoft and similar companies. Further, the Commission found that the Feinbergs failed to disclose their use of investor monies to pay for personal living expenses, including a bird-watching trip to Mexico, as well as the transfer of more than $891,000 to their personal bank account. In settling this matter, the Feinberg admitted to the Commission’s findings for the purposes of its administrative proceeding and any other proceeding in which the Commission is a party and consented to theentryof the consent order.

For more details about this case, view the full text of the Commission’s order S-20905A-14-0061. The Commission’s final order against the named respondents will be posted online as soon as it is signed by all of the Commissioners.

2019-07-04T10:28:52-07:00February 3rd, 2015|AZ Corporation Commission|0 Comments
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What are Arizona LLC Members Voting Rights?

Question:  The members of my multi-member Arizona limited liability company never signed an Operating Agreement.  The members now disagree on how to run the company.  What are the members’ voting rights?

Answer:  One of the primary reasons the members of a multi-member LLC should sign an Operating Agreement is to set rules on members’ voting rights and to set what major actions require the prior approval of a majority or super majority of the members or the unanimous approval of all members.  If the members fail to adopt a good Operating Agreement then the default voting rules of Arizona’s LLC law apply and its a matter of time before the members disagree on action and big problems arise.

When the members of an Arizona LLC fail to adopt an Operating Agreement that provides for members’ voting rights or if the members adopt an Operating Agreement that is voting rights deficient, Arizona Revised Statutes Section 29-681 applies and provides the default members’ voting rules and rights.

The voting rules that apply to an Arizona LLC that does not have an Operating Agreement with voting rules signed by all of the members are listed below.  There are only nine actions that require the approval of members – four of which of which require the approval of all members and five of which require the approval of a majority of the members.

  • All Members Get One Vote:  Every member has one vote regardless of how much money the member invested or how much of the LLC the member owns.  For example, if Homer and Marge Simpson invested $1,000 in World Wide Widgets, LLC and acquired a 1% membership interest as community property and Ned Flanders invested $99,000 for 99% of the company then each of the three members has one vote with respect to the nine major actions listed in Section 29-751.  Warning:  If you are the major investor and/or the owner of a majority of the percentage interests in an Arizona LLC Section 29-751 is the reason you must have a good Operating Agreement that sets forth voting rules and rights.
  • When Unanimous Approval is Required:  Only four actions require that all members approve the action.  “The affirmative vote, approval or consent of all members is required to:

1. Adopt, amend, amend and restate or revoke an operating agreement or authorize a transaction, agreement or action on behalf of the limited liability company that is unrelated to its purpose or business as stated in an operating agreement or that otherwise violates an operating agreement.

2. Issue an interest in the limited liability company to any person.

3. Approve a plan of merger or consolidation of the limited liability company with or into one or more business entities as defined in Section 29-751.

4. Authorize an amendment to the articles of organization that changes the status of the limited liability company from or to one in which management is vested in a manager or managers to or from one in which management is reserved to the members.”

  • When Approval of a Majority of the Members is Required: Only five actions require the approval of a majority of the members.  “The affirmative vote, approval or consent of a majority of the members, or if management of the limited liability company is vested in one or more managers, the affirmative vote, approval or consent of the sole manager or a majority of the managers, is required to:

1. Resolve any difference concerning matters connected with the business of the limited liability company.

2. Authorize the distribution of limited liability company cash or property to the members.

3. Authorize the limited liability company to repurchase all or part of any member’s interest in the limited liability company from that member.

4. Authorize the filing of articles of termination concerning the limited liability company.

5. Subject to subsection C, paragraph 4 of this section, authorize an amendment to the articles of organization, except that an amendment that merely corrects a false or inaccurate statement in the articles of organization may be filed at any time by a manager if management of the limited liability company is vested in one or more managers or by a member if management of the limited liability company is reserved to the members.

When there is no Operating Agreement Section 29-751.E.1 & 2 give the majority of members a lot of power to out vote the minority members and run the company.

The members failure to to adopt an Operating Agreement more often than not will eventually lead to a dispute among members as to how to run the company.  One of the most common reasons people call me is to learn their options when their Arizona LLC does not have an Operating Agreement and the members need a company divorce.

2016-11-16T08:23:42-07:00February 1st, 2015|FAQs, Member Disputes, Members, Operating LLCs|0 Comments
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Arizona Benefit Corporation Law Effective January 1, 2015

The Arizona legislature passed Senate Bill 1238, in April of 2013.  Governor Brewer signed the bill on April 30, 2013.  SB 1238 provides for the creation of a new type of Arizona corporation called the “benefit corporation” beginning January 1, 2015.  As of the date of this post, 27 states have adopted benefit corporation statutes.

The benefit corporation is not a type of nonprofit corporation. An Arizona benefit corporation is a type of for profit corporation that seeks higher standards of corporate purpose, accountability, and transparency.  The Articles of Incorporation on an Arizona benefit corporation must state that the corporation is formed for a general public benefit.

An Arizona benefit corporation may also promote one or more “specific public benefits.”  Arizona Revised Statutes Section 10-2402.5 provides that “specific public benefits” include:

(a) Providing low-income or underserved individuals or communities with beneficial products or services.

(b) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business.

(c) Protecting or restoring the environment.

(d) Improving human health.

(e) Promoting the arts, sciences or advancement of knowledge.

(f) Increasing the flow of capital to entities with a purpose to benefit society or the environment.

(g) Conferring any other particular benefit on society or the environment as specified in the benefit corporation’s articles of incorporation.

2018-05-20T08:58:16-07:00December 20th, 2014|Miscellaneous|0 Comments
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Annual Meetings of Members of an Arizona LLC

Question:  Does Arizona limited liability company law require the members and managers of an Arizona LLC to hold an annual meeting?

Answer:  No.  However, some badly worded Operating Agreements do require that the members hold annual meetings.

Although no Arizona statute or case requires annual meetings or special meetings of the members or managers of an Arizona LLC as an Arizona LLC attorney who has formed 9,200+ Arizona LLCs I recommend that both types of meetings be held. There are two reasons why members and managers should hold meetings.

  • To reduce the chance that a court will pierce the veil and hold the members of the LLC liable for the debts of the LLC.  One of the factors courts consider when asked to pierce the veil is “did the LLC operate like a business or a hobby?”  Prudent businesses hold meetings and document the actions approved or rejected by the members and managers.  LLCs operated like a hobby do not hold meetings.  Note:  If your LLC’s Operating Agreement requires that the members or managers hold annual meetings then you must make sure that the meetings are actually held and document that fact.  The failure of members to hold annual meetings required in an Operating Agreement is a factor that counts against the members when a court is asked to pierce the veil and hold the members liable for the debts of the LLC.
  • To inform members and managers of important proposed company before it occurs and give them the opportunity to vote to approve or reject the proposed action.  This is especially important when an LLC has multiple unrelated members.  Consider two hypotheticals:  (1) LLC is considering whether to enter into a contract that will require the company to pay a third party a lot of money.  The member who owns more than 50% who is a manager signs the contract without prior notice to the other members who learn of the contract after it’s a done deal.  (2) Same facts, but majority member holds a meeting of the members at which all of the members discuss the proposed contract and then vote on whether or not to sign the contract.  The first method risks alienating the other members who will rightly feel left in the dark.  The second method gives everybody a chance to be informed in advance and give their two cents on signing or rejecting the contract.  Guess which method is less likely to result in disgruntled members who may want a company divorce.

Purchase My Do-It-Yourself Meeting Minutes & Resolutions

I’ve made it very easy for Arizona LLCs to document actions approved by members and managers. Just purchase my editable Word meeting minutes and resolutions that you can modify whenever needed to document special and annual meetings of your LLC’s members and managers.  You can also purchase a document called “Action by Consent” by which the members and managers can adopt resolutions approving company actions in lieu of actually holding a meeting. Each document comes with 16 resolutions for the most common types of actions voted on by members and managers.

Go to my Arizona legal form store to purchase your do-it-yourself minutes and resolutions.

2019-06-15T07:41:39-07:00December 6th, 2014|FAQs, Operating LLCs, Veil Piercing|0 Comments
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Can an LLC be a Tax-Exempt 501(c)(3) Charity?

Question:  My group is considering forming a tax-exempt charitable organization.  Can the organization be a limited liability company or must it be a nonprofit corporation?

Answer:  It can be an LLC if the LLC is wholly owned by a single exempt organization and the LLC satisfies the 12 conditions described in an IRS paper called “Limited Liability Companies as Exempt Organization Update.” The LLC cannot have individuals or nonexempt organizations as members, and its organizing documents must state a purpose to further the charitable purpose. To learn more about nonprofit corporations see my website called “Nonprofit Corporations & Charitable Organizations.”

The 12 conditions are:

1. The organizational documents must include a specific statement limiting the LLC’s activities to one or more exempt purposes.

2. The organizational language must specify that the LLC is operated exclusively to further the charitable purposes of its members.

3. The organizational language must require that the LLC’s members be section 501(c)(3) organizations or governmental units or wholly owned instrumentalities of a state or political subdivision thereof (“governmental units or instrumentalities”).

4. The organizational language must prohibit any direct or indirect transfer of any membership interest in the LLC to a transferee other than a section 501(c)(3) organization or governmental unit or instrumentality.

5. The organizational language must state that the LLC, interests in the LLC (other than a membership interest), or its assets may only be availed of or transferred to (whether directly or indirectly) any nonmember other than a section 501(c)(3) organization or governmental unit or instrumentality in exchange for fair market value.

6. The organizational language must guarantee that upon dissolution of the LLC, the assets devoted to the LLC’s charitable purposes will continue to be devoted to charitable purposes.

7. The organizational language must require that any amendments to the LLC’s articles of organization and operating agreement be consistent with section 501(c)(3).

8. The organizational language must prohibit the LLC from merging with, or converting into, a for -profit entity.

9. The organizational language must require that the LLC not distribute any assets to members who cease to be organizations described in section 501(c)(3) or governmental units or instrumentalities.

10. The organizational language must contain an acceptable contingency plan in the event one or more members ceases at any time to be an organization described in section 501(c)(3) or a governmental unit or instrumentality.

11. The organizational language must state that the LLC’s exempt members will expeditiously and vigorously enforce all of their rights in the LLC and will pursue all legal and equitable remedies to protect their interests in the LLC.

12. The LLC must represent that all its organizing document provisions are consistent with state LLC laws, and are enforceable at law and in equity.

2016-11-16T08:23:42-07:00August 4th, 2014|FAQs|0 Comments
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Arizona LLCs Are Eight Times More Popular Than Arizona Corporations

The Arizona Corporation Commission statistics for its fiscal year ending June 30, 2014, show that people are forming Arizona LLCs eight times more often than Arizona corporations.  Most people forming Arizona corporations do not know that the corporation is an obsolete entity that should be used only in a few select circumstances.

I have formed 9,200+ Arizona limited liability companies since 2001, but less than 100 for profit Arizona corporations.  For the reasons why there is such a big difference, see my article called “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?”  See also“Contents of Arizona LLC Attorney Richard Keyt’s $597 Complete LLC Package” and Testimonials.

2019-06-15T07:40:28-07:00July 1st, 2014|Forming LLCs, LLCs & Corporations|0 Comments
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Beware Certificate of Good Standing Rip Off

Today we received in the mail about 30 envelopes from Arizona Business Filing Services.  The envelopes contained an official looking document entitled “2014 Certificate of Good Standing Request Form.” The document suggests that the brand new Arizona LLC should pay ABFS $59.99 to obtain a Certificate of Good Standing for the new LLC.  As soon as I saw the document I knew it was a scam.  Here are some tell tale signs that the letter should be ignored:

  • It starts with IMPORTANT!
  • It states “Your Articles of Formation have been filed with the Secretary of State of Arizona.”  Arizona LLC’s don’t file Articles of Formation with the Secretary of State.  Arizona LLCs file Articles of Organization with the Arizona Corporation Commission.
  • The cost for the Certificate of Good Standing is $59.99, but anybody can obtain a COGS from the Arizona Corporation Commission for $10.

FYI:  We never get a Certificate of Good Standing for LLCs we form.  Your LLC does not need a COGS unless some party like a bank or title insurance company asks for it.  When somebody does demand a COGS the requestor wants a current document, not one obtained two years before the request for the COGS.

The following is the text of a June 9, 2014, press release from the Arizona Corporation Commission concerning the Arizona Business Filing Services COGS letter:

Corporation Commission Warns Business Owners of
False Service Claiming to Offer “Official” Documents

PHOENIX — The Arizona Corporation Commission is warning business owners that an individual or group calling itself “Arizona Business Filing Services” is sending out an official – looking document offering to provide an “Arizona Certificate of Good Standing” for a fee of $59.99. This entity is not affiliated with the Corporation Commission, and business owners do not need to go through any third party to obtain their Certificate. Further, the Commission cannot guarantee the authenticity of such a document.

Valid Certificates of Good Standing can only be obtained directly from the Corporation Commission. The entity status can be viewed online, or a hard – copy certificate of good standing can be obtained by corporations and limited liability companies immediately online for a fee of $45, or by mail, for a fee of $10 (regular processing time).

The Commission has referred this false advertisement to the Attorney General’s office for investigation. I f you have received it, please contact the Arizona Attorney General’s Office in Phoenix at (602) 542-5763, in Tucson at (520) 628-6504, or outside the Phoenix and Tucson metro areas at 1 (800) 352-8431. To file a complaint online, please visit the Attorney General’s web site at www.azag.gov. To file a complaint in person, the Attorney General’s Office has 37 satellite offices throughout Arizona with volunteers available to help. Locations and hours are posted on the Attorney General’s web site .

2018-11-01T19:25:20-07:00June 11th, 2014|AZ Corporation Commission, Operating LLCs|0 Comments
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New IRS Procedure to Get EIN for an LLC Owned by a Nonresident Alien

Question:  I am a not a U.S. citizen and I live outside the U.S., aka a “nonresident alien.”  I formed a limited liability company in the U.S.  How do I get a federal employer id number (EIN) for my LLC?

Answer:  You can get the EIN one of two ways:  the easy way or the not so easy way. Before January of 2014 we could get an EIN for an LLC we formed for a nonresident alien if the nonresident alien completed and signed an IRS form SS-4 that designated my legal assistant as a third party designee authorized to contact the IRS and get the EIN.  My legal assistant would call the IRS international EIN number, fax the SS-4 to the IRS agent and spend about 45 minutes on the phone, but at the end of the call the IRS would give my legal assistant the EIN.

Beginning in January of 2014, the IRS canned that procedure.  Now a company of any type owned by a nonresident alien gets an EIN for the company by one of the following two methods:

You should be able to get the EIN for the new LLC by using the IRS’ online wizard here:

Easy Way: If the nonresident alien has an IRS issued International Taxpayer Identification Number (ITIN), the nonresident alien can obtain the EIN in a 5 – 10 minute data entry session using the IRS’ online EIN wizard.  After submitting all of the information the website will display the EIN.  Be sure to print the page with the EIN and keep it in a safe place.

Hard Way:  If the nonresident alien does not have an ITIN then he or she must complete and sign an IRS form SS-4 and fax or mail it to the IRS.  Faxing the SS-4 to the IRS is the better method because the IRS will fax the EIN to the applicant in approximately four business days vs. three to four weeks if the SS-4 is mailed to the IRS.  Prepare, sign and fax the IRS form SS-4 to the IRS at 859-669-5760.

To get a partially completed IRS form SS-4 for an LLC and my detailed instructions on how to fill out the form read my article called “How to Complete IRS Form SS-4.”  Be sure to delete all the text at the bottom of the form in the Third Party Designee Fields and insert your name, phone number and fax number at the bottom of the form.

2017-10-06T21:36:19-07:00June 5th, 2014|FAQs, Forming LLCs, Tax Issues|0 Comments
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Warning: Improper Contract Signature May Create Personal Liability

Question:  My LLC is to be the tenant on a real property lease.  The landlord’s lease has a signature block that indicates I will sign the lease as the manager and as a member of the LLC.  The signature block looks like this:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager and Member

If I sign the contract will I be personally liable under the lease in addition to the LLC?

Answer:  Probably.  If you sign the contract with the signature block as indicated above the landlord will claim you signed the contract in your capacity as the manager of the LLC AND in your individual capacity as a member.  A court might agree because that is the strict reading of the text under your signature.  Arizona LLC law says that a member does have have the legal power to sign a contract and bind the Arizona LLC on legal obligations.  Therefore the text “and Member” can only mean the signer is signing in his or her individual capacity.

Bottom Line:  If you do not want to be liable for obligations under a contract, make sure the signature line/block shows that you are signing only on behalf of the LLC.  The signature block should be one of the following:

If the LLC is member managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Member

If the LLC is manager managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager

2016-11-16T08:23:42-07:00April 21st, 2014|FAQs, How Do I, Operating LLCs|0 Comments
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How Do I Complete IRS Form SS-4

Question:  I just formed a limited liability company.  I want a third party to obtain a federal employer id number (EIN) from the IRS.  The form is confusing.  Can you help me complete IRS Form SS-4?

Answer:  Yes.  We get this question so often LLC attorney Richard Keyt wrote a detailed article that explains how to complete the IRS Form SS-4.  Read “How to Complete IRS Form SS-4.”

Note:  If you are not asking a third party to get your LLC’s EIN don’t use IRS Form SS-4.  Instead, go to the IRS’ EIN wizard and take five minutes to answer questions online.  The IRS will issue your LLC an EIN at the end of the simple data entry process.

Watch this video to learn how to use the IRS’ online wizard to get an EIN for your LLC or PLLC.

2023-10-24T10:15:45-07:00April 20th, 2014|FAQs, Forming LLCs, How Do I, Operating LLCs|0 Comments
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Do I Need a Certificate of Good Standing for My LLC?

Question:  Do I need to purchase a Certificate of Good Standing for my Arizona limited liability company from the Arizona Corporation Commission?

Answer:  Not unless a third party requires it.  The purpose of the Certificate of Good Standing is to prove to people or companies that your Arizona LLC was formed and is in good standing with the Arizona Corporation Commission.  You do not need the Certificate of Good Standing unless a third party requests it.  If you do get a request for a Certificate of Good Standing the requester will want a current Certificate of Good Standing, not one created months or years before the date of the request.

The most common reason you might need a Certificate of Good Standing is your LLC wants to borrows money from a financial institution.  Lenders frequently ask for a Certificate of Good Standing because they want to confirm that the LLC exists and is in good standing with the Arizona Corporation Commission when the lender loans the money.

Don’t waste your money on getting a Certificate of Good Standing unless somebody asks for it and complying with the request is important to your LLC.

If you need a Certificate of Good Standing for an Arizona LLC or corporation for your company or somebody else’s company watch my demonstration video and I will show you how to purchase the Certificate of Good Standing for $45 and download it immediately.

2023-10-24T10:16:06-07:00March 30th, 2014|AZ Corporation Commission, FAQs, Operating LLCs|0 Comments
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Do Members of an Arizona LLC Owe Fiduciary Duties to Other Members?

Question:  “Does a member of an Arizona limited liability company owe other members of the company any fiduciary duties?

Answer:   A March 27, 2014, Arizona Court of Appeals opinion in the case of TM2008 Investments, Inc., vs. ProCon Capital Corp. says that the members of an Arizona limited liability company do not owe any fiduciary duties to the other members unless the members signed an Operating Agreement that creates and imposes contractual fiduciary duties on the members.

Since the TM2008 Investments case involves fiduciary duties we should first explain what the term means.  The Cornell University Law School Legal Information Institute says the following about fiduciary duties:

“A fiduciary duty is a legal duty to act solely in another party’s interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.”

If a person owes a fiduciary duty to another person it also means it is much easier for the principal to sue the fiduciary for breach of a fiduciary duty and win a judgment because there is a higher standard of care associated with the fiduciary duty than would otherwise apply.

The TM2008 Investments, Inc., vs. ProCon Capital Corp. case arises from a dispute among the two members of Doveland Developments, LLC, a company formed to buy land and develop it into homes.  Unfortunately the project was not successful.  The lender threatened to foreclose and sell the land and go after the owners of the two members (Steve Tackett and Bonnie Vanzant) of Doveland Developments, LLC, because they had personally guaranteed the payment of the loan.  The members of Doveland Developments, LLC, are TM2008 Investments, Inc., and ProCon Capital Corp.

When the lender notified the parties that the loan was in default Bonnie Vanzant paid the loan in full.  She then sued Steve Tackett under an indemnification agreement they had signed to collect from Steve one half of the money Bonnie paid to the lender under her personal guaranty of the loan.  TM2008 Investments filed a petition to dissolve and liquidate Doveland Developments due to the inability to conduct business in light of the members’ substantial disagreements. ProCon Capital filed counterclaims against TM2008 Investments for breach of the implied covenant of good faith and fair dealing (count 1) and breach of contract (count 3), and against TM2008 Investments and the Bonnie and James Vanzant personally for breach of fiduciary duty (count 2).

The lawsuits were consolidated.  The trial court granted Bonnie Vanzant’s motion for summary judgment on the indemnification claim, but denied TM2008 Investments’ motion for summary judgment on the counterclaims.  Just before trial, ProCon Capital voluntarily dismissed with prejudice counts 1 and 3.  After jury trial on the claim for breach of fiduciary duty, the jury returned a verdict in favor of ProCon Capital and against TM2008 Investments and the Vanzants personally for $1,039,754.  The losers appealed.

The primary issue before the Arizona Court of Appeals was whether or not Arizona’s limited liability company law provides that a member of an Arizona LLC owes a fiduciary duty to the other members of the LLC.  ProCon Capital argued that because Arizona corporate and partnership law create fiduciary duties on shareholders and partners, respectively, Arizona law must therefor create fiduciary duties on members of an Arizona LLC.  The appellate court disagreed.  The court said:

“We decline in this case to mechanically apply fiduciary duty principles from the law of closely-held corporations or partnerships to a limited liability company created under Arizona law. The legislature did not explicitly outline any such duties for members of an LLC; instead, the LLC Act allows the members of an LLC to not only create an operating agreement, but also delineate in that agreement the duties members owe one another.”

Translation:  The court said Arizona’s LLC statutes do not subject members of Arizona LLCs to any fiduciary duties and neither do any Arizona appellate court opinions.

However, the court said that an Operating Agreement can contain language that creates one or more fiduciary duties on members.  The Operating Agreement of Doveland Developments, LLC, contained this clause that ProCon Capital aruged created a fiduciary duty on TM2008 Investments, Inc, and Bonnie and James Vanzant:

It is agreed any Member shall not be liable to the Company or any other Member for any damages or the like relating to any vote, decision, action, inaction or the like taken on behalf of the Company in accordance with these provisions and other provisions of this Agreement if such is done in good faith and with reasonable business judgment including the duty to make management decisions with the care of an ordinarily prudent person in a like position and similar circumstances and in a manner believed to be in the best interests of the Company.

The appellate court found that the above quoted language did not create a fiduciary duty on the members.

The court reversed the trial court and sent the case back to the trial court.

Lessons to Be Learned

The TM2008 Investments, Inc., vs. ProCon Capital Corp. case stands for the following:

  • Arizona’s statutes that govern Arizona limited liability companies do not create fiduciary duties on members.
  • Members of an Arizona LLC can create one or more fiduciary duties by inserting appropriate language in the LLC’s Operating Agreement.

The issue of whether the Operating Agreement of a multimember Arizona LLC should or should not contain fiduciary duty provisions is a topic for another article.  Hint:  A member in control of an Arizona LLC would not want any fiduciary duties in the Operating Agreement, but the minority member would want the opposite.

2018-05-31T17:09:09-07:00March 29th, 2014|FAQs, Lawsuits, Member Disputes, Operating Agreements|0 Comments
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What is Piercing the Veil of an LLC & Why is Do You Need to Understand It?

Question:  I have heard the term “piercing the veil” of a corporation or a limited liability company.  What does the term mean and why do owners of LLCs need to understand it?

Answer:  “Piercing the veil” means that a court disregards the shield or veil created by state law that says the owners of a corporation or an LLC are not liable for the debts of the entity.

Example 1: Homer Simpson’s LLC called World Wide Widgets, LLC, borrowed $25,000 from Ned Flanders.  The LLC signed the promissory note, but Homer didn’t.  The LLC does not pay.  World Wide Widgets, LLC, doesn’t have any assets so Ned knows if he gets a judgment against the LLC he can’t collect it.  Ned never gets his money.

Example 2:  Same facts as Example 1, but in operating the LLC Homer did not follow Arizona LLC law and did not follow proper procedures.  Ned sues the LLC and Homer and asks the court to pierce the veil and hold Homer liable for the LLC’s debt.  The court finds there are grounds to pierce the company veil and holds Homer personally liable for the LLC’s $25,000 debt.  This is the bad result for the LLC member and frustrates the reason people form an LLC, i.e., to protect themselves from liability for the debts of the LLC.

Jay Adkisson, a nationally known asset protection lawyer, said the following in response to a recent court ruling in a case called Shermane Hector v. Mo–Dad Environmental Serv., LLC:

The veil-piercing/alter ego challenges to LLCs are going to be interesting because they start out with the intended lack of formality of corporations, and then their owners often get loosey-goosey about how the company is operated, how it is capitalized (and continues to be capitalized), etc.  IMHO, the real challenge for planners is not so much in the meticulous drafting of LLC management agreements and the like, but in the education of owners as to how the entity needs to be run after all the ink dries.

How true.  The vast majority of people think that if they file the Arizona Corporation Commission’s fill in the blanks form Articles of Organization they are home free and their life savings are protected from the LLC’s debts.  Ignorance may be bliss, but ignorance of the legal concept called “piercing the company veil” can cost LLC members big bucks.

Most people who form an LLC don’t know that they must comply with Arizona’s LLC law or risk a court piercing the veil and holding them liable for the LLCs debts.  For example, Arizona LLC law requires that every Arizona LLC maintain certain records.  If you own an Arizona LLC don’t you think it would be a good idea to comply not only with that statute, but other Arizona LLC laws too?

The Shermane Hector v. Mo–Dad Environmental Serv., LLC court said this about veil piercing:

Some of the relevant factors considered in determining whether to apply the alter ego doctrine include: commingling of corporate and shareholder funds; failing to follow statutory formalities for incorporating and transacting corporate affairs; undercapitalization; failing to maintain separate bank accounts and bookkeeping records; and failing to hold regular shareholder and director meetings”

In forming 9,200+ Arizona LLCs I learned a long time ago that I must educate my LLC clients about Arizona LLC law.  I accomplish this two ways:

  • The LLC Operations Manual:  This is a 170 page book I wrote that explains Arizona’s LLC law in great detail.  For example, chapter 3 of the Operations Manual contains a list of 34 tasks that every LLC should complete in its first 75 days.  Learn more about the LLC Operations Manual.
  • Informative Email Messages:  Everybody who hires me to form an Arizona LLC will be sent 50 email messages during the first year informing them about Arizona LLC law and reminding them to do things like sign the Operating Agreement, open a bank account, set up the LLC’s bookkeeping system, consult with a CPA and document loans by members to the LLC.

To learn more about this very important topic read my article called “Two Phases in the Life of an LLC.”

2019-06-15T07:39:23-07:00March 18th, 2014|Asset Protection, FAQs, Operating LLCs, Veil Piercing|0 Comments
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