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LLCs & Corporations

Changes to Arizona LLC Law Effective August 9, 2017

The Arizona legislature passed SB1272, which was signed into law by the Governor or Arizona.  This new law makes minor changes to Arizona’s LLC and corporate laws.  These new laws are effective on August 9, 2017.  A summary of the changes is below.

NEW LEGISLATION SUMMARY

SB1272 was passed this last session. It was a corporation omnibus bill, and it affects several filing requirements for both corporations and LLCs. The changes are summarized below in the order in which they appear in the bill. To read the entire bill, click on the bill number.

MOD accounts:

The bill grants the Commission the discretion to allow the use of MOD (money-on-deposit) accounts. Previously, the statute did not give the Commission any discretion. (See changes to A.R.S. § 10-122(K).) For the foreseeable future, the ACC will continue current procedure with MOD accounts.

Approval of documents:

The Commission is no longer obligated to return a copy of an approved document to the customer; the obligation now is to provide notice of the approval. (See changes to A.R.S. § 10-125.) Effective August 9, 2017, the Commission will no longer send out a copy of the document with the approval letter; only the approval letter will be returned to the submitter. Approved documents are available on our website.

Rejection of documents:

The Commission will continue to return a copy of a rejected document along with the letter explaining the rejection. (See changes to A.R.S. § 10-125.)

Electronic transmission and Notice:

Definitional changes were made, and other references throughout the corporation and LLC statutes have been modified to refer to “electronic transmission” where appropriate, and that definition links back to the definition of “electronic record” found in the electronic transactions statutes, A.R.S. § 44-7001, et seq. This is an attempt to codify the use of email as an allowable means of communication and for giving Notice between the Commission and entities. (See, e.g., A.R.S. §§ 10-140(21), 10-141, and 10-504.) The Commission now can send official notices, such as a Notice of Pending Administrative Dissolution, via email. Please note that this will NOT be implemented until the new computer system is up and running. When the new system is in use, the Commission will ask for the entity to consent to receive such notices by email. If the entity does not consent, notices will be sent via the U.S. Post Office.

Change documents:

The requirements for Statements of Change have been simplified. Only the new information for address and agent will be required. We are revising our forms to reflect the minimal requirements and will have those available as of August 9.

Annual Reports:

The dissolution and withdrawal statutes have been revised to allow for a six-month suspension of the annual report requirement for corporations that file for a voluntary dissolution/withdrawal. (See, e.g., changes to A.R.S. § 10-1403.) Corporations have six months after submission in which to complete a dissolution or withdrawal. Often, corporations will try to complete the dissolution/withdrawal but find that they now owe their annual report and/or owe penalties for not filing it on time. This bill provides that the annual report requirement is suspended for six months from the date the dissolution/withdrawal is submitted. Note: once the six months passes, the annual report is due and so are penalties, if enough time has passed since the due date. TIP – obtain the tax clearance certificate before submitting the dissolution. That way, you will never run into a penalty situation with the annual report. This change is being programmed into the current system and should be implemented by August 9. The new law applies only to dissolutions or withdrawals delivered to the ACC on or after August 9, 2017.

Foreign nonprofit corporations:

The gap left by last year’s SB1356 is now closed – foreign nonprofit corporations no longer have to file applications for new authority when they amend their articles. A foreign nonprofit corporation that amends its name, duration, or state of jurisdiction will now file Articles of Amendment to Application for Authority (along with a certified copy of the amendment) – a significant cost savings ($25 fee instead of $175). This change is already in effect for foreign for-profit corporations, from last year’s SB1356. The ACC’s form will apply to both for-profit and nonprofit corporations as of August 9, 2017.

Nonprofit corporations:

Another gap was closed – nonprofit corporations can sue for false filings. For-profit corporations and LLCs were granted this right of action in last year’s SB1356. Note – this is a private right of action and is not something the ACC will do for the corporation.

LLC administrative dissolution:

LLCs whose latest date to dissolve has passed will now be administratively dissolved. (See changes to A.R.S. § 29-786.) The LLC does have an option of amending its articles, or, if it is administratively dissolved, of reinstating and then amending its articles. There are several thousand LLCs that will be administratively dissolved pursuant to this provision, beginning on or after August 9, 2017.

2017-07-08T08:07:24-07:00July 8th, 2017|AZ Corporation Commission, LLCs & Corporations, Miscellaneous|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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S Corporation Ignorance

For the umpteen time today a client told me about the client’s discussion with a person who does not understand the difference between the type of entity formed under the law of one of the fifty states vs. the method of income tax applied to the entity by the Internal Revenue Code of 1986, as amended.   The ignoramus said, “My company insists that it enter into a contract with your company, but only if your company is an S corp.”  My client’s company is an LLC, but the ignorant person thinks his company cannot enter into a contract with the LLC because the LLC is not an “S corporation.”

Too many people, including CPAs and lawyers, do not understand that when they say the entity must be an S corporation they are mixing two concepts: (i) the type of entity formed under state law, and (ii) the income tax method applicable to the entity under the Internal Revenue Code.  Just today I downloaded the materials to a webinar I will watch later today.  The lawyer who is teaching the webinar created reference materials that constantly use the phrase “limited liability companies vs. ‘S’ corporation.”  The lawyer knows better, but falls into the trap of loose talk about S corporations.

Not one single state in the United States allows people to create an S corporation.  The states allow people to create, sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, for profit corporations, nonprofit corporations, benefit corporations, and limited liability companies.  The term “S corporation” refers to a method of federal income tax applicable to an entity under the Internal Revenue Code.  After forming your entity under state law you must then decide the federal income tax method you want to apply to your entity.  If Homer Simpson forms a for profit corporation in Arizona and an Arizona LLC, he can cause both entities to be taxed under Subchapter S of the Internal Revenue Code by timely filing an IRS form 2553.  The federal income tax law applies exactly the same to the corporation and the LLC taxed as S corporations.

P.S.  Timely filing the IRS Form 2553 means filing the form with the IRS within the first two and one half months of the entity’s existence or within the first two and one half months after the beginning of a calendar year.

For more on this topic see my article called “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?“

2017-05-29T09:32:16-07:00December 19th, 2016|FAQs, Forming LLCs, LLCs & Corporations, Operating Agreements, Tax Issues|0 Comments
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Arizona Benefit Corporations Update

On January 1, 2015, Arizona’s benefit corporation law became effective.  This new law allowed people to form a new type of Arizona corporation called the “benefit corporation.”  An Arizona benefit corporation is a corporation whose Articles of Incorporation states that the corporation is a benefit corporation.  The benefit corporation may have a general public benefit goal, i.e., to have a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.

Yesterday I asked the Arizona Corporation Commission how many benefit corporations have been formed under Arizona’s relatively new benefit corporation law.  The answer is twelve!  Yes.  Twelve benefit corporations formed in Arizona in two years.  Of the twelve Arizona benefit corporations ten of them became b corps in 2015 and two became b corps in 2016.  Here are the only corporations in Arizona that are benefit corporations:

  • Goodmans, Inc.
  • Sechler, CPA, P.C.
  • Desert Sky – Music, Art & Sustainability Festival, Inc.
  • Elevate by Will Claye Inc.
  • Spirit of Esther Incorporated
  • Individualized Pool Care, Inc.
  • Spex: Sedona Philosophy Experience Corporation
  • Nail Art Club, Inc.
  • Good Market Inc.
  • Upcycle Tucson Inc.
  • The Bull Market, Inc.
  • Envusion, Inc.

You might ask “why would anybody form an Arizona benefit corporation?”  My answer is I don’t know.  If you can think of a good reason to form a benefit corporation rather than a form a for profit corporation, a nonprofit corporation or a limited liability company, leave a comment and tell me.

2018-05-20T14:07:25-07:00December 15th, 2016|AZ Corporation Commission, LLCs & Corporations, Miscellaneous|0 Comments
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Tax Free Merger of a Corporation into an LLC

Question:  How do I convert my corporation into a limited liability company?

Answer: Two ways – the easy way and the hard, but not too hard way.

Easy Way:  If your corporation does not have assets that have substantial value or contracts that cannot be assigned or transferred to the LLC without the consent of the other party to the contract then simply form a new LLC, dissolve the corporation and start doing business under the new LLC.  If your corporation is an Arizona corporation and you dissolve it before or concurrently with forming your Arizona LLC the new LLC’s name can be identical to the corporation’s name.

Harder Way:  Form an Arizona LLC and merge the corporation into the LLC.  The advantage of this method is that a merger causes the assets and liabilities of the corporation to become assets and liabilities of the LLC automatically as of the effective date of the merger.  If the dissolution of the corporation would cause its shareholders to pay unwanted income taxes the merger method may avoid the tax.

Example 1:  World Wide Widgets, Inc. owns property that has a value of $101,000.  The sole shareholder’s basis in his stock of the corporation is $1,000.  If the corporation assigned the property to its shareholder before dissolving the shareholder would have taxable gain of $100,000 ($101,000 value of property – $1,000 adjusted basis of the stock).

If the stock is a capital asset (held for more than one year) the shareholder in this case could be paying as much as 23.8% of the gain as federal income tax plus state income tax if the shareholder resides in a state that has a state income tax.  Arizona’s tax rate for capital gains in 2016 is 4.5%.  Therefore, if the shareholder is an Arizona resident and the stock is a capital asset the total federal and Arizona income tax on the $100,00 gain is $24,500 if the shareholder is not subject to the 3.8% federal surtax on net investment income or $28,300 if the shareholder is subject to the surtax.  Yikes!  Who wants to pay federal and state income tax if it can be avoided.

The good news is that if the corporation is taxed as an S corporation or a C corporation and the LLC is taxed as an S corporation or a C corporation the merger can be a tax free reorganization under Section 368(a)(1)(F) of the Internal Revenue Code.  By carrying out the “F” merger the shareholder can eliminate the income tax.

Example 2:  Same facts as example 1 except the corporation taxed as a C or an S corporation merges into an LLC taxed as a C or an S corporation.  Result:  $0 income tax instead of $24,500 or $28,300.

Conclusion:  Ask your CPA to tell you in writing what would be the income tax consequences to you if you were to dissolve your corporation.  If dissolution will cause you to pay federal and/or state income tax you do not want to pay then do an F reorganization, i.e. merge your corporation into an LLC that is taxed as a C or S corporation.

P.S.  If your surviving LLC will be an Arizona LLC hire me, Richard Keyt to prepare the merger documents and to consummate the tax-free merger.  Call me at 480-664-7478 if you have questions or to get started.

2016-11-24T11:13:40-07:00November 25th, 2016|FAQs, How Do I, LLCs & Corporations, Tax Issues|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 9,300+ 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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Arizona Corporation Commission Halts Unregistered Securities Sales

The Arizona Corporation Commission sanctioned multiple individuals and their affiliated companies for offering and selling unregistered investment programs concerning wind energy development and gold mining. The Commission ordered more than $16. 3 million in restitution and $130,000 in administrative penalties.

The Commission ordered Arizona residents Edward L. Mazur and Ronnie Williams to pay a total of $16,347,279 in restitution and $125,000 in administrative penalties for fraudulently promoting an unregistered investment program involving the development of wind energy. The Commission found that, while not registered to offer or sell securities, Mazur and Williams offered and sold to over 300 investors throughout the U.S. interests in a proposed wind energy development project. The Commission found, however, that Mazur and Williams failed to disclose that almost half of the investor funds raised would pay for sales commissions and not for the development of the wind turbine technology or energy development projects described in the private placement memoranda. In settling this matter, Mazur and Williams neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

In a separate case, the Commission ordered Larry Goldman of Tucson and his affiliated company, MT Explorations, LLC to pay a $5,000 administrative penalty for promoting an unregistered gold mining investment program. The Commission found that, while not registered as a securities salesman or securities dealer, Goldman and his affiliated company raised $322,0 00 from at least 25 investors who were located in Arizona, Ohio and Utah. The Commission found that Goldman subsequently forwarded investor monies to an individual who represented that he owned and operated various gold mines throughout the United States, including Congress, Arizona and Helena, Montana. In settling this matter, Goldman neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

2016-04-08T18:15:47-07:00December 11th, 2012|AZ Corporation Commission, LLCs & Corporations|0 Comments
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New Hampshire Adopts New LLC Act

On June 18, 2012, the Governor of  New Hampshire signed into law New Hampshire’s entirely new limited liability company act.  The law is effective January 1, 2013, for LLCs formed in New Hampshire after December 31, 2012, and January 1, 2014, for New Hampshire LLCs formed before January 1, 2013.  The law is called the “New Hampshire Revised Limited Liability Company Act.”

The primary author of the new act is attorney John Cunningham who has written two treatises on limited liability companies.  He and Vernon Proctor wrote Drafting Delaware LLC Agreements.  John is the author of the $674 Drafting Limited Liability Company Operating Agreements (3d ed. 2012).  I own, refer to and recommend both of these expensive legal how to books.

Read Johns’ newspaper article on the new law called “What will new LLC Act mean for businesses” in which he crows “The new act is arguably the best LLC act in the United States.”

I gave the new Act a quick over view and generally liked what I saw.  The Act imposes fiduciary duties on members and managers.  It also provides for default statutory provisions that apply to all NH LLCs unless they adopt an Operating Agreement that provides otherwise.  The one provision I do not like is the charging order provision because it allows a creditor of a member to sell the member’s interest in the LLC.

2018-11-11T10:39:01-07:00July 30th, 2012|LLCs & Corporations|0 Comments
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ABA’s Revised Prototype Limited Liability Company Act May 2011

On May 1, 2011, the Editorial Board LLCs, Partnerships and Unincorporated Entities Committee, Business Law Section, of the American Bar Association published its proposed Revised Prototype Limited Liability Company Act.  The following is the Committee’s summary its proposed LLC act:

1. Articles of Organization Changed to Certificate of Formation.

The term “articles of organization” has been changed to “certificate of formation” to better align the Act with current limited liability company acts.

2. Operating Agreement Changed to Limited Liability Company Agreement.

In an effort to better signify the nature of the agreement among the members by referring to the agreement in a manner consistent with the general and limited partnership statutes (which refer to the agreement of the partners as the “partnership agreement”), the term “limited liability company agreement” has been used in lieu of the term “operating agreement.”

3. Consolidation of Provisions on Limited Liability Company Agreement Override.

Following the RUPA formulation and subsequent uniform act formulations, the Act places in one section (section 110) the various provisions that may not be modified by the limited liability company agreement. This centralization allows for the elimination of the phrase “unless otherwise provided in the limited liability company agreement” or similar phrases throughout the Act and the ambiguity that results in the absence of the proper override language. Therefore, all provisions within the Act are default provisions that may be modified by the limited liability company agreement unless modifications are prohibited under section 110.

4. Elimination of Manager-Managed and Member-Managed Dichotomy and Statutory Actual and Apparent Authority.

The Act changes significantly the original Prototype Act in that it eliminates the member-managed and manager-managed bifurcation of management structures and the statutorily conferred actual and apparent authority of members and managers in those paradigms. Instead, the Act provides that a person’s actual or apparent authority to bind the limited liability company will be determined with reference to the limited liability company agreement, decisions of the members in accordance with the limited liability company agreement or the default rules of the Act, a statement of authority, or law other than the Act such as the common law of agency. This approach allows drafters to provide for managers, officers, boards of directors, and other forms of governance that were difficult if not impossible to accomplish under the original Prototype Act.

5. Fiduciary Duties or Standards of Conduct; Express Authorization to Eliminate Fiduciary Duties by Agreement. (more…)

2017-08-25T14:41:55-07:00February 28th, 2012|LLCs & Corporations|0 Comments
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Can an Arizona LLC Have Officers Such as a President?

Question:  Can an Arizona limited liability company have a President, Vice President, Chief Executive Officer or personnel with other titles?

Answer: Yes.  Arizona’s statutes that authorize the creation of LLCs do not restrict the titles a company may give to its employees or personnel.

Technically, corporations have presidents and CEO, but Arizona LLCs do not.  Arizona law mentions only three types of people or entities associated with an AZ LLC:  members (owners), managers (equivalent to the president of a corporation) and noneconomic members (neither a member nor a manager, but a special character that is not defined in Arizona law).

You LLC has Articles of Organization.  Corporations have Articles of Incorporation.

Arizona law provides for two types of LLCs:  member managed and manager managed.  Only member managed AZ LLCs have managing members.  In fact, AZ law provides that all members of a member managed LLC are managing members and have management power.

If you have a manager managed AZ LLC and you sign as manager on behalf of the LLC, you are complying with Arizona law and clearly indicating to the other party the capacity in which you sign the document.  This is important to avoid personal liability.

Arizona law does not say that your LLC cannot have a president or a CEO.  It’s your company and as the controlling member you can create any LLC office you desire and call it whatever you want to call it.  The problems with calling somebody the President of your AZ LLC are:

1.  People who understand Arizona law will not accept the signature of a person whose title is President because they know that a member must sign for a member managed Arizona LLC and a manager must sign for a manager managed Arizona LLC.  Prudent people will look up the LLC on the Arizona Corporation Commission’s website to see if the LLC is member managed or manager managed and insist that the contract be signed by the appropriate person named in the LLC’s Articles of Organization on file with the Arizona Corporation Commission.

2.  There is a risk that if the contract results in a lawsuit, the other party could claim they thought they were dealing with a corporation rather than an LLC and therefore your company would be required to prove it complied with AZ corporate law rather than AZ LLC law to get the protection afforded by Arizona law to the owners of those types of entities.

3.  The other party to the contract might also claim the signer misrepresented the signer’s capacity to sign the contract.

Read about the perils of signing contracts on behalf of an entity in my article called “President of Corporation Personally Liable for Signing Contract.”

I do not recommend mixing corporate terms with LLC terms so you avoid the problems mentions above.

2016-11-16T08:23:54-07:00July 9th, 2011|FAQs, LLCs & Corporations, Operating LLCs|2 Comments
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Veil-Piercing

Owners of corporations and limited liability companies worst nightmare is that a creditor will sue the company and its owners and ask the court to “pierce-the-corporate-veil” and hold the owners liable for the debts and obligations of the company.  Peter B. Oh, Associate Professor of Law at the University of Pittsburgh has written a scholarly article called “Veil-Piercing.”  Here is the abstract of the article:

From its inception veil-piercing has been a scourge on corporate law. Exactly when the veil of limited liability can and will be circumvented to reach into a shareholder’s own assets has befuddled courts, litigants, and scholars alike. And the doctrine has been bedeviled by empirical evidence of a chasm between the theory and practice of veil-piercing; notably, veil-piercing claims inexplicably seem to prevail more often in Contract than Tort, a finding that flouts the engrained distinction between voluntary and involuntary creditors.

With a dataset of 2,908 cases from 1658 to 2006 this study presents the most comprehensive portrait of veil-piercing decisions yet. Unlike predecessors, this study examines Fraud, a long-suspected accessory to veil-piercing, as well as specific sub-claims in Contract, Tort, and Fraud to provide a fine-grained portrait of voluntary and involuntary creditors. And this study analyzes the rationales instrumental to a piercing decision.

The findings largely comport with our legal intuitions. The most successful civil veil-piercing claims lie in Fraud or involve specific evidence of fraud or misrepresentation. Further, claims not only prevail more often in Tort than Contract, but adhere to the voluntary-involuntary creditor distinction. Surprisingly, though, veil-piercing presents a greater risk to individual shareholders than corporate groups.

2016-11-16T08:23:57-07:00March 3rd, 2010|Asset Protection, LLCs & Corporations, Veil Piercing|0 Comments
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If My New Business Will Have Start Up Losses, Should It be an LLC or an S Corporation?

Question:  I am considering starting a new business and I anticipate that it will produce losses, rather than profits for the first few years.  Should I form a limited liability company or an S corporation to own and operate the business?

Answer:  People ask this question of me a lot, which is why I wrote a detailed article called “LLCs vs. Corporations:  Which Type of Arizona Entity Should You Form?”  My article explains the many reasons why I believe that the LLC is the entity of choice in Arizona.  People who ask this question are mixing the type of entity formed under state law with a method of taxation under the Internal Revenue Code of 1986, as amended.  When you are thinking of forming an entity in Arizona to operate a business or to own investment real property, the first question is what type of entity should I form under Arizona law?  Almost always the answer is a limited liability company.

After you form your company, the next question is what is the best method of income tax for the entity?  If your tax adviser says that your LLC should be taxed as an S corporation and if it is eligible for that method of tax, then all of the members of company must sign an IRS Form 2553 (the instructions) and file it with the Internal Revenue Service before the deadline for making the S corp election.  An LLC taxed as an S corporation is a “pass through” entity (it does not pay income taxes), which means that losses are passed through to the owners who can deduct the losses on their personal income tax returns (if they have sufficient basis).  Note: An LLC that elects to be taxed as a C corporation, an S corporation, a sole proprietorship or a partnership for federal income tax purposes does not change its character.  The entity always remains an LLC created under Arizona law regardless of the method of federal income tax applicable to the entity.

Bottom line:  If S corp tax treatment is important and your business is in Arizona, form an Arizona LLC and cause it to be taxed as an S corporation by filing an IRS form 2553 in the first 75 days after forming the LLC.

P.S.  I recommend that everybody who forms an LLC consult with a good tax advisor as soon as possible after forming the entity to obtain advice on which of the four federal income tax methods (sole proprietorship, partnership, C corporation or S corporation) is best for the limited liability company.  The election to change the default method of income tax (sole proprietorship or disregarded entity for a single member LLC or partnership for a multi-member LLC) must be filed within 75 days of the date of forming the LLC for the election to be effective from the date of formation.  For a list of the Certified Public Accountants I recommend in Arizona see “Professionals We Like.”

To learn why 9,300+ people have hired me to form their Arizona LLC, see “Contents of Arizona LLC Attorney Richard Keyt’s $597 Complete LLC Package” and Testimonials.

2019-06-15T09:03:55-07:00March 1st, 2010|Ask the KEYTLaw Girl, FAQs, Forming LLCs, LLCs & Corporations|0 Comments
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Arizona Court of Appeals Finds Officers & Directors of Arizona Corporation Personally Liable for Corporation’s Debt

Arizona Republic:  “Corporate officers can be held personally liable in some situations when their defunct firms don’t pay suppliers, the Arizona Court of Appeals has ruled.  The judges maintained that lawsuits against a corporation for failing to pay a debt are valid only against the corporate entity. And when the corporation goes away, the creditors generally cannot go after the individual shareholders  or directors.”  The case is Arizona Tile, LLC, vs. Howard Steven Berger, Cynthia Berger and John McCarthy.

The general rule of Arizona law is that the shareholders, officers and directors of an Arizona corporation and the members and managers of an Arizona limited liability company are not liable for the debts and obligations of the company.  There are, however, many exceptions to this general rule.  This case illustrates one of those exceptions.  Arizona Revised Statutes Section 33-1005 requires contractors who receive payments intended for subcontractors and materialmen to hold the money in trust for the intended payee.  This statute is the basis for imposing liability on the corporation’s officers and directors beca1use they had a duty to see that the money was paid to the proper payee, but instead they paid other corporate debts that the officers and directors had personally guaranteed.  In short they used money intended for Peter to pay the corporation’s debt to Paul because if Paul did not get paid, Paul could collect the debt owed by the officers and directors under their guaranties.

2016-11-16T08:23:57-07:00February 12th, 2010|Asset Protection, Lawsuits, LLCs & Corporations|0 Comments
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Westcor, Pediatrician Spar over ‘Prasada’ Name for Medical Practice in Surprise

Arizona Republic:  “A Sanskrit word meaning ‘gracious gift’ or ‘clarity’ has resulted in anything but for two Surprise business entities.  A doctor who recently opened his first practice, Prasada Pediatrics, is involved in a trademark-infringement dispute with Westcor, the developer of the master-planned community of Prasada.  Dr. Brian Lawrence Young, whose wife’s mother is Buddhist, said he chose the name for its Sanskrit meanings.  ‘We live in Surprise, so we know that there’s a significant need for pediatrics in Surprise,’ said Young, who moved to the Valley from New Jersey in 2005.”

Is this a case of the big company with a deep pocket using its ability to spend money on legal fees intimidating the little guy?  Consider what Harvard University’s Berkman Center for Internet & Society says about  the topic “What Constitutes Trademark Infringement:

If a party owns the rights to a particular trademark, that party can sue subsequent parties for trademark infringement. 15 U.S.C.  Sections 114, 1125.  The standard is “likelihood of confusion.” To be more specific, the use of a trademark in connection with the sale of a good constitutes infringement if it is likely to cause consumer confusion as to the source of those goods or as to the sponsorship or approval of such goods. In deciding whether consumers are likely to be confused, the courts will typically look to a number of factors, including: (1) the strength of the mark; (2) the proximity of the goods; (3) the similarity of the marks; (4) evidence of actual confusion; (5) the similarity of marketing channels used; (6) the degree of caution exercised by the typical purchaser; (7) the defendant’s intent. Polaroid Corp. v. Polarad Elect. Corp., 287 F.2d 492 (2d Cir.), cert. denied, 368 U.S. 820 (1961).

So, for example, the use of an identical mark on the same product would clearly constitute infringement. If I manufacture and sell computers using the mark “Apple,” my use of that mark will likely cause confusion among consumers, since they may be misled into thinking that the computers are made by Apple Computer, Inc. Using a very similar mark on the same product may also give rise to a claim of infringement, if the marks are close enough in sound, appearance, or meaning so as to cause confusion. So, for example, “Applet” computers may be off-limits; perhaps also “Apricot.” On the other end of the spectrum, using the same term on a completely unrelated product will not likely give rise to an infringement claim. Thus, Apple Computer and Apple Records can peacefully co-exist, since consumers are not likely to think that the computers are being made by the record company, or vice versa.

A search of the U.S. Patent & Trademark Office’s database shows that an Arizona limited liability company called Westcor/Surprise, LLC, has obtained two federally registered trademarks.  They are:

1.  Registration Number:  3684454.  For Prasada as a standard character mark in the following classes: (1) IC 036. US 100 101 102. G & S: Shopping center services, namely, leasing of shopping centers; real estate leasing, real estate management. FIRST USE: 20050600. FIRST USE IN COMMERCE: 20050600, and (2) IC 037. US 100 103 106. G & S: Real estate development and site selection; construction services, namely, planning and building, construction consulting for commercial, residential, and medical facilities. FIRST USE: 20050600. FIRST USE IN COMMERCE: 2005060.

2.  Registration Number:  3138577.  For Prasada as a words, letters and/or numbers in stylized form in class IC 036. US 100 101 102. G & S: Shopping center services, namely, rental and management of shopping center space. FIRST USE: 20050518. FIRST USE IN COMMERCE: 20050518.

I highlighted the classes for Westcor/Surprise’s two registered marks because its trademark/service mark rights extend to these areas.  The registrations are for International Class 36 (real estate affairs) and 37 (building construction; repair; installation services).  Note that Westcor/Surprise did not register Prasada in International Class 44, which is for medical services.  Hmm!  Could it be that Westcor/Surprise did not register its trademark for Prasada in IC 44 because it’s use of Prasada does not involve medical services?

Westcor/Surprise has not sought to register a federal trademark for Prasada as a medical practice or doctors’ office, which is nothing like shopping center services or real estate development.  Do you think there is a likelihood of confusion between a doctor’s medical practice called “Prasada Pediatrics” and a huge shopping mall and master-plannded community many miles away called “Prasada”?  Do you think anybody would go to Prasada Pediatrics because they intended to shop at the Prasada Pediatrics mall? I’m having a hard time finding a likelihood of confusion unless perhaps it is Westcor/Surprise, LLC, that is confused because it cannot tell the difference between a shopping mall and a children’s doctor’s office.

2016-11-16T08:23:57-07:00February 6th, 2010|LLCs & Corporations, Trademarks|0 Comments
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Can an Arizona LLC be Owned Entirely by Non-U.S. Citizens Who Do Not Reside in the U.S.?

Question:  Can an Arizona limited liability company be formed and owned by non-United States citizens who do not reside in Arizona or the United States?

Answer:  Yes.  Arizona limited liability company law does not require that any owner of an Arizona LLC be a U.S. citizen or a resident of the United States.  I have formed many Arizona LLCs for people who live outside the U.S. and who are not U.S. citizens.

LLC’s Need a Federal Employer Tax ID Number:  It is also possible for an LLC owned only by non-U.S. citizens to get a federal employer identification number from the Internal Revenue Service.  An LLC needs  an EIN to open a bank account in the United States and to put on federal income tax returns and forms.

U.S. Bank Account:  As for opening a bank account in the U.S., it is best if at least one owner or the manager is in the U.S. to open the account in person in the United States.  U.S. bank laws require that the bank know and verify who is it dong banking business with.    If that is not possible, I recommend that LLCs owned solely by non-U.S. citizens coordinate opening an account in the U.S. with the branch office of a bank in their county of residence that has one or more bank branches in the U.S.

2019-06-15T11:50:13-07:00December 14th, 2009|Ask the KEYTLaw Girl, FAQs, LLCs & Corporations, Members|0 Comments
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Must an Arizona CPA form a PLLC?

Question:  Must an Arizona CPA who desires to practice accounting in Arizona form a professional limited liability company (PLLC) or can the CPA form a standard vanilla limited liability company (LLC)?

Answer:  An Arizona CPA can form either an LLC or a PLLC to practice accounting in Arizona.  The following text is taken from the Arizona State Board of Accountancy’s website:

The use of the professional designation, such as PC (Professional Corporation) or PLLC (Professional Limited Liability Company), means that the service being offered may only lawfully be rendered by a person duly licensed in this state, such as those offered by attorneys and CPAs/PAs. The use of the designation, however, is not required to form a CPA firm; for example, if you are considering forming a limited liability company, you can license the firm as an LLC or as a PLLC, but you are not required to license your firm as a PLLC.

2016-11-16T08:23:57-07:00December 10th, 2009|LLCs & Corporations, PLLCs|0 Comments
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President of Corporation Personally Liable for Signing Contract

Improperly Worded Company Contracts can Cause Signer to be Liable

One of the primary reasons people form limited liability companies and corporations is to protect the owners from the debts and liabilities of the company.  The general rule of Arizona law is that the members of an Arizona LLC and the shareholders of an Arizona corporation are not liable for the company’s debts.  One of the biggest exceptions to this rule arises when an owner signs a contract and becomes personally obligated to pay the company’s debt.

The Personal Guaranty

The most common type of contract that obligates an owner of a company to pay the company’s debts is called a “guaranty” or “personal guaranty.”  A guaranty is a contract by which the signer/guarantor promises to pay or satisfy the debt of another person (the company).  Guaranties are frequently required by landlords and lenders who know that if the company doesn’t pay, the debt will never be paid.  Arizona law provides that if only one spouse signs a guaranty, then the debt cannot be collected from the community property of the guarantor and his or her spouse.

Contracts that Create Personal Liability

Owners and employees of a company can create contractual personal liability for themselves if they sign a contract on behalf of the company, but the wording of the contract does not make it clear that the signer is signing on behalf of a company.  The Arizona LLC Quick Start Guide that I give every LLC that I form contains actual examples of the exact language that should be used in contracts to prevent the signer from inadvertently becoming personally liable to pay the company’s debt created under the contract.

If the signer of an LLC or corporate contract wants to avoid becoming personally liable for the debts of the company created in the contract, the language in the contract must clearly state that the party is the LLC or corporation and indicate the capacity of the signer.

Iowa limited liability company and corporate attorney Marc Ward reports on a recent Iowa case that where the court found that the person who signed a two page contract on behalf of a corporation was personally liable to pay the corporation’s debt under the contract.

The Iowa Court of Appeals opinion in Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case. On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed. And on the other hand, it is a warning to lawyers that things aren’t as simple as they appear.

Unfortunately for Moyer the contract contained a clause that said “I hereby personally guarantee to pay on demand any and all sums due that my/our company shall fail to pay.”

Mr. Moyer did not sign the signature block for the personal guaranty, but the court found he was liable anyway.

Proper Way to Sign Contracts

Right Way to Designate the Company in a Contract:  World Wide Widgets, LLC, an Arizona limited liability company.  Note the LLC after the name and the written out “limited liability company.”   Make sure both the abbreviation and the full designation are used.  Typically the proper designation of the company should be in the first paragraph and in the actual signature block where the signer signs.  If it is not, the signer should hand write the missing information above where he or she signs and/or on the first paragraph where the company is named.

Right Way to Designate the Capacity of a Signer in a Contract:  Homer Simpson, President (for an Arizona corporation), or Homer Simpson, Manager (for a manager-managed Arizona LLC), or Homer Simpson, member (for a member-managed Arizona LLC).

Wrong Way to Designate the Company in a Contract:  World Wide Widgets

Wrong Way to Designate the Capacity of a Signer in a Contract:  Homer Simpson.

Beware of Personal Guaranty Language in the Contract

If a contract contains any language that would cause the signer to be a guarantor and impose personal liability on the signer, the signer who wants to avoid personal liability must take a pen and cross-out or strike-out all of the guaranty language.  If you are signing a contract, you must read it and strike-out any language you don’t want and write on the document any additional language you want.  You can modify with hand-written changes all pre-printed contracts before signing.

2016-11-16T08:23:57-07:00October 19th, 2009|Asset Protection, LLCs & Corporations, Operating LLCs|0 Comments
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How to Change the Name of a Limited Liability Company

Question:  Can I change the name of my Arizona limited liability company?

Answer:  Yes.  Assuming the members approve the name change, an Arizona limited liability company can change its name by amending its Articles of Organization on file with the Arizona Corporation Commission.  For a detailed explanation of how to change the name, see my article called “How to Change the Name of an Arizona LLC.”

2011-07-14T14:45:57-07:00October 13th, 2009|FAQs, LLCs & Corporations, Operating LLCs|0 Comments
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Why Not Form a New Business as an LLC?

Question:  What is the best type of entity to form to own and operate an Arizona business or to own investment real estate?

Answer:  The Arizona limited liability company, except in limited circumstances.

Two business law attorneys wrote a paper published in The Practical Tax Lawyer periodical that describes many of the reasons that an LLC is the right choice of entity for most new businesses, and advises that a new business choosing a legal form should first consider an LLC. The authors present a series of simple examples to illustrate the advantages that LLCs often have over both C corporations and S corporations.  The article begins:

“An LLC is the right choice, however, in a majority of cases. Accordingly, an LLC should be the first form to consider for a new business. . . . An LLC has nearly unlimited flexibility in the types of equity and debt interests that it may issue to its members. An LLC may issue all manner of common interests, preferred interests, vested or unvested interests, debt, and options to acquire any of the above.”

As an Arizona lawyer who has been practicing business law in Arizona since 1980 and who has formed 9,300+ Arizona LLCs, I agree with the authors that the limited liability company is almost always the best type of entity to form to operate a business or own real estate in Arizona.  People form Arizona LLCs 12 times more often that they form Arizona corporations.  See “ACC Entity Formation Statistics.”

2019-06-15T08:35:37-07:00October 6th, 2009|FAQs, Forming LLCs, LLCs & Corporations|0 Comments
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Legislative Logjam Puts Arizona Corporation Commission in Limbo

Arizona Business Gazette:  “The ability of Arizonans to form new corporations could start to slow within days and come to a screeching halt unless lawmakers fix their budget, according to the chair of the Arizona Corporation Commission. Kris Mayes said her agency was willing to go along with plans by Gov. Jan Brewer and legislators to have its incorporating division become fiscally self-sufficient. The plan, as crafted in legislation, was to let the agency keep and use money it obtained in fees.”  The state legislature approved the plan, but for unrelated reasons, Governor Brewer vetoed the law that contained the funding for the Arizona Corporation Commission.

2011-07-03T16:29:34-07:00October 1st, 2009|AZ Corporation Commission, LLCs & Corporations|0 Comments
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