Getting the Most out of Your LLC
A limited liability company (“LLC”) is a legal business entity that – when used properly – can provide the owner with significant legal protections and tax savings. In Arizona, LLCs are formed by filing certain papers (and paying certain fees) with the Arizona Corporation Commission (“AZCC”). While LLCs can be formed rather simply and inexpensively by accountants, legal document services, and business owners themselves, there are many potential pitfalls which can cause great financial harm business owners in the future if the LLC is not set up and used properly. LLCs can be legally ignored (known as “piercing the corporate veil”) if they are not used properly, which means that having a qualified lawyer set up your LLC is the safest way to set up and use an LLC.
Forming a New LLC
This blog article is about how to properly use an existing LLC; if you haven't started your business yet, check out our blog called Starting a New Business in Arizona.
Using Your LLC
Generally, all property, debt, contracts, accounts, and other items or services associated with an LLC should be in the LLC’s name, and not the members’ (owners’) names. Furthermore, any relations or correspondence with third parties should also be in the name of the LLC, with you signing as the member and/or manager of your LLC. So, if you are signing a lease agreement or other legal document on behalf of your LLC, the signature line should say “Acme Products, LLC – by Wile E. Coyote, its Managing Member” (or similar). If the signature line simply said “Acme Products, LLC” without the actual signer’s name, this would probably be legally binding but may create difficulties down the road due to the signer’s name not appearing; meanwhile, if the signature line simply said “Wile E. Coyote” then the signer would be binding himself personally, and not their LLC.
Managing Your LLC’s Finances
When you create and use an LLC, your lawyer’s job is to advise you about how to protect yourself from potential legal liability, and your accountant’s job is to advise you about how to minimize your tax liabilities and avoid disputes with the IRS. To minimize legal liability, it is important to keep your LLC’s finances and matters separate from your personal finances and matters as much as possible. With your accountant’s advice, you can transfer money and property into your LLC, and you can transfer money and property out of your LLC, but as much as possible your LLC should conduct business and transactions in its own name, with its own funds and credit, in order to keep your property and finances separate and insulated from the LLCs’ obligations and liabilities.
Your LLC can do financial and other transactions with you, but they need to be documented and have terms that are at “fair market value” or would otherwise be reasonable if they were between your LLC and somebody else or their LLC. For example, if you use your truck for business purposes, you should transfer the truck’s title, registration, and insurance into your LLC’s name. On the other hand, if you use your truck for business purposes while its title, registration, and insurance are in your individual name, and you cause a car accident that injures somebody, then that person can sue your LLC and you personally, and if they win a lawsuit against you then they can go after your assets as well as your LLC’s finances. (For example, they could record their judgment in the county where you own a home, and you would not be able to sell your home without paying their judgment.) This would defeat one of the major purposes of having an LLC, which is to ensure that if your LLC encounters legal liability, that a barrier (sometimes referred to as a “corporate veil”) will prevent your LLC’s legal adversaries from going after your personal money and assets. Improperly mixing your business and personal finances and assets is known as “comingling.”
Similarly, you should generally not use your LLC’s funds to directly pay the expenses of other people and LLCs, and similarly, you should not use personal finances to pay the expenses of your LLCs. The 928 Law Firm can advise you on exceptions to this general rule.
You should talk to an accountant about how to use your LLC for bookkeeping and tax purposes. For example, the accountant will likely advise you that all purchases for the LLC should be made from a bank account in the LLC’s name. If your LLC’s bank accounts have insufficient funds to conduct their business, you may deposit personal funds into the LLC’s account as a capital contribution, which will be recorded by your accountant. You may also want to specifically ask your accountant about whether you should file a Form 2553 with the IRS to treat your IRS as a corporation for tax purposes, which may reduce your income tax obligation compared with simply using your LLC in its initial status (known as “disregarded entity” or “pass-through” company).
Fixing Problems with Existing LLCs
The 928 Law Firm is also experienced with identifying and fixing common errors with existing LLCs (such as those formed by non-lawyers), such as:
Filing papers to reinstate LLCs which have been administratively dissolved by the AZCC due to failures to comply with AZCC requirements for formation and maintenance of LLCs;
Publishing articles of organization when the person forming an LLC failed to publish the LLC’s articles in newspaper when doing so was required by the AZCC;
Adding members when an LLC was inadvertently formed with no members;
Adding a statutory agent when an LLCs statutory agent resigned and was not replaced; and
Updating addresses for members, managers, and statutory agents when the AZCC was not notified that their addresses changed.
An operating agreement is a legal document that governs an LLC’s membership, management, and operations. Arizona does not technically require LLCs to have operating agreements, and if an LLC does not have an operating agreement, then its membership, management, and operations will be governed by the Arizona Limited Liability Company Act (“the AZ LLC Act”) and related laws. However, most LLC owners without operating agreements probably never read the AZ LLC Act says, and therefore probably don’t know what it says; furthermore, the AZ LLC Act may impose undesirable legal terms on the LLC which the owner may not like. For these reasons, it’s best to hire an experienced lawyer to prepare an operating agreement for your LLC.
The 928 Law Firm is Here for You
The 928 Law Firm’s legal team is experienced with LLC formation and maintenance, as well as drafting operating agreements and fixing problems with existing LLCs. If you believe that your business is (or will be) big enough and profitable enough to justify going through the time and effort to create and use an LLC, then it’s almost certainly worthwhile to hire a lawyer to make sure that your LLC is set up and used properly.
Thanks for taking the time to read this article about LLCs! When you call our office to schedule an initial consultation about your LLC, mention that you read this article and we will waive your consultation fee. We look forward to talking to you soon!