Business Law Resources

A business entity is a legal structure separate and apart from its owners (like an adult child). This provides personal liability protection for the business owners and the business’ management. I consider business entities to be: Limited Liability Companies (LLCs), Corporations, Limited Partnerships (LPs), Limited Liability Partnerships (LLPs) and Liability Limited Partnerships (LLLPs). A revocable trust is not a business entity in most states, and neither are sole proprietorships or general partnerships. Business entities can sue and be sued, incur and collect debt, make contracts, breach contracts and do most things that human individuals can do. Business entities also have their own equivalent of a social security number called an EIN/TIN (Employer Identification Number/Taxpayer Identification Number). Business entity owners should never use their personal social security number for their business entity, or they may lose their separate and distinct status (corporate veil) from their company.

Generally, no, but it varies by state. In Arizona, revocable trusts are not business entities. A revocable trust is a legal arrangement to ensure a person’s assets go to specific beneficiaries upon death. A trust (if done correctly) eliminates the need for probate (court intervention to distribute assets after a person dies). Having a business entity owned by a revocable trust is a common part of a business succession plan.

A “sole proprietorship” is an individual doing business as an individual or in a community property state (like Arizona, California or Nevada), a husband and wife doing business. The owner(s) of a sole proprietorship are 100% personally liable (responsible) for any business activities and debt. If the sole proprietorship fails, the business owners will likely have to file personal bankruptcy to get out of the business debt as the business debt is also their personal debt. Sole proprietorships generally must pay self-employment tax and they do not get many of the tax benefits of being a business entity. Sole proprietorships may also operate under a trade name (aka fictitious name).

A “general partnership” is defined as two or more unmarried people operating a business for the purpose of making a profit. For example, this could be two friends forming a band to play gigs at local bars. There is no formality required to form a general partnership in Arizona, California or Nevada (not necessarily true in Delaware). Both partners are 100% personally liable (responsible) for partnership activities and debt. The responsibility is not split between the partners, but each partner is 100% liable for partnership debt. If the general partnership fails, the partners may have to file personal bankruptcy to get out from under the business debt as the business debt is also their personal debt. Partners in a general partnership typically must pay self-employment tax and they do not get many of the tax benefits of being a business entity. General Partnerships may also operate under a trade name (aka fictitious name), and they may need to record documentation of their use of a trade name with the County recorder in the County where they operate their partnership to be in compliance with the law.

Both LLCs and Corporations shield their owners and management from personal liability for business debt and activities. They are legally considered individuals and are completely separate and apart from their owners if ALL legal formalities are followed. This is called the corporate veil. Legally, from a personal liability protection standpoint, there is no difference between an LLC or a corporation. In most States, LLCs have less structure and annual reporting, and Corporations have a more formal structure and more reporting. Generally, the type of business and how many owners it may have determines which type of business entity would be most advantageous.

Maybe, it depends. I want to say an unqualified “YES!!!” but I think there are some instances when an LLC would not necessarily protect the owner from any personal liability (based on the type of business). I think, however, that generally having a company shell to protect the owners from personal liability makes sense in most cases, especially with the ease of company formation. This would be a case-by-case analysis to determine whether or not a business entity is right for you. A CPA should also join in this conversation along with an attorney.

YES!!! An attorney has experience and malpractice insurance. Not only that, but a qualified attorney can help you prevent the common mistakes that businesses make that result in litigation or other costly missteps. Even if you decide to do the actual formation of the business entity yourself, you should always speak with an attorney before doing so. We focus on preventing costly litigation by ensuring businesses are set up correctly at the beginning and maintaining them correctly on an ongoing basis. You may think you or a third-party filing company has done everything correctly (and maybe you have), but if you have not, it will be costly to fix it when you find out. Besides, YOU (as a business owner) need to focus on what brings your business money and not doing things that you could pay others to do while you focus on bringing in money to your business.

A “qualified attorney” for your business is an attorney who has practiced business law and has experience in that area. It is ideal to find an attorney that has worked with your industry, but it is not necessary so long as your attorney has experience with business formation, maintenance and dissolution. All attorneys have the same degree and have passed the same bar exam if they work in your State. However, attorneys focus their practices on different areas, and you need one that has experience in yours. For example, I have practiced all types of business law for over 27 years, but I do not practice personal injury or family law. If you have those issues, I will refer you to one of my colleagues who focuses on those areas of law. Generally, you do not want an attorney who handles every type of legal matter for you as those attorneys tend to be jacks of all trades and the masters of none (with very few exceptions).

Yes!!! Always consult with a qualified CPA whenever you are forming a business or making any changes to your business. A CPA does not need to handle your day-to-day bookkeeping, but you should consult with one to be sure you are minimizing your tax liability by using all the deductions available to you (like attorney/CPA fees, etc.). LLCs and corporations may choose how they are taxed (C-Corp, S-Corp, etc.) and some methods of taxation are more advantageous for your business than others. A qualified CPA will help you ensure that you have chosen the best method of taxation for your business. Attorneys are able to legally do whatever you want in a business set-up or a contract, BUT it may not be advantageous tax-wise so always, always, always consult with a CPA. However, your CPA should not be giving you legal advice or forming your company.

A “qualified CPA” for your business is a CPA that has experience in business formation, maintenance and dissolution. You should always consult with a CPA, but make sure that the CPA has handled businesses like yours. Just like attorneys, CPAs have specialties so be sure yours understands the finances of your particular business. For example, if you sell goods, be sure your CPA is well-versed in Transactional Privilege Tax (TPT aka sales tax) reporting. If you have employees, make sure your CPA has handled payroll reporting.

Attorney and CPA fees are generally tax deductible for business entities. Your business should always have a pre-established relationship with an attorney and CPA in case an issue comes up that requires immediate attention. Hopefully, because you have consulted with both an attorney and CPA you will have prevented some of the common pitfalls that require immediate attorney or CPA attention. Regardless, when you consult with an attorney or CPA, their fees are tax deductible.

Yes, cost effectiveness, time management and efficiency. I could do my business taxes on TurboTax myself, but I don’t want to waste my time figuring out something that a tax professional can do correctly and more quickly than I can. I like the knowledge that if (God forbid) there is a mistake, my tax professional has malpractice insurance that will cover me in an audit, and I am not going to have to pay hundreds or thousands of dollars to correct the mistake I made doing my tax returns myself. I will pay more to have a tax professional correct my errors than I would have if I had a tax professional do my taxes in the first place. Attorneys are the same. It will definitely be more expensive to fix errors than it is to do it right the first time. I have 27 years + business law experience and malpractice insurance for legal matters. Your CPA has no insurance to cover any mistakes regarding legal matters so be sure you speak with an attorney on the structure, maintenance and operation of your business and not just a CPA.

Have a conversation with your attorney about projects that need to be done and a budget for doing so. I do most projects on a flat fee basis which gives you the security of the cost. However, some projects cannot be done for a flat fee because there are too many variables. However, there can be a cap on time spent on hourly fees and a monthly accounting. I am NOT suggesting that this is a negotiation of fees like the Mercado Central in Guadalajara, but a discussion of budget and payment. You do not negotiate with your doctor about the cost of surgery or the dentist if you need a tooth pulled, the same goes for flat fee projects with attorneys. The cost for professional fees is set, but they can be put on a payment plan or worked into an annual budget.

Anybody can form a business entity. It is what you do with the business entity and how you do it that matters. You need to consult with both an attorney and CPA to make sure that you are operating your business entity correctly. Also, attorneys and CPAs need to stay in their own lanes. You would not have me (an attorney) do your taxes (that would be silly as I do not have CPA after my name) so why would you have your CPA do your attorney’s job? You need both. Consulting with an attorney prior to the formation of your business entity will limit your overall costs. It is easier to set up proper management/ownership and put a succession plan in place at the beginning of your business than having to change it later (which is more expensive). Also, if you have a CPA do your business formation, understand that the CPA’s malpractice insurance may not cover any mistakes made as this is legal work, just like my malpractice insurance would not cover any mistakes I made doing your taxes.

Yes, you can. It is not hard. However, the nuances as to what should be done before, after and during the life of your company are where you need legal advice. How should you sign documents? What should the structure be? Should your revocable or irrevocable trust own your company? These are questions that require the advice of a legal professional. Also, if you do it yourself and make a mistake, you will Likely pay MUCH more to fix the problem than if you obtained legal advice in the first place. You also will not know you have made a mistake until something bad happens and your personal assets might be at risk.

Yes, yes, they do, and you get what you pay for. What you are paying for is document preparation and not the legal advice that you should have before, during and after you form a business entity. I don’t need to actually form your business entity for you. Anybody can file paperwork and get that done, I will tell you what to do before and after your business entity is formed. Third party filers do not have your back if something goes wrong. They are done after they have formed the business. Read the fine print and know what you are paying for. In my opinion, the fees third party companies charge to form a business are quite expensive for what they actually do. You should also NOT agree to have them as your statutory/registered agent. There is no reason why you need a them to be your statutory/resident agent as you can do it yourself. Unless you have a specific reason to use a company as your statutory/resident agent this is just an annual charge you do not need to pay. If you are going to save money, save it here and not by failing to get legal or tax advice.

A “statutory agent” or a “resident agent” is a person or company that is designated to receive legal correspondence on behalf of the company. In Arizona, the term “statutory agent” is used and in California, Nevada and most other states the term “registered agent” is used, but they mean exactly the same thing. If a company is sued, the statutory agent/resident agent is the one that is served with the legal documents. Every company (except for sole proprietorships/general partnerships) must have one. Statutory/resident agents may use a mailing address for general correspondence but must maintain a physical address within their state because lawsuits (summonses, subpoenas, etc.) must be served in person on a person in most cases.

NO, definitely not. There are many companies that will provide statutory/resident agent services, but if you are a small company, you do not need the added ANNUAL expense. Many third-party companies that form LLCs automatically appoint themselves as your statutory agent/registered agent so that they may continue to receive an annual fee. They do not explain to you that you do NOT need them to be your statutory/registered agent and that you could be your own statutory/resident agent.

A statutory agent/resident agent must have a physical address in the state where the company is registered or formed and be available to receive documents in person at that address during business hours. There are no other requirements. If your statutory agent/resident agent receives legal documents for your company, legally, your company has been served (whether you know about it or not). It does not matter if the statutory/resident agent tells you about the documents or you find out too late. This is why it is critical to have someone trustworthy be your statutory/resident agent and keep the address for receiving documents updated. I recommend that business owners use themselves as their own statutory/resident agent so they will always know what is going on and can do something about it.

If you are not physically located in the jurisdiction where your company is formed or registered, you will have to pay to have someone be your statutory/resident agent. I would use a company that provides statutory/registered agent services for companies regularly. I would not use a CPA or even an attorney. I would hire a company that accepts documents for companies as typically, they have portals to provide notice to the company owners in real time whereas, correspondence could be delayed in getting to you if your CPA’s office is not set up to provide statutory/resident agent services. You may also want to hire a company to provide statutory/resident agent services, if you just don’t want to deal with it. There is very little correspondence for a statutory/resident agent to handle so hiring a statutory/resident agent generally is an unnecessary expense, but it is perfectly acceptable to do so if you are making an educated choice vs. having a decision made for you without being told the alternatives.

Once your statutory agent/resident agent is served with a legal document for your company, it is as if you (the business owner) received it. If your statutory agent/resident agent does not give it to you and a default judgment is entered against your company, there is probably nothing you can do about it but sue your statutory agent/resident agent. Your business will have a judgment against it because the business did not respond and raise any defenses. Your statutory agent/resident agent probably does not have any insurance to cover this so you will likely be out of luck. In addition, if your statutory agent/resident agent does not keep his/her or its address accurate with the Corporation Commission/Secretary of State, the Plaintiff may serve the Corporation Commission/Secretary of State to get service of process against your business. Again, you may not know about any of this, but by law your business has been served. For these reasons, it is CRITICAL to have a statutory agent/resident agent that is either you as the business owner or an actual statutory agent/resident agent company that is set up to receive service and let you know about it. It is also important (if you are the statutory agent/resident agent that you keep your address updated with the Corporation Commission/Secretary of State so if there is service, the process server can find you. If the process server cannot find you for service, the Corporation Commission/Secretary of State will be served, and you may not know about it because your address is incorrect. It is never a good idea to hide from the service of legal documents. It is best to know what is going on so you can defend any claims.

The main benefit of forming an LLC or corporation is protection for its owners from personal liability. For example, IF all legal formalities are met, the owners and management of the company are not responsible for the business’ debts or other obligations (unless a personal guarantee has been signed). This means that if the business is sued and a judgment is entered against the company, the creditor could only go after the company assets for collection and not the assets of the company’s owners/management. This is called the corporate veil.

Because LLCs, Corporations and all types of Limited Partnerships are business entities separate and distinct from their owners and management, the owners and management are not personally responsible for the company’s debt or other liabilities. This is a called the corporate veil. It only exists if all corporate formalities to keep ownership/management separate from the business entity itself are followed.

If the owners/management of a business entity do not follow the formalities to keep the company separate and apart from their personal affairs, the owners and management of the company may be personally responsible for the company’s debts and other liabilities. In short, the company will be considered a “sham” or an “alter ego” of the company’s owners/management. Failure to maintain a separate bank account for the company, paying personal bills out of the company bank account, continuing to use the owner’s social security number for company matters, failure to update government agencies with address changes, etc. are all factors to consider when determining whether the corporate veil may be pierced.

Reverse piercing of the corporate veil is when the personal creditor’s of the business owners go after the business owner’s interest in the business entity to satisfy debt. If the owners of a business entity are ever sued personally, their personal assets are at risk and may be used to satisfy their personal debts. Reverse piercing the corporate veil allows the creditors of a business owner to take the owner’s ownership interest in the business entity as the ownership interest is the owner’s personal property. This can happen either by a charging order or in bankruptcy. If an owner files a bankruptcy, a bankruptcy trustee steps into the owner’s shoes and may become the owner of the company. It is important to have a written agreement to protect the business entity from the business owner’s personal creditors even if the business entity is a single-member LLC or one person corporation.

To avoid or mitigate reverse piercing the corporate veil, business entities should have SPECIFIC language in a written agreement (for example, in an Operating Agreement, Bylaws or Partnership Agreement) that specifies how an owner becomes a true owner. The agreement should also specify that owners have NO management authority just because they are owners. For example, no LLC should be member-managed as members automatically get to manage the LLC. If a creditor is allowed to manage, the creditor may have the ability to thwart business operations, control the flow of money and possibly shut the business down. If there is an agreement that only allows managers, officers or specific partners to manage the business entity’s affairs, a creditor stepping in will only be able to have a financial interest in the business entity and not manage it. Many times, having a written agreement with these provisions will stop a creditor or bankruptcy trustee from pursuing the ownership interest in the business entity. If they do still pursue the ownership interest, they are left only with a financial interest in the business entity and have no ability to manage it.

Single-member LLCs and single-person corporations often do not follow corporate formalities because they seem silly. I am a single-person corporation, and I am required by law to have a meeting of my shareholders (me) to vote in my Board of Directors (me) who then meets to vote in my Officers (me). If I want to maintain the personal liability veil, I need to do this and keep a record. If I do not, a creditor could argue that my corporation is just an alter ego (a sham), and I should not be afforded personal liability protection. Following legal formalities is even more important for single-member LLCs because there are so few formalities to follow. I think single-member LLCs should always have an Operating Agreement and if there are no annual reporting requirements in the LLC’s jurisdiction, be sure to check the Arizona Corporation Commission’s website periodically to ensure that the LLC’s public records are accurate. In addition, pay yourself only through draws or payroll. Do not pay personal bills out of the business account, do not use your social security number for your bank account, have an EIN and do anything else that would be proper business practice for a multi-member LLC. I understand that it is just you, but this is also what a creditor will say if the creditor is trying to hold you personally responsible for LLC debt or other claims against the LLC. You need to do everything possible to show that you followed the best practices for legitimate businesses. When in doubt, pretend you have other owners/managers or officers in your business and ask yourself if you could do what you are contemplating if they existed. For example, would a multi-member LLC allow you to pay for your family vacation or your mortgage payment out of the business account? Probably not.

From a legal standpoint, a corporation is a corporation is a corporation. The designation “S” or “C” just indicates whether the corporation is taxed under Subchapter S of the IRS Code (S-Corp) or Subchapter C (C-Corp). Generally, companies that gross less than $5,000,000 a year elect to be taxed as an S-Corp, but there is no one size fits all rule. The IRS has its own regulations for ownership and structure for S-Corps so sometimes electing to be taxed as an S-Corp may not be advantageous for other reasons. For example, a company (including LLCs that elect to be taxed as an S-Corp) must distribute profits and losses/distributions equally among owners which may not be what the owners really want. Consult with a CPA regarding any election for taxation. Your tax election may also be changed later, but there are specific rules for doing so. Contact a CPA on all matters regarding methods or taxation.

NO, absolutely not, your company does not have to be a corporation to be taxed under Subchapter S of the Internal Revenue Service Code (S-Corp). Both LLCs and corporations may choose (elect) how they wish to be taxed within seventy-five (75) days of their formation by filling out IRS Form 2553. The choices for taxation are Subchapter C, Subchapter S, Partnership (which is the default if no election is made for a multi-member LLC) and Disregarded Entity (default for single-member LLCs – no separate tax return filed by the owners, income and expenses listed on IRS Form 1040/Schedule C). Business entities may change their method of taxation after the first election but should consult with a tax professional for the specific rules for doing so.

No, if you are an Arizona or California resident you will not be exempt from paying state taxes where you live. You will not pay Nevada personal income state taxes, but you would not anyway because you do not live there. Plus, if you form your LLC in Nevada and it operates in Arizona, you will have the expense of a resident agent in Nevada, annual LLC reporting fees as well as the registration fee for foreign entities in Arizona. You absolutely can form an entity in another state and have it operate elsewhere, but you need to be able to articulate a valid reason why you would go to the extra expense and hassle.

Not necessarily. Unless you can identify a SPECIFIC reason why it is advantageous to form a business in a State where the business does not operate there is no reason to do so. I am not suggesting that there is never a reason to form in Delaware or any other state when you are located elsewhere, but I am suggesting that there should be an identifiable reason why it is worth the extra annual cost to maintain a registered agent in two locations as well as maintaining any annual reporting requirements with government agencies in each state.

A “shareholder” of a corporation is an owner of the corporation, and that ownership is indicated by the owner’s number of shares of stock. After a corporation is formed, it issues shares of stock to its shareholders. The corporation’s shareholders (owners of stock) must meet at least once annually to elect the Board of Directors.

The “Board of Directors” of a corporation is one or more individuals that meet at least once annually to set the policies and procedures of the corporation. The Board of Directors also elects the corporation’s officers and approves the corporation’s Bylaws. A shareholder or officer may be on the Board of Directors, or the Board of Directors may be made up of disinterested third parties or a combination of both.

Legally, the officers of a corporation are a President, Vice President, Treasurer and Secretary. These individuals are the ones that handle the day-to-day affairs of the corporation. The corporate Bylaws detail their roles and responsibilities. Corporations may have other officers or call their officers by different titles, but they should at the very least have the equivalent of a President, Secretary and Treasurer. Officers may be on the Board of Directors; they may be shareholders, or they may not.

Bylaws are the internal governing document of the corporation or the written policies of the corporation. Bylaws contain the basic rules of conduct of the corporation and responsibilities of its officers and Board of Directors. In general, Bylaws are a private document that governs the corporation’s business affairs. Only corporation’s that are publicly traded must make their Bylaws public.

Yes. The law requires that all corporations have Bylaws. If your corporation does not have Bylaws and at some point, your corporation is sued, a creditor could argue that you do not follow corporate formality and therefore, your corporation is a sham. A creditor could possibly be allowed to collect from the shareholders’/officers’/directors’ personal assets for a corporation debt and not just the assets of the corporation.

Corporations must file an annual report with either the Arizona Corporation Commission or the California/Nevada Secretary of State and pay the requisite annual fee. Internally, corporations must have a meeting of the shareholders to elect the Board of Directors and a meeting of the Board of Directors to elect the Officers of the corporation.

Yes, yes and yes. As a practical matter, this is silly. I am a single person corporation and every year on Cinco de Mayo (so I can remember my annual meeting date) I have a “meeting” with my shareholders (me), and they elect the Board of Directors (me). Then, the new Board of Directors (me) meets and elects the new officers. I win all of the elections and really my meetings consist of changing the year in the Meeting Minutes from the previous year and signing them as they are the same year to year. I am the President, Vice President, Treasurer and Secretary of my corporation. I do this because I must maintain corporate formality to keep my personal liability protection even if as a practical matter the formalities are silly for a one-person corporation.

We can help. You should create Bylaws and Annual Meeting minutes as soon as possible. First, this will help you maintain your corporate veil. Second, if you ever want to sell your corporation or your corporate assets you will need them. We can also talk (with your CPA) about converting your corporation to an LLC, so you no longer have to file any type of annual report (AZ LLCs) and you are no longer are required to have annual meetings (unless your Operating Agreement says otherwise). However, from a tax standpoint, this may have ramifications that outweigh the benefits which is why a CPA should be consulted for your specific circumstances.

File annual reports, conduct annual meetings and maintain accurate public and private records. The corporation must be separate and apart from its shareholders (owners) so it must have its own bank account and EIN/TIN.

A “non-profit corporation” (also, more accurately, called a “not-for-profit corporation”) is a corporation just like any other, but it has received tax exempt status from the IRS. Typically, non-profit corporations request IRS Code 501(C)(3) status as they will be providing charitable services, but there are other tax exemptions for non-profit corporations. The Articles of Incorporation and Bylaws for a non-profit corporation need to contain specific language so that the corporation may obtain its tax-exempt status from the IRS. Make no mistake, successful non-profit corporations make a profit, but it goes back into the corporation for charitable works unlike in a “for-profit” corporation where the shareholders receive the benefits of any profit.

First, you do NOT have a non-profit corporation if you do not have tax-exempt status with the IRS. The Arizona Corporation Commission has a standard form for Articles of Incorporation to form a corporation. There is a section where you can check a box stating that you are forming either a non-profit or a for-profit corporation. If you check the box for a non-profit corporation, this DOES NOT MAKE YOU A NON-PROFIT corporation. You MUST get tax-exempt status (501(c) or some other tax-exempt status before you are a non-profit organization. Second, your Articles of Incorporation must have non-discriminatory and other required language to comply with the IRS requirements to obtain tax-exempt status. The Arizona Corporation Commission’s Articles of Incorporation for non-profit organizations does not contain this language. You will need to file Restated Articles of Incorporation that contain the mandatory IRS language in order to comply with the requirements to obtain tax-exempt status with the IRS.

If you do not have funds to consult with an attorney before forming your non-profit corporation, you should wait to form the organization until you do. There are MAJOR pitfalls for the Board of Directors and Officers of a non-profit (some personal) if a non-profit corporation is not formed correctly and more importantly, operated correctly. You also MUST get an attorney who has worked with non-profit corporations to advise you. You are doing a good thing, but you need to do it right or you could be living the saying “no good deed goes unpunished.” If you help fund the non-profit corporation start up, you may be able to use your contribution as a donation or also make it a loan. Perhaps you could forgive the loan later and have that count as a qualified donation for your taxes. A CPA should also be involved in this conversation.

No. Non-profit corporations are corporations and must have the structure that a corporation provides.

A “Professional Corporation (P.C.) is a business entity that is owned by licensed professionals to provide the professional services they are licensed to provide (for example, legal, accounting, medicine, real estate brokerage, etc.). Arizona, California and Nevada all recognize and allow the formation of P.C.s in their states. When forming a P.C. to provide licensed professional services, contact the State Regulatory Board for that profession to ensure that there are no additional reporting or formation requirements. For example, California requires that P.C.s providing medical services register with the California Board of Medical Examiners.

A “member” of an LLC is an owner of the LLC. Generally, members of an LLC describe their ownership as a “Percentage Interest” or a “Percent Interest” of the LLC. For example, a 50% owner of an LLC would say that the member owns a “50% Percentage Interest” in the LLC. LLC ownership may also be held in units, but this must be designated in the Operating Agreement. LLCs in Arizona, California and Nevada do NOT issue stock and their members do NOT own stock and are NOT shareholders. In some states, LLCs do issue stock and do have shareholders. It is important to use the terminology of the State where your LLC is formed.

A “manager” of an LLC is the individual or individuals that handle the day-to-day activities of the LLC. Managers may be members of an LLC, or they do not have to be. Any manager with authority for the business should be listed appropriately with the Arizona Corporation Commission, California Secretary of State or Nevada Secretary of State. Management roles (and especially limitations on manager authority) should be expressly detailed in the LLC’s Operating Agreement.

A “manager-managed” LLC is an LLC that specifically designates one or more individuals to act as managers of the LLC. They may or may not also be members (owners) of the LLC. A “member-managed” LLC is an LLC where every member (owner) has equal authority to operate the LLC because they are a member. An LLC needs to only have one manager but may have more.

An Operating Agreement is a private internal governing document for an LLC. It details the policies and procedures of the LLC as well as the roles and responsibilities of its members and managers. It is not a public document.

The legal answer for Arizona is no, you do not. HOWEVER, if you are a multi-member LLC (even if just you and your spouse as members), I consider it reckless, ill-advised and akin to playing Russian Roulette if you do not have an Operating Agreement. If something goes wrong and there is no Operating Agreement, you will be governed by the default provisions of the law, and you may not like them. Operating Agreements allow you and your owners to opt out of many provisions of the law that would not be advantageous with your particular business activities, structure or ownership.

I would have a basic Operating Agreement even if you are a single-member LLC. It is always easier to provide and Operating Agreement to a bank or finance company when they ask for one instead of arguing with them about whether the law requires you to have one or not.

Templates can be a good starting place in some instances. However, the laws vary from state to state so you want to be sure that your Operating Agreement follows the law in the state your LLC was formed as a starting point. If you want to DIY an Operating Agreement, at the very least, get one specific to your State and consult with an attorney about the specifics. I think a solid Operating Agreement is where your attorney fee budget should be spent as it is critical for succession plans, management and the day-to-day operations of the LLC.

In the State of Arizona, LLCs do not file annual reports. In California and Nevada, there are annual reporting requirements and fees. In all three states, LLCs must keep their records up to date with their location, mailing address, ownership and management. Keep in mind that when any of these things change, there also may be additional reporting requirements triggered under the Corporate Transparency Act (CTA).

Yes, BUT depending on how the LLC elects to be taxed there may be limits on what type of business entity may own an LLC. A CPA should be consulted to make this determination.

Generally, my answer is yes, if you can. If a rental property is owned by an LLC, if there is a problem with a tenant on that property, the tenant could only successfully sue the LLC and not the owner/manager of the LLC. Also, if the tenant ever received a judgment against an LLC, the tenant could only successfully collect from LLC assets and not the assets of the LLC owners/managers. You should also be sure that your insurance will cover the rental property if it is transferred into an LLC. Insurance generally covers anything that happens on the property, but in the event it does not having the rental property in an LLC is added protection.

Having each rental property in its own LLC provides maximum personal liability protection for LLC owners/managers, however it is a practical nightmare (separate EiNs, bank accounts, etc. to follow formality). Sometimes it is best to form a holding company or management company as the umbrella and then have separate LLCs for various rental properties. Alternatively, it may be beneficial to look at forming a Series LLC out of Nevada. There are many ways to handle these situations and there is no right or wrong answer. This is why you seek legal advice.

A “Series LLC” is a business structure that has a master LLC and unlimited sub-LLCs (known as the series, cells or branches). Each sub-LLC is segregated from the other sub-LLCs and the master LLC. Each sub-LLC also has its own assets, members, managers, purpose and goals. If one sub-LLC is sued or owes a debt, the assets of the others are not at risk.

Series LLCs are a good mechanism for rental investments as they avoid the necessity of forming a separate LLC for each rental property. However, each sub-LLC must maintain its own bank account and be separate from the others so administratively there may be the same amount of work. Also, there may be additional costs if your business is not located in a state that allows the formation of Series LLCs in the state. For example, Nevada allows a Series LLC to be created under Nevada law and California and Arizona do not. Arizona and California allow Series LLC to be recognized in Arizona and California so a Series LLC could be formed in Nevada and registered to do business in another state. If you are considering a Series LLC, you must have a comprehensive Operating Agreement and you should talk to a CPA that has dealt with Series LLCs before.

A “Professional Limited Liability Company (PLLC of PLC)” is a business entity that is owned by licensed professionals to provide the professional services they are licensed to provide. When forming a PLLC to provide licensed professional services, contact the State Regulatory Board for that profession to ensure that there are no additional reporting or formation requirements.

Yes, Arizona and Nevada allow the creation of PLLCs.

No, California has no mechanism to create a PLLC in California. Since there are no PLLCs in California, professionals providing services to the public in California must either elect to be a Professional Corporation (P.C.) or a Limited Liability Partnership (LLP) if they want to be a California business entity providing professional services.

A general partnership is when two or more people work together to make a profit. It is essentially a sole proprietorship for two unmarried people. It is not a business entity and there is no legal mechanism to create it in almost all states (but Delaware). Many general partnerships are formed by accident when two people decide to do something to make money together. For example, if Fred and Maria decide they are going to bake cookies to sell at a State Fair. They have formed a general partnership. If any of the cookie customers at the State Fair get sick, both Fred and Maria are 100% personally liable. There is no limited personal liability in a general partnership and each partner is 100% responsible for their actions and the actions of the other partners. A general partnership is not a separate entity apart from its owners.

In California, general partnerships may file a Statement of Partnership Authority and record their Partnership Agreements in the county where they operate, but this is merely permissible and not mandatory. The Statement of Partnership Authority for a general partnership (Form GP-1) may only be filed on paper and submitted to the Sacramento office of the California Secretary of State.

In Nevada, general partnerships and sole proprietorships must obtain a Nevada State business license to operate in Nevada.

A “Limited Partnership (LP)” is a business entity formed by filing documents with the Secretary of State. An LP has at least one general partner (with unlimited personal liability and 100% management authority) and at least one limited partner that only has a financial interest in the LP and no management authority. Limited partners have limited personal liability capped at the amount they have invested in the LP.

A “Limited Liability Partnership (LLP)” is a business entity formed by filing documents with the Secretary of State. Each partner in an LLP has limited personal liability and is only responsible for his/her own actions and not the actions of the other partners in the LLP. Each partner’s personal liability is limited to the amount of money they invested in the LLP and responsibility for their own actions. There is no general partner in an LLP as all of the partners have limited personal liability, so they are all considered limited partners by law.

LLPs are common for professional businesses like law firms, medical practices, accounting firms and wealth management companies who want to pool their resources to cover overhead while only having responsibility for their own professional work. Partners in LLPs are only liable for the services they provide and not the services provided by the other partners.

When forming an LLP to provide licensed professional services, contact the State Regulatory Board for that profession to ensure that there are no additional reporting requirements. For example, California LLPs providing either professional legal or medical services are required to register their LLP with the State Bar of California or the California Board of Medical Examiners respectively.

Not all states allow all professions to form LLPs. In California and Nevada there are restrictions on which licensed professionals may form and operate an LLP whereas in Arizona there are no restrictions on the type of profession that may operate an LLP.

No, the Application to Register a Limited Liability Partnership for an LLP (Form LLP-1) may only be filed on paper and submitted to the Sacramento office of the California Secretary of State. All other partnership or business formation/maintenance documents must be filed electronically in California.

The difference between Limited Liability Partnership (LLP) and a Limited Liability Company (LLC) is the liability protection as well as management structure. In an LLP, the partners share management equally and they are not responsible for another partner’s mistakes. In an LLC, the members may appoint only one or more managers (that do not have to be members) to manage the LLC’s affairs. The members of an LLC have limited personal liability for any claims against the LLC (which include the actions of any member of the LLC). There also may be significant tax advantages to forming an LLC in lieu of a LLP as an LLC may elect how to be taxed whereas an LLP is taxed as a Partnership and the income flows through to the partners partners. You should definitely consult with a CPA to be sure that your business structure minimizes your tax liability or if it does not, the other benefits of a certain type of business structure outweigh the tax implications. Sometimes it is just a numbers game as to what makes the most sense.

A “Limited Liability Limited Partnership (LLLP)” is formed by filing documents with the Secretary of State. It is a hybrid between an LP (because it has one or more general partners with limited personal liability protections and absolute control of partnership management) and an LLP (because its limited partners are insulated from the acts of the other partners). General partners in an LLLP are shielded from liability for the acts of the other general partners whereas in an LP the general partner(s) have no personal liability protection. Limited partners are not liable for partnership debts and their liability is capped at their investment in the LLLP. Real estate investors use LLLPs often when they are developing property. A real estate investor who is a limited partner in an LLLP developing real estate only has to risk losing the amount of the investor’s investment and does not have to worry about being liable to pay the other debts incurred by the LLLP.

LLLPs may be formed in both Arizona and Nevada. LLLPs are not recognized universally and LLLPs are not available as a business entity structure in California. However, California will recognize an LLLP formed in another jurisdiction. Ease of LLLP recognition and acceptance by multiple jurisdictions should be a consideration when choosing to form an LLLP.

A “Partnership Agreement: is an internal written agreement between the partners that governs how the partnership will be run. It is the same as Bylaws for corporations and Operating Agreements for LLCs. It should detail the roles of the partners, an exit strategy, a succession plan, the ownership percentages, dispute resolution procedures, profit and loss distribution, management, voting, procedures for the addition and removal of partners, events of dissolution, dissociation/withdrawal of a partner and any other responsibilities/obligations of the partners. It is a private document as is confidential from the public.

YES!!! The Partnership Agreement governs the internal operations of the partnership and makes it clear what the roles and responsibilities of the partners are, as well as how disputes will be resolved. A comprehensive Partnership Agreement may eliminate disputes before they start as the partners have made clear their expectations, responsibilities and obligations. I view failing to have a Partnership Agreement as akin to playing Russian Roulette with your business. If there ever is a dispute between the partners of the partnership, the very first thing that is consulted is the Partnership Agreement. If there is no Partnership Agreement, the partners must follow the default partnership laws of the state where the partnership was formed. Many times, these are unfavorable. A Partnership Agreement may opt out of most statutes that the partners do not want to govern their partnership.

A foreign business is any business entity that was not formed in the state where it is operating. If an entity is formed in Delaware and it wants to do business in Arizona, it is considered a foreign business doing business in Arizona. Any business that was formed outside of the U.S. is also considered a foreign business and may need to register in the state where it is operating.

Generally, a business that was formed outside the state where it wants to do business must register to do business in the state where it wants to operate. For example, if a Nevada LLC wants to do business wants to do business in Arizona, it would need to register to be a foreign LLC doing business in Arizona. Foreign registration is a matter of filing the appropriate paperwork and paying a fee. Foreign business entities registered to do business in other states must comply with the registration state’s annual reporting requirements but are still governed by the laws of the state of their formation. You will also need to have a statutory agent/resident agent with a physical location in the state where you are registering to do business. Generally, in these instances, I recommend using a service company as the business owners typically are not living in the foreign state where they are registering to do business.

A “business succession plan” is a roadmap for what happens if (God forbid) something happens to any key person in the company (temporarily or permanently). Will the company carry on? Will the company be forced to shut down? Will your ownership be subject to probate? A succession plan is a procedure designed to help avoid probate and allow your company to continue so it can be sold (in the worst case) or it can also be a procedure for how you can exit the company when you want to retire. Succession plans do not have to be hard and many times they only require simple changes, but you should have a succession plan (personally and professionally) no matter what.

If something happens to you either temporarily or permanently, you do not want to lose something you have worked so hard for because you cannot operate it. If you have died, you also want your heirs to benefit from your work. A succession plan takes the guess work out of what happens when you are temporarily or permanently unable to run your business by setting a clear path for how the business will respond to the unexpected.

Wrong. Here is a true story. Healthy business owner passes away unexpectedly. He built his multi-million dollar business from the ground up. He had one minority owner that held less than 5% of the company at the time of the business owner’s death. Clearly, the business owner’s spouse will inherit his interest in the business AFTER PROBATE which will take over a year and probably much longer. In the meantime, the surviving spouse has no management rights in the company and the minority owner may choose not to distribute funds to her or not as he has sole authority to make financial decisions for the company. There is no mechanism for the surviving spouse to obtain any voting rights in the company or make any management/financial decisions for the company, so she is at the mercy of the minority owner. This could have been avoided if the business owners had thought through this scenario and incorporated a succession/exit strategy into their Operating Agreement, Bylaws or Partnership Agreement. The sad thing is that the business owner that passed away had a trust and if his ownership interest in the company had been transferred/held by the trust, his spouse could step into his shoes as an owner of the Company upon his death without probate. Bottom line: is this could have very easily and cost-effectively been avoided, but now it is too late.

A business “exit strategy” is just a “business succession plan” said another way. An exit strategy is a plan for the future. At some point, you or other owners want to do something else, retire, sell the business or sell your portion of the business. At the onset, it is the best practice to have a plan for valuing the business so that any transition is smooth. It is also critical to maintain all the formalities of a business (keeping public records current, updating internal governing documents, filing taxes, etc.) not only to maintain the corporate veil to protect your personal assets, but also to effectuate a smooth transition out of the business.

It is best to have an exit strategy as soon as possible, especially when you have multiple business owners. Many times, when an owner decides that he/she wants to leave the business for whatever reason (retirement, etc.) the parties may disagree and how that owner should be compensated for his/her ownership interest in the business. It is best to decide buy-out provisions early on so there is no dispute later. If there is an exit strategy in place, the owners just need to follow the plan they agreed to so there are fewer arguments.

You want to consider what happens in the event or an owner death, permanent or temporary disability, divorce, marriage or voluntary buy-out. This is not an exhaustive list, but a means to illustrate the situations to consider and account for when crafting your exit strategy/succession plan.

Arizona, California and Nevada are community property states which means, generally, that spouses each own 100% of what the other owns unless other steps have been taken. Spouses can disclaim an interest in a business such that they have no interest in it, they may also have a prenuptial or postnuptial agreement stating that they are keeping their ownership interests separate. They may also take steps to keep their individual assets separate and apart from the marital community. If an owner is married, that potentially brings another person into the business as an owner, if an owner is divorced, it may take a person out of ownership, and he/she may want to be paid for it. These are things to consider and account for. There is no right or wrong way to handle these situations so long as educated decisions are made. Also, marriage and divorce of owner spouses may affect the business’ Beneficial Ownership Information Report (BOIR) under the Corporate Transparency Act (CTA) such that it needs to be updated within 30 days of the change.

Regardless of whether you are a single owner or have a multi-owner business, you are leaving a mess for your heirs and/or the other business owners. If your interest in the business values at over $75,000, your ownership interest would need to be probated with the court. Alternatively, in Arizona, if your ownership interest values at less than $75,000 your heirs may be able to pass your business interest by Affidavit. Both of these scenarios are a hassle AND they cost money. They also vary by state. If you put a business succession plan in place, you can very easily avoid this added stress on your grieving family. Also, if you are temporarily disabled and unable to run the business with no plan in place, you may lose everything you have worked for because there is no person with authority to take care of matters when you can’t.

Depending on the type of business and the state you are located in, business may sometimes be owned as a joint tenancy/community property right of survivorship or by a trust. In addition, payment for a business interest to the heirs of an owner may be paid by a life insurance policy or alternatively, through a business valuation and agreed upon pay out. Powers of Attorney may also be tools for managing the business in the event of temporary disability.

It can be, but generally any exit strategy/succession plan is contained in the internal governing document of the business (Operating Agreement, Bylaws, or Partnership Agreement). There is no right or wrong exit strategy/succession plan to have. Exit strategies and succession plans are not one size fits all. We can discuss various options to find what is right for you and your business. It is not the actual terms of the exit strategy or succession plan that are important, but the fact that you have some type of planning in place.

A “domestication” of a business entity is the act of changing the business entity’s domicile from one state to another. For example, a California LLC or Corporation may want to change its domicile from California to Arizona for some reason. It is entitled to do that. The process is called “domestication”. Once domesticated, the business entity will no longer be governed by the state where it was formed and will be governed by its new domicile state. Its formation date will remain the same.

Yes. You may probably move your business entity from one state to another through the domestication process if the two states involved both allow for domestication. Alternatively, if the states where your business entity is located and wants to move do not allow for a domestication, you could accomplish the change of domicile through a merger.

A “conversion” of a business entity is the legal process of converting an existing business entity into another type of business entity. For example, you could convert an LLC into a corporation or vice versa. If for some reason the conversion statutes are not available in your state, conversion is always available through merger.

Yes. In most states, there is a conversion process for all types of business entities to change their form. If for some reason, the conversion statutes are not available in your state, conversion may always be accomplished by merger. In any conversion, a CPA should be consulted to be sure that the corresponding changes are made with the IRS and other taxing authorities. The new business entity type may need to obtain a new EIN/TIN, but the start date of the business entity will remain the same.

A “merger” is the voluntary fusion of two business entities into one surviving business entity. Sometimes businesses want to join forces to gain a larger market share, stop competing against one another, increase their customer base and achieve economies of scale by merging into one business entity. Alternatively, an existing business may merge with a new business entity if it needs to domesticate or convert and the statutes to do so through a domestication or conversion process are unavailable in that state.

There are two ways to sell your business. You can either sell all of its assets or you can sell your ownership interest in the business entity itself. You will want to talk to a CPA about the tax ramifications of the sale so you can limit any tax liability.

There are two ways to buy a business. You can either purchase all of the business assets or you can purchase the Seller’s ownership interest in the business entity itself. Generally, asset purchases are best because you can form a new business entity to start fresh going forward and eliminate potential liability from the previous business. This can even be done while maintaining the continuity of the business with the customer base. Alternatively, you may want to purchase the Seller’s ownership interest in a business entity itself. If you are purchasing the Seller’s ownership interest in the business entity, you will need to conduct comprehensive due diligence to be sure that there are no issues lurking in the background that you will be responsible for as the new owner. You will want to talk to a CPA about the tax ramifications of the business purchase so you can limit any tax liability.

Yes, you should have a qualified attorney represent YOU and YOU alone in a buy/sell transaction. You are either selling your business that you have built and you need to maximize your profits, but also ensure that you are paid in full. You should have very solid default provisions if you are allowing a buy-put over time. Alternatively, if you are buying a business, it is a significant investment that should be vetted. You need to be sure that the contractual terms of the agreement are doable, that you will be able to comply with the terms of the contract and you have had a legal professional do due diligence on the business that you are purchasing. Both the Seller and Buyer should have separate attorneys as their interests are by definition diverse.

You can find a contract for almost anything online. I think that is a great starting place, but you MUST have a qualified business attorney review it. You live or die by your contracts and their terms. You will have to litigate the terms of your contract if there ever is a dispute. You need to be sure the contract complies with the law of your state. I like it when my business clients draft bullet points for key terms or they find a contract similar to what they want online. It saves time and money as I know immediately what my client is looking for and we can really focus on other state-specific necessary terms. You should have all of your business contracts reviewed annually as laws change and so does your business. Also, you may decide you want to add or delete clauses to adjust to the changes in your business.

Yes, you should always have a qualified business attorney review your business contracts unless you are willing to do the job for free. Many times, business owners miss opportunities to guarantee payment in the event of default or bankruptcy. Also, business owners sometimes fail to put in warranty/disclaimer language that could protect them from liability or make the scope of work clearer. It is best practice to consult with an attorney about all of your business contracts/application for services.

I do not want you to contact me every time you need a minor change to your existing contract either. It is a waste of my time and your money. I generally create a Master contract whenever possible so that you may change the scope of work, add or delete clauses or make changes that do not affect the legalities of the contract. I will provide you with something you can edit, and we can draft alternate clauses so you have them when you need them. Let’s discuss how we can get you solid enforceable contracts to protect you and your business, but that also may be adjusted as necessary without changing their enforceability or incurring additional attorney fees.

You can do work on a handshake as oral contracts are enforceable in Arizona, but it is an incredibly bad idea. Anyone that will not put your agreement in writing is not going to honor it. Do not work with them. I don’t care if it is your friend or your grandma, if you have a good faith deal there should be no problem putting it in writing. Contracts do not need to be lengthy; they just need to cover the key terms of the deal so it is clear everyone is on the same page.

The best practice is to have a qualified attorney review any legal document you are going to sign. However, if you are comfortable with the terms of the contract, it is up to you to contact an attorney or not. If you do not understand the terms or the contract, you believe they are unclear or they do not memorialize the agreement as you understand it, you should definitely consult with an attorney before you sign. Once you sign a contract, your agreement with the other party is governed by the written contract so it needs to accurately reflect the deal.

SEEK LEGAL ADVICE IMMEDIATELY. Information is power and you need to know what options are available to you so you can make educated decisions. Don’t wait until the business is completely dead or on its last legs, contact counsel and make a plan as soon as possible. Sometimes companies that think they are going to fail are able to get financially healthy with some adjustments that the law provides. Make sure you have accurate, sound legal advice specific to your circumstances as soon as possible.

The two biggest mistakes that companies in financial distress make are: failure to talk to a qualified attorney about their options as soon as they know they are in financial distress; and failure to pay Payroll Taxes (Withholding Taxes)/TPTs (sales tax). First, speaking with a qualified attorney is helpful as each state has dissolution statutes that will guide the process. Many times business owners go about dissolution without advice and they miss some excellent opportunities for dealing with business creditors. Arizona has some incredibly helpful statutes to deal with creditors while dissolving an LLC or corporation and it is important to know what the options are as soon as possible so that you can make a plan. The second biggest mistake business owners make when their business is in financial distress is failure to pay Payroll Taxes and TPTs. These taxes are considered trust fund taxes and the owners of the company (and in some instances their bookkeepers) may be held 100% responsible for their payment and penalties. Pay these taxes when due even if it hurts. Failure to do so will create additional problems for both the business and its owners.

Every state has procedures for dissolving every type of business entity and the process is called dissolution and the process is similar but varies by state. Arizona has favorable dissolution laws that shorten the time that creditors have to bring any claims against the dissolving business entity. Talk to a qualified business attorney if you think you will be dissolving in the more immediate future so that you can plan for it appropriately.

Unfortunately, no. A dissolution of a business entity only resolves the business entity’s debt. Personal guarantees of business owners survive the dissolution process and must be resolved separately. Click here for more information on personal guarantees and their validity.

When your next tax returns are due, you need to make sure that the returns are marked “Final”. This is true for both federal and state tax returns as well as TPT reports and WTH reports. You may also close your business account with the IRS if you want to although it is not necessary.