It is a Limited Liability Company.
A limited liability company (also known as an LLC) is a distinct legal entity that is neither a partnership nor a corporation. The company has some of the characteristics of a partnership and some of the attributes of a corporation.
A limited liability company is managed either by its members (owners) or by one or more managers. The manager does not need to be a member (owner). The members of a limited liability company are shielded from personal liability. Profits and losses may pass directly to the members without taxation of the limited liability company itself.
An Operating Agreement is a contract between all parties involved in the company, and may be similar to the by-laws of a corporation. The Operating Agreement may impose or eliminate certain duties of the members and managers. Having a well-drafted and lawyer-approved Operating Agreement is essential. Many people draft their own Operating Agreement or have a paralegal prepare one – both of these things may lead to disaster and overwhelming expense down the road. Think twice.
Articles of organization must be prepared and filed with the Arizona Corporation Commission (ACC), together with the proper filing fees.
After the ACC approves the articles, a notice of filing must be published in a newspaper of general circulation. Afterward, an affidavit of publication must be filed with the ACC.
If certain changes are made to the limited liability company, additional documents must be filed with the ACC
No, an attorney is not a legal requirement. You can prepare and file the articles of organization yourself; however, you need to be thoroughly versed in Arizona law to do the job correctly. A prudent person would consult a lawyer to determine if their LLC was properly formed, giving them limited liability, and if their Operating Agreement adequately protects the interests of the members and managers.
A mistake in connection with the organization of the LLC can cause serious adverse economic, legal or tax consequences.
Choose the name of your LLC carefully. It is very important that your name portray the image you want for your new company. Legally, the name you select must not be deceptively similar to any existing LLC, corporation or trade name in Arizona.
For example, if an LLC named “Arizona LLC” exists in Arizona, you probably would not be allowed to name your business Arizona Limited Liability Company. It is possible that the name you select will not be distinguishable. The records of the ACC should be searched before a name is selected, in order to avoid problems such as the rejection of the articles due to name similarity.
The name you select must show your business is a Limited Liability Company, so it must include the words “Limited Liability Company,” or the abbreviation LLC.
In Arizona, only one person is needed to form an LLC.
The IRS does allow one member LLCs to qualify for pass-through tax treatment; however, taxation of one person LLCs at the state level may be different.
An LLC is owned by its members. They are analogous to partners in a partnership or shareholders in a corporation, depending on the how the LLC is managed.
A member will more closely resemble shareholders if the LLC utilizes a manager or managers because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company.
A member’s ownership of an LLC is represented by their “interests,” just as partners have an “interest” in a partnership and shareholders have stock in a corporation.
An LLC may be managed by its members (owners) or by a manager or managers.
If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision-making process of the company.
If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation’s board of directors. These managers are in charge of the affairs of the corporation.
An advantage of the LLC is its tax flexibility – the members of the LLC are allowed to select how the entity will be taxed.
Most LLCs select to be taxed as a partnership. This means that the LLC is treated as a pass-through entity, paying no separate entity level tax.
On the other hand, the LLC could elect to be taxed as a corporation by completing IRS Form 8832. If this election is made, the LLC would pay a separate entity level tax. This choice may be advantageous if the LLC owners want to retain profits in the business and would prefer to have these retained earnings taxed at the corporate income tax rate as opposed to the personal rate.
LLCs offer several advantages.
LLCs allow for pass-through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC are treated like the earnings from a partnership, sole proprietorships and most S corporations.
A limited liability company only provides limited liaibilty if the company was properly capitalized at inception. If the company is undercapitalzied at inception the “veil” of the company may be pierced at any time.
The LLC owner’s liability is generally limited to the amount of money which the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation’s shareholders. Creditors of a member cannot seize the member’s interest in the LLC; instead they can only obtain a “charging order” which permits them to receive the member’s distributions (if any) from the LLC.
Flexible Management Structure and Flexible Ownership is Permitted
Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by its members. Thus, profit interests may be separated from voting interests.
The disadvantages of an LLC include:
More paperwork than an ordinary partnership.
Paucity of published Arizona appellate opinions settling the law.
While the S corporation’s special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.
An LLC may offer several classes of membership interests while an S corporation may only have one class of stock.
Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than 75 shareholders. Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs, partnerships or nonresident aliens.
LLCs are allowed to have subsidiaries without restriction. S corporations are not allowed to own eighty percent or more of another corporation’s shares.
The choice of an LLC or an S corporation should be made only after consultation with a certified public accountant and an experienced attorney. The choice of entity may depend upon many factors including taxation, limited liability, management, administrative expense, and others.