LLC stands for limited liability company, a type of business entity formed under state law and recognized separately from its members. An LLC is a flexible type of business entity that combines some of the benefits of a partnership or a sole-proprietorship with the personal liability protection of a corporation.
Advantages of Forming an LLC in Arizona
As mentioned before, perhaps the greatest benefit of an Arizona LLC is its flexibility. LLCs can operate without the rigid formalities applicable to Arizona corporations (annual meetings, minutes/resolutions, annual report, annual fee), but still afford tremendous personal liability protection.
In fact, whereas corporate stock (read: ownership) may be seized and liquidated by creditors, only distributions from Arizona LLCs may be seized. In other words, an individual’s ownership interest — called membership — in an Arizona LLC is protected from creditors. However, it is always important to understand that personal liability insulation is never absolute. LLC owners should always consult with a qualified business lawyer to learn what kind of behavior can erode this liability shield and expose LLC owners to personal liability.
Additionally, Arizona LLCs offer tax flexibility, too. By default, single member LLCs are considered disregarded entities for tax purposes, meaning that all profits and losses are passed to its sole member. If the LLC has more than one member, it may be taxed as a partnership or it may be elect to be taxed under subchapter C of the code as a C Corp, or under subchapter S of the code as an S Corp.
Relative to Arizona corporations, Arizona LLCs are also more affordable to create (lower filing fee, currently $50) and more affordable to maintain.
How to Form an LLC in Arizona
An LLC can be formed in Arizona by filing articles of organization with the Arizona Corporation Commission and paying the associated filing fee. This is all that is required, though our business attorneys strongly encourage clients to create an operating agreement that provides the members’ rights and responsibilities in various business contingencies.
The operating agreement is a contract between members of the LLC should provide procedures and provisions related to:
- Profit/loss sharing;
- Corporate accounting;
- Member authority to bind LLC;
- Member addition/removal;
- Community property interests;
- Termination or dissolution of LLC
Some of this may seem common sensical, but we have encountered operating agreements prepared by prominent document preparation companies that created an unresolvable impasse when members wished to dissolve the company. In those situations, the voting shares were unevenly allocated in a way that created a “tie” without any tiebreaking procedure specified. It cost the parties tens of thousands of dollars to litigate what should have been properly included in their operating agreement.