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Arizona Limited Liability Companies

Formation. A Limited Liability Company is formed in Arizona by filing Articles of Organization with the Arizona Corporation Commission and paying the appropriate fee. The Articles of Organization must be published at least three consecutive times in a newspaper of general circulation in the county in the company maintains its place of business.

Name and title of assets. Bank accounts, vehicles and other assets as well as contracts should be in the LLC name. All expenses and income of the business should be entered into or paid from accounts in the LLC name and identification number. Failure to observe these formalities could lead to loss of statutory protection from personal liability.

Taxation. The tax treatment of the LLC depends on whether it has more than one member.

• If it has more than one member, it is treated as a partnership for federal and Arizona income tax purposes unless it elects to be treated as a corporation. This means that an annual return on IRS Form 1065 must be filed and all of the partnership taxation rules apply. These rules are extremely complex and a professional return preparer and tax advisor are strongly advised. In general, each member is a "partner" and must report his or her share of LLC income on his or her individual income tax return. This income is taxable to members whether or not it is distributed. A distribution of cash or property to a member generally has no tax consequences except for a reduction in partnership basis. However, there are exceptions to this rule and again, professional advice should be sought.

• If it is a one-member LLC, it is ignored as a separate entity for income tax purposes. The operations of the LLC will be reported on Schedule C of the owner-member’s federal income tax return.

• The LLC must file all other tax forms, such as federal payroll or excise tax returns and Arizona Transaction Privilege tax returns, in its own name and using its own employer identification number, regardless of whether it is a one-member or multiple-member entity.

Distributions. Members who draw regular checks from the company must treat these as owners or partner’s draws and will not withhold social security, Medicare and income tax. Instead each member is responsible for paying estimated income tax each quarter to cover the income and self employment tax liability on his or her share of LLC income. Non-members are paid salaries on which taxes must be withheld. Deposits of the withheld taxes as well as the LLC’s share of the social security and Medicare taxes must be made and quarterly payroll tax returns filed with the federal and state governments. No distributions should be made if the LLC will be rendered insolvent (that is, its debts and other liabilities will exceed its assets) as a result without seeking legal advice.

Personal expenses. Only business expenses and member draws should be disbursed from the LLC bank accounts.

Annual report. Unlike corporations, no annual report must be filed with the Arizona Corporation Commission.

Members and managers meetings and records. Member and manager meetings should be held at least annually and minutes of the meetings maintained in a minute book. A single member LLC generally does not need to follow this practice. Meetings may be held provided notice is given to members or managers in accordance with the operating agreement. The notice can be given by mail, fax or other written means. A valid meeting can be held without notice if all members or managers attend the meeting or if written waivers of notice are signed by all of them. The LLC’s operating agreement has provisions concerning notice, meetings and quorum which may differ from the above and the operating agreement should be checked concerning particular requirements.

New members. Member meetings must be held whenever a new member is admitted. Unanimous consent is required to admit a new member unless the operating agreement provides otherwise. Whenever a new member is admitted, articles of amendment must be prepared and filed with the Arizona Corporation Commission, unless the LLC is run by managers (as stated in its Articles of Organization) and the new member will hold less than a 20% interest after admittance.

Member interests. Certificates may be issued evidencing share ownership, but are not required. Whenever additional contributions are made by any person, the interest of that person in the LLC will not increase as a result unless the other members agree and the contribution is made in exchange for the additional interest.

Operating Agreement. The operating agreement can only be amended by action of the members in conformity with the Articles of Organization. Legal counsel should be consulted prior to amending the operating agreement.

Articles of Organization. The Articles of Organization are on file with the Arizona Corporation Commission and can only be amended by filing Articles of Amendment with the commission.

Statutory Agent. Every LLC is required to designate an individual or entity to act as its statutory agent for service of legal process. Legal papers served on this individual or entity will be considered served on the corporation. The agent must accept the position and the name and address of the agent must be on file with the Corporation Commission. If the identity or address of the agent is changed, the Corporation Commission must be notified.

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