by Lori A. Curtis
30-May-2013
In general, Arizona LLCs offer a few advantages over other types of business entities, such as partnerships or corporations. They are less expensive to form and operate. There is no requirement for annual meetings and minutes, and unlike corporations, there is no annual fee due ($45/year for corporations,) and you do not have to file annual reports with the Arizona Corporation Commission. You also have more choices on how you want the business to be taxed for federal income tax purposes.
Importantly, under Arizona statute, in the event there is a lawsuit that results in a judgment, a charging order is the only remedy for a creditor who gets a judgment against an owner. So, what is a charging order?
Charging order
If a creditor obtains a judgment against you, the creditor can apply to the court for an order that states the following. If the LLC intends to distribute any money or property to you, as a member of the LLC, the LLC must deliver the money or property to the creditor rather than to you.
If you owned stock in a corporation, the judgment creditor could garnish the stock and sell it to satisfy the judgment. However, if you have a membership interest in an LLC, the only remedy a judgment creditor can get against your membership interest is a charging order against the LLC. However, the LLC is not required to make distributions to its members and therefore, can keep its assets within the LLC.
Maintaining the LLC
The charging order protection is a key reason why we suggest each LLC have at least two members. Arizona LLC law provides that members of an Arizona LLC have charging order protection. However, LLCs arose out of partnership law. Because LLCs are traditionally partnerships, charging order protection was created to protect business partners from their partners’ personal misfortunes.
For instance, if your member interest in the LLC was seized, all of a sudden your partners would have to deal with a new partner (such as a judgment creditor). This would be a “partner” with whom the other partners did not approve or agree to do business. The charging order prevents this from happening.
In some states, this protection was afforded even single-member LLCs, however states are now reversing this protection for single-member LLCs. Additionally, in community property states, such as Arizona, a husband-and-wife-owned LLC is still deemed to be a single-member LLC because the “community” owns their interests.
For this reason, we suggest a third party also be a member of the LLC. This third party can be an irrevocable trust, or an individual. This maintains the partnership protection of an LLC.
Importantly, you always want to run your LLC as a business. This means keeping a separate bank account for the business and not using business funds to pay your personal bills. You should keep an accurate accounting of all business income and expenses including any salary or distributions you pay to yourself in order to maintain the LLC as a actual business. When you form your LLC, you should draft an operating agreement that protects all the members, and every member should sign the agreement. If you make any changes to the LLC, such as adding or subtracting a member, you should document those changes.
Proper use of an LLC can be a valuable asset protection tool in the arsenal available to you. Call our office today to talk to an attorney to see if an LLC is right for you.