What is a Limited Liability Company?
In Arizona, a limited liability company or LLC is a limited liability entity organized pursuant to Arizona’s Limited Liability Company Act, A.R.S. § 29-601, et seq. An LLC formed pursuant to Arizona law is in many ways like a partnership, e.g. federal and state taxation like a partnership, and in many ways like a corporation, e.g. limited liability similar to a corporation. An LLC organized under Arizona law is often thought of as a hybrid partnership-corporation.
Is the name you want available?
The name must contain the words "Limited Liability Company" or "Limited Company" or the abbreviations "L.L.C.", "L.C.", "LLC" or "LC".
Who Can Be a Member?
In Arizona, the Limited Liability Company Act permits the following to have a membership interest, i.e. ownership interest, in an Arizona Limited liability company: “any individual, general partnership, limited partnership, domestic or foreign limited liability company, corporation, trust, business trust, real estate investment trust, estate and other association.” A.R.S. § 29-601(15).
While many LLCs organized pursuant to Arizona law have more than one member, the Act permits an LLC to have as little as one member. Such an LLC is often referred to as a single-member limited liability company. While courts in some states have disregarded the limited liability protections of some single-member LLCs, state courts in Arizona have not taken such a drastic step in published, precedent-creating decisions.
Why Form a Limited Liability Company in Arizona?
An LLC organized pursuant to Arizona law is a flexible and accepted manner of structuring and operating businesses because of: 1) limited liability, 2) tax flexibility, and 3) minimal formalities.
1) Limited Liability
Often, the single biggest advantage of using a limited liability company to structure a business is the limited liability that it can provide.
Unlike partnerships and sole proprietorships, an LLC can effectively limit its owners' liability to creditors, provided the owners, called members, have not personally guaranteed the debts of the LLC.
2) Tax Flexibility
In years past, the most common corporate form was a "C" corporation. The distributions made by a "C" corporation to its shareholders are taxed twice, once at the corporate level and once at the shareholder level. This system of two-level taxation is often referred to as corporate taxation. In contrast, however, there is another corporate form, called the "S" corporation, that is only taxed at one level for distributions made to shareholders. This single-level taxation is often called pass-through taxation.
A limited liability company provides flexibility in that it allows the LLC's owners to choose either corporate taxation or pass-through taxation.
3) Minimal Formalities
In order to form and operate a corporation, a substantial number of formalities are required. However, there are fewer formalities required to form a limited liability company in Arizona and much fewer formalities required to operate an LLC. This lack of formalities allows people to effectively silo their liability through easily forming and easily operating multiple LLCs.
Organize an Arizona LLC
In order to organize an LLC in Arizona, a person, called the organizer, can take the following steps:
1) Check Name Availability
There are a number of different legal sources that affect whether an LLC can use a particular name and the amount of protection the LLC will have in the name, including: (a) federal trademark law, (b) state statutory law, and (c) state common law.
(a) Federal Trademark Law
If a business contemplates selling or providing services outside the state of Arizona, it may be beneficial to choose a name that can receive federal trademark protection via federal trademark registration and does not infringe upon another trademark.
When choosing a trademark, perhaps the single most important consideration is choosing a trademark that can receive significant trademark protection because the mark is distinctive.
In general, federal trademark law does not provide significant trademark protection if a trademark is “merely descriptive” of the good or services associated therewith; rather, a trademark generally must be suggestive of the good or services associated therewith (e.g. “Mustang” in terms of cars), abstracted (e.g. “Apple” in terms of electronics), or totally made up (e.g. “Verizon”).
The United States Patent & Trademark Office provides a tool — TESS — to search pending and existing federal trademark registrations.
(b) Arizona Statutory Law
Arizona's Limited Liability Company Act requires that an LLC’s name contain the words "limited liability company" or "limited company" or the abbreviations "L.L.C.", "L.C.", "LLC" or "LC", in uppercase or lowercase letters. Further, the LLC’s name cannot contain the words "association", "corporation" or "incorporated" or an abbreviation of these words and cannot include the words "bank", "deposit", "credit union", "trust" or "trust company" separately or in combination unless the LLC is to be and becomes actively and substantially engaged in such industries or is a holding company holding substantial interest in companies actively and substantially engaged such industries. A.R.S. § 29-602(A).
In general, the name of the limited liability company must also be distinguishable from either a reserved or actual name of an entity that is authorized to transact business in Arizona. In specific, Arizona statutory law provides:
B. Except as authorized by subsections C and D of this section, the name of the limited liability company shall be distinguishable from all of the following:
- The corporate name of a corporation incorporated in this state or a foreign corporation authorized to transact business in this state.
- A corporate name reserved under section 10-402 or registered under section 10-403.
- A fictitious name adopted by a foreign corporation under section 10-1506.
- The corporate name of a nonprofit corporation incorporated in this state or a foreign nonprofit or not for profit corporation authorized to conduct affairs in this state.
- The partnership name of a limited partnership organized and registered under the laws of this state or of a foreign limited partnership authorized to transact business in this state.
- The name of a limited liability company organized in this state or a foreign limited liability company authorized to transact business in this state.
- A trade name registered pursuant to title 44, chapter 10, article 3.1.
- The name of a registered limited liability partnership organized in this state or a foreign limited liability partnership authorized to transact business in this state.
A.R.S. § 29-602(B).
We have created a tool that allows you to perform a preliminary search of the availability of an Arizona LLC name using the Arizona Corporation Commission's systems.
(c) Common Law
Trademarks need not be registered – either at the federal or state level – in order to provide rights to the owner of the mark; rather, the use of a trademark without formal registration generally creates rights in the mark. As a result, if significant investment in the LLC’s name is contemplated, it is often beneficial to pay for a trademark clearance search from companies like Thomson Reuters.
2) Complete & File Articles of Organization
In Arizona, the Limited Liability Company Act requires the Articles of Organization to contain: A) the name of the limited liability company, B) the name, street address in Arizona and signature of the agent for service of process, C) the address of the company's known place of business in Arizona, if different from the street address of the company's statutory agent, D) whether the LLC is member-managed or manger-managed, and E) the names of the managers, if member-managed, or the names of the members, if member managed. A.R.S. § 29-632.
3) Publish Notice of Organization
In Arizona, the Limited Liability Company Act requires: "Within sixty days after the commission approves the filing, there shall be published in a newspaper of general circulation in the county of the known place of business, for three consecutive publications, a notice of the filing of such articles of organization..." A.R.S. § 29-635.
4) File Affidavit of Publication
While not required, we generally recommend that once the publication requirement has been fulfilled, "[a]n affidavit evidencing publication may be filed with the commission" in order to prove that the formation requirements were satisfied. A.R.S. § 29-635.
5) Execute Operating Agreement
While not required, we generally recommend that an LLC’s members enter into an operating agreement, which is the limited liability company’s counterpart of a corporation’s bylaws or a partnership’s partnership agreement. Without an operating agreement, the default provisions in the Arizona Limited Liability Company Act will govern the relationships and interests within the LLC on many issues, including: management, profits/losses & distributions, voting, and membership changes.
Why Use a Lawyer?
If an Arizona limited liability company can be formed very easily, why use a lawyer? In short, the default provisions provided for LLCs organized in Arizona by law are a bare minimum. Because the circumstances and operations of most businesses are unique, a one-size-fits all policy is often insufficient to allow businesses to run effectively and efficiently while providing protection to the businesses' owners. Customized and well-drafted LLC operating agreements can account for each business' unique circumstances and provide effective protections to business owners.
Articles of Organization - Document required to “organize” – the term “incorporate” is not used with an Arizona LLC – a limited liability company. Once the Articles of Organization have been signed by the LLC’s Organizer and LLC’s Statutory Agent, the Articles then must be filed with Arizona’s Corporation Commission.Arizona’s Corporation Commission does not return the original Articles of Organization after filing, but does return a copy to the LLC’s Organizer.
Manager - If an LLC’s Articles of Organization specify that management of the LLC will be vested in managers, such managers generally have broad authority to manage the LLC, unless such authority is restricted by an operating agreement.
Member - The owners of an LLC are called “members.” Unless the Articles of Organization specify otherwise and unless otherwise restricted by an operating agreement, an LLC’s members have full authority to bind and act on behalf on an LLC.
Statutory Agent - Person appointed to receive service of process associated with court proceedings on behalf of the LLC, should that ever be necessary. A statutory agent need not be affiliated with the LLC’s business, per se, but the statutory agent must accept such a role via the agent’s signature on the Articles of Organization or subsequent amendment thereto.
Registered Office - An LLC’s Articles of Organization must contain “[t]he address of the company's known place of business in [Arizona], if different from the street address of the company's statutory agent.”
Organizer - An LLC’s Articles of Organization must include the name and signature of the person organizing the LLC, i.e. the Organizer. An LLC’s Organizer need not have an ownership interest in the LLC or be otherwise affiliated with the LLC.
Operating Agreement - Sets forth the rights and duties of the LLC members one to another. Operating Agreements are almost recommended because of the dearth of default provisions included in Arizona’s LLC Act, but are not required. Unlike an LLC’s Articles of Organization, an LLC’s Operating Agreement need not be filed with Arizona’s Corporation Commission.
Expedited Filing - Arizona’s Corporation Commission provides that an LLC’s Articles of Organization can be filed in an expedited manner, which is generally much faster than regular filing, by paying an additional fee.
This brief overview of some important considerations associated with limited libaility comapnies organized pursuant to Arizona law is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.
Douglas K Cook is an Arizona attorney with over 40 years of experience as a practicing attorney. Although Douglas K Cook's office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.