Tag Archives: limited liability company

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Succession Planning for LLCs

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A business is like other types of property. If you die owning them in your personal name, there will need to be a probate. Don’t be like the young lady above, whose parents owned an LLC but failed to specify how the business would be managed when the parents died. Think about it. There might be payroll, bills, customers needing service. And no one is legally authorized to do anything. However, this is easily avoided. This blog will discuss two basic types of succession planning for LLCs.

In Arizona, there is a statute that covers “non-probate transfers.” As an example, if your house is in joint tenancy with your wife (or husband), then when you die, it goes to your spouse. The same thing happens with a checking account. If it’s jointly held, it goes to the joint owner.

You can do the same thing for a limited liability company (or for that matter, any other type of business). But it requires additional documentation that most people don’t do. For a limited liability company, we would rely on A.R.S. 14-6101 (“Nonprobate transfers on death; nontestamentary nature”). That statute basically says that an asset that is owned by the deceased person, and that is controlled by a written instrument, passes to a person the deceased person designates either in the written instrument or in a separate writing.

There are two basic ways to make sure a limited liability company is not tied up in probate after the owner dies. My preference is to have the LLC owned by a revocable trust. The revocable trust then says what happens to the property (including the company) after the owner dies. The second way is to name one or more beneficiaries of the member’s ownership interest in either a company document (such as a Member’s Operating Agreement) or (even simpler yet) on a separate writing like a Beneficiary Designation.

The quickest way to name a beneficiary of your LLC’s membership interest is by signing a form similar to this:

“Effective upon my death, I hereby assign all of my right, title, and interest in __________________, LLC to ______________________.”

Succession planning for LLCs can be tricky. It’s best to have an attorney do this for you because you want to make sure you are having the correct person sign it. I’m saying this because transferring assets can involve community property interests (if you are married) or other issues. If that’s the case, decide whether you want the spouse to sign a waiver of community property interest. It should also be acknowledged by a notary.

If you have any questions, feel free to give us a call at 602-443-4888.

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Do you need to add “LLC” to your company name?

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Do you own a business? Is that business formed as an LLC? Here’s the next question: Do you need to add “LLC” to your company name? After all, McDonalds just has a big “M” in front of their restaurants, and they merely advertise as “McDonalds.” Who thinks of Ronald McDonald being a spokesperson for “McDonalds, Inc.”?

Here’s the answer. Failing to include “LLC” whenever you advertise or print your company name can be a factor in determining whether you should be personally liable for business debts. Here’s an example. Let’s say you own a store. Someone slips and falls on a banana peal in your store. That person wheels his wheelchair into a lawyer’s office and asks who he can sue. The lawyer will mention suing your business. But then the lawyer will do some research. If it turns out that your signage simply shows as “Billy Bob’s Grocery Store” (instead of “Billy Bob’s Grocery Store, LLC”), the lawyer could make a case that you failed to inform the injured person that there was an LLC. Essentially, the lawyer is saying it’s unfair for you to surprise your customer by now informing him that your business is a limited liability company. Perhaps the customer would have decided not to do business with you if they had known they weren’t actually buying groceries directly from Billy Bob. (I know this sounds far-fetched, but this is the way lawyers and courts think.)

There are not many Arizona cases on this point. However, there is a U.S. District Court case from Arizona that discusses this issue. See EEOC v. Recession Proof United States LLC (2013 U.S. Dist. LEXIS 171524; 2013 WL 6328000). That case discussed the doctrine of corporate veil piercing. (I.e., holding the owner personally liable for a business debt.) The case found that even though Arizona had not specifically held veil piercing applies to limited liability companies (as opposed to corporations), the same principles and rationales apply. The federal court basically predicted that an Arizona court would ultimately apply the doctrine to limited liability companies.

Next the federal court in Recession Proof listed the various factors that a court will consider in whether to pierce the LLC’s veil (and hold the owner personally liable:

1. payment of salaries and expenses of the company by its owners;
2. failure to maintain corporate formalities (This doesn’t apply as much to limited liability companies);
3. undercapitalization (in other words, not having adequate liability insurance or cash reserves to pay any foreseeable claim);
4. commingling of corporate and personal finances;
5. plaintiff’s lack of knowledge about a separate corporate existence;
6. owners making interest free loans to the corporation; and
7. diversion of corporate property for personal use.

EEOC v. Recession Proof United States Llc, 2013 U.S. Dist. LEXIS 171524, *22 (D. Ariz. Aug. 19, 2013). If you are personally sued, the court will ask if (1) the owner is even bothering to treat the business as a separate entity, and (2) whether failing to hold the owner personally liable would result in fraud or injustice. See Seymour v. Hull & Moreland Eng’g, 605 F.2d 1105, 1111 (9th Cir. 1979). A third factor to be considered is whether the person who created the limited liability company formed the copany with fraudulent intent or if the corporate form was fraudulently misused following formation.

In plain English: If you’re a business owner, chances are that you already violate some of the above-listed factors. You might pay some personal expenses from the company. You might take money as “loans” from the company as a way to get cash out. You might use company property (maybe the car, maybe a computer) for personal use. If you also fail to advertise that you are an LLC, there is a pretty strong case that you should not be protected from the company’s creditors.

So … to answer the question of whether you should include LLC in your business name when it appears in your marketing, etc., the answer is “Yes.” This is an easy way to make one of the factors not apply.

I’ve tried to explain this as simply as possible (for a short blog post). But I’m sure I haven’t answered all your questions. If you have further questions, feel free to call me at 602-443-4888.

(P.S., the photo of Paul Deloughery in front of the Magellan Law office shows how we advertise that we are an LLC. Since the law firm is a professional limited liability company, we use the acronym “PLC.”)

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