Tax Free Merger of a Corporation into an LLC and more...


Tax Free Merger of a Corporation into an LLC

Question:  How do I convert my corporation into a limited liability company?

Answer: Two ways – the easy way and the hard, but not too hard way.

Easy Way:  If your corporation does not have assets that have substantial value or contracts that cannot be assigned or transferred to the LLC without the consent of the other party to the contract then simply form a new LLC, dissolve the corporation and start doing business under the new LLC.  If your corporation is an Arizona corporation and you dissolve it before or concurrently with forming your Arizona LLC the new LLC’s name can be identical to the corporation’s name.

Harder Way:  Form an Arizona LLC and merge the corporation into the LLC.  The advantage of this method is that a merger causes the assets and liabilities of the corporation to become assets and liabilities of the LLC automatically as of the effective date of the merger.  If the dissolution of the corporation would cause its shareholders to pay unwanted income taxes the merger method may avoid the tax.

Example 1:  World Wide Widgets, Inc. owns property that has a value of $101,000.  The sole shareholder’s basis in his stock of the corporation is $1,000.  If the corporation assigned the property to its shareholder before dissolving the shareholder would have taxable gain of $100,000 ($101,000 value of property – $1,000 adjusted basis of the stock).

If the stock is a capital asset (held for more than one year) the shareholder in this case could be paying as much as 23.8% of the gain as federal income tax plus state income tax if the shareholder resides in a state that has a state income tax.  Arizona’s tax rate for capital gains in 2016 is 4.5%.  Therefore, if the shareholder is an Arizona resident and the stock is a capital asset the total federal and Arizona income tax on the $100,00 gain is $24,500 if the shareholder is not subject to the 3.8% federal surtax on net investment income or $28,300 if the shareholder is subject to the surtax.  Yikes!  Who wants to pay federal and state income tax if it can be avoided.

The good news is that if the corporation is taxed as an S corporation or a C corporation and the LLC is taxed as an S corporation or a C corporation the merger can be a tax free reorganization under Section 368(a)(1)(F) of the Internal Revenue Code.  By carrying out the “F” merger the shareholder can eliminate the income tax.

Example 2:  Same facts as example 1 except the corporation taxed as a C or an S corporation merges into an LLC taxed as a C or an S corporation.  Result:  $0 income tax instead of $24,500 or $28,300.

Conclusion:  Ask your CPA to tell you in writing what would be the income tax consequences to you if you were to dissolve your corporation.  If dissolution will cause you to pay federal and/or state income tax you do not want to pay then do an F reorganization, i.e. merge your corporation into an LLC that is taxed as a C or S corporation.

P.S.  If your surviving LLC will be an Arizona LLC hire me, Richard Keyt to prepare the merger documents and to consummate the tax-free merger.  Call me at 480-664-7478 if you have questions or to get started.

The post Tax Free Merger of a Corporation into an LLC appeared first on Arizona Limited Liability Company Law.

    


How a Married Couple Owns an Arizona LLC as Community Property

Married Arizona residents can own property as separate property, community property and community property with right of survivorship.  Arizona law provides that if a married Arizona resident acquires property, the property is automatically community property (not community property with right of survivorship) unless the property was a gift or inherited property.  When property is owned as community property or community property with right of survivorship then each spouse owns an undivided one half of the property and if they divorce, each spouse is entitled to one half the value of the combined value of the couple’s community property asset.

Separate property is property acquired from a gift or inherited property or property acquired before marriage.  The non-owner spouse has no interest in or claim to his or her spouse’s separate property.

The only difference between community property and community property with right of survivorship is what happens to the interest of the first spouse to die.  When an Arizona married couple owns property as community property and one of them dies, the interest of the deceased spouse does not transfer automatically to the other spouse.  The interest of the deceased spouse is inherited as provided in the deceased spouse’s will or trust, but if there is no will or trust then the interest of the deceased spouse passes according to the law of intestate succession.  A probate may be required to complete the transfer to the property heir(s) unless the value of the interest is less than $75,000.

When an Arizona couple owns property as community property with right of survivorship then if one spouse dies, the interest of the deceased spouse transfers automatically to the surviving spouse without the need for a probate.  If a married Arizona couple wants the community property interest of a deceased spouse to pass automatically to the surviving spouse on the death of the first spouse they must own the property as community property with right of survivoship.

How to Own an Interest in an Arizona LLC as Community Property with Right of Survivorship

If a married couple who are Arizona residents form an Arizona LLC they automatically own their interest in the LLC as community property, not community property with right of survivorship.  If they want to own their interest in the LLC as community property with right of survivorship they must sign an Operating Agreement that expressly declares that the married couple holds their interest in the limited liability company as community property with right of survivorship. Arizona Revised Statutes Section 29-732.01.C.

When people hire me to form their Arizona LLC and tell me they want to own their interest in the LLC as community property with right of survivorship then we insert language in the LLC’s Operating Agreement hat expressly declares that the married couple holds their interest in the limited liability company as community property with right of survivorship.

The post How a Married Couple Owns an Arizona LLC as Community Property appeared first on Arizona Limited Liability Company Law.

    


Caution: LLC Membership Interests Held as Community Property

Question:  My husband and I acquired a 50% membership interest in an Arizona LLC as community property with right of survivorship.  Homer & Marge Simpson own the other 50% of the LLC.  My husband died and my husband’s interest in the LLC passed to me automatically per Arizona Revised Statutes Section 29-732.01.

Homer Simpson says that he and Marge now have control of the LLC because the 25% interest I acquired from my husband is a mere assignment of his interest and is not a membership interest with voting rights.  The Simpsons say that I own a 25% membership interest in the LLC and the 25 votes associated with that membership interest and an economic right to 25% of the profits of the LLC without any voting rights.  Homer says that since my husband’s death members have 75 total votes instead of 100, the Simpsons have 50 votes and I have 25 votes  How many votes do I have?

Answer:  The interest in the LLC that you inherited from your husband is a membership interest with voting rights rather than an assignment of an economic interest without voting rights if the members of your LLC signed an Operating Agreement that provides that when a married couple own their interest in the LLC as community property with right of survivorship and one of them dies, the interest of the deceased inherited by the survivor is a membership interest.  Section 29-731.B.2.  If the members of your LLC did not sign such an Operating Agreement then what you inherited from your husband was a 25% economic interest in the LLC without any voting rights.

Lesson to Be Learned:  If your Arizona LLC has members who own their membership interests as community property with right of survivorship, joint tenancy with right of survivorship or tenants in common and the members want the heirs who inherit an interest to inherit membership interests with voting rights vs. economic interests without voting rights then the members of the LLC must sign an Operating Agreement that provides that inherited interests are membership interests with voting rights.

Note:  My standard Operating Agreement contains this automatic membership interest with respect to inherited interests clause.  Hire Arizona LLC attorney Richard Keyt to amend your existing Operating Agreement or prepare a new Operating Agreement by completing our online Questionnaire.

The post Caution: LLC Membership Interests Held as Community Property appeared first on Arizona Limited Liability Company Law.

    


Arizona LLC Alert System Updated to 36 Messages

A lot of lawyers and document preparers form Arizona limited liability companies including yours truly.  My LLC formation services, however, include many features nobody else offers.  One of my unique services is the Arizona LLC Alert System, which is a series of email messages I send to people who purchase my Silver and Gold LLC packages.

In forming

5,000+ Arizona LLCs I learned a long time ago that people need help learning about and accomplishing the many post LLC formation tasks that arise when people form a new LLC.  Here is a short list of common LLC post formation tasks:

  • Get federal employer ID number.
  • Open bank account in name of the LLC.
  • Arrange for all members to sign the Operating Agreement.
  • Set up a bookkeeping system.
  • Consult with tax accountant about which of the four ways an LLC can be taxed is best for the owner(s) of the LLC.
  • File IRS Form 8832 or 2553 if recommended by the LLC’s tax advisor.
  • Transfer land to the LLC by recording a deed (for LLCs that are to own real estate).
  • Purchase insurance.
  • Get a dba or tradename from the Arizona Secretary of State.
  • Register a federal trademark.

Another unique service I give purchasers of Silver and Gold LLCs is access to my 170 page ebook called the “Arizona LLC Operations Manual.”  Chapter 3 of the Operations Manual is a checklist of 34 tasks the LLC should accomplish in its first 75 days after being formed.  To help members of new LLCs I form accomplish these 34 tasks I created the Arizona LLC Alert System.  It is a series of email messages I send to the members of Silver and Gold LLCs I form.  These messages remind people to accomplish important LLC post formation tasks.

The Arizona LLC Alert System previously contained 24 Alert email messages, but over the past weekend I added 14 new email Alerts.  See the entire list of the 38 Alert emails now included in the Alert System.  The Alert System sends members a mobile friendly email message that links to a mobile friendly web page where the actual content of the alert is displayed.  Our LLC members love getting these informative alerts.

The following is a list of other unique LLC formation services I provide for all purchasers of my Silver and Gold LLC formation packages.

  • Two different Operating Agreements – a 30 page Operating Agreement for single member LLCs and husband and wife owned LLCs and a 45 page Operating Agreement for multi-member LLCs.
  • Provisions in the Operating Agreement needed as a result of the Bipartisan Budget Act of 2915, that modified the partnership audit rules applicable to LLCs.
  • Addition of Partnership Representative provisions in the Operating Agreement.  These provisions replace the tax matters partner provisions required under TEFRA.
  • Optional Service:  All LLC documents uploaded in pdf format to a secure folder on the internet using Cytrix’ Sharefile.
  • Optional Service:  Members digitally sign all documents and are sent pdf copies of the digitally signed documents.

Hire Me to Form Your Arizona LLC for $397, $597 or $997

See the contents of our Bronze, Silver and Gold LLC packages.  To hire us to form an Arizona LLC follow one of the two options on our LLC formation page.

The post Arizona LLC Alert System Updated to 36 Messages appeared first on Arizona Limited Liability Company Law.

    

LegalZoom & Arizona LLC Newspaper Publication

Recently I received an email message from a person who is not my client that stated the following:

“I hired LegalZoom to form the LLC that I started here in Arizona . . . towards the end of 2014. Earlier this year I found out that . . .

[the LLC] was never published in the newspapers ( I thought that this service what part of the package that I purchased from LegalZoom) I’m not quite sure what to do”

This is an example of why people should not use this document preparer to form an Arizona LLC.  We always publish for every LLC we form.  Publication is a requirement of Arizona LLC law.

Arizona Revised Statutes Section 29-635.C states:

“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”

Notice the language that says the notice SHALL be published.  Arizona LLC law, however, does not state the consequence of failing to publish the notice timely.  A third party could argue to a court that the failure to satisfy the publication requirement of Section 29-635.C means the LLC was not legally formed and therefore does not exist.

Because Arizona law is silent on the consequences of failing to publish, I recommend that LLCs that do not publish timely publish when they become aware of the fact the LLC did publish.  Better late than never.

The post LegalZoom & Arizona LLC Newspaper Publication appeared first on Arizona Limited Liability Company Law.

    

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