Warning: Improper Contract Signature May Create Personal Liability and more...


Warning: Improper Contract Signature May Create Personal Liability

Question:  My LLC is to be the tenant on a real property lease.  The landlord’s lease has a signature block that indicates I will sign the lease as the manager and as a member of the LLC.  The signature block looks like this:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager and Member

If I sign the contract will I be personally liable under the lease in addition to the LLC?

Answer:  Probably.  If you sign the contract with the signature block as indicated above the landlord will claim you signed the contract in your capacity as the manager of the LLC AND in your individual capacity as a member.  A court might agree because that is the strict reading of the text under your signature.  Arizona LLC law says that a member does have have the legal power to sign a contract and bind the Arizona LLC on legal obligations.  Therefore the text “and Member” can only mean the signer is signing in his or her individual capacity.

Bottom Line:  If you do not want to be liable for obligations under a contract, make sure the signature line/block shows that you are signing only on behalf of the LLC.  The signature block should be one of the following:

If the LLC is member managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Member

If the LLC is manager managed:

World Wide Widgets, LLC, an Arizona limited liability company

By:_______________________________
Homer Simpson, Manager

The post Warning: Improper Contract Signature May Create Personal Liability appeared first on Arizona Limited Liability Company Law.

    

How Do I Complete IRS Form SS-4

Question:  I just formed a limited liability company.  I want a third party to obtain a federal employer id number (EIN) from the IRS.  The form is confusing.  Can you help me complete IRS Form SS-4?

Answer:  Yes.  We get this question so often LLC attorney Richard Keyt wrote a detailed article that explains how to complete the IRS Form SS-4.  Read “How to Complete IRS Form SS-4.”

Note:  If you are not asking a third party to get your LLC’s EIN don’t use IRS Form SS-4.  Instead, go to the IRS’ EIN wizard and take five minutes to answer questions online.  The IRS will issue your LLC an EIN at the end of the simple data entry process.

The post How Do I Complete IRS Form SS-4 appeared first on Arizona Limited Liability Company Law.

    

Do I Need a Certificate of Good Standing for My LLC?

Question:  I was checking the Arizona Corporation Commission’s website to make sure that all the information about my Arizona limited liability company displayed is correct.  I clicked on the “Check Corporate Status” button in the upper right hand corner of the page.  The site said my LLC is in good standing, but I noticed a button on the bottom left titled “Print Certificate.”  When I clicked on the Print Certificate button I was taken to a page where I could pay $45 with my credit card and then print a Certificate of Good Standing for my Arizona limited liability company.  Should I purchase a Certificate of Good Standing?

Answer:  No.  The purpose of the Certificate of Good Standing is to prove to people or companies that your Arizona LLC was formed and is in good standing with the Arizona Corporation Commission.  You do not need the Certificate of Good Standing unless a third party requests it.  If you do get a request for a Certificate of Good Standing the requester will want a current Certificate of Good Standing, not one created months or years before the date of the request.

The most common reason you might need a Certificate of Good Standing is your LLC wants to borrows money from a financial institution.  Lenders frequently ask for a Certificate of Good Standing because they want to confirm that the LLC exists and is in good standing with the Arizona Corporation Commission when the lender loans the money.

In conclusion, don’t waste your money on getting a Certificate of Good Standing unless somebody asks for it and complying with the request is important to your LLC.

The post Do I Need a Certificate of Good Standing for My LLC? appeared first on Arizona Limited Liability Company Law.

    

Do Members of an Arizona LLC Owe Fiduciary Duties to Other Members?

Question:  “Does a member of an Arizona limited liability company owe other members of the company any fiduciary duties?

Answer:   A March 27, 2014, Arizona Court of Appeals opinion in the case of TM2008 Investments, Inc., vs. ProCon Capital Corp. says that the members of an Arizona limited liability company do not owe any fiduciary duties to the other members unless the members signed an Operating Agreement that creates and imposes contractual fiduciary duties on the members.

Since the TM2008 Investments case involves fiduciary duties we should first explain what the term means.  The Cornell University Law School Legal Information Institute says the following about fiduciary duties:

“A fiduciary duty is a legal duty to act solely in another party’s interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.”

If a person owes a fiduciary duty to another person it also means it is much easier for the principal to sue the fiduciary for breach of a fiduciary duty and win a judgment because there is a higher standard of care associated with the fiduciary duty than would otherwise apply.

The TM2008 Investments, Inc., vs. ProCon Capital Corp. case arises from a dispute among the two members of Doveland Developments, LLC, a company formed to buy land and develop it into homes.  Unfortunately the project was not successful.  The lender threatened to foreclose and sell the land and go after the owners of the two members (Steve Tackett and Bonnie Vanzant) of Doveland Developments, LLC, because they had personally guaranteed the payment of the loan.  The members of Doveland Developments, LLC, are TM2008 Investments, Inc., and ProCon Capital Corp.

When the lender notified the parties that the loan was in default Bonnie Vanzant paid the loan in full.  She then sued Steve Tackett under an indemnification agreement they had signed to collect from Steve one half of the money Bonnie paid to the lender under her personal guaranty of the loan.  TM2008 Investments filed a petition to dissolve and liquidate Doveland Developments due to the inability to conduct business in light of the members’ substantial disagreements. ProCon Capital filed counterclaims against TM2008 Investments for breach of the implied covenant of good faith and fair dealing (count 1) and breach of contract (count 3), and against TM2008 Investments and the Bonnie and James Vanzant personally for breach of fiduciary duty (count 2).

The lawsuits were consolidated.  The trial court granted Bonnie Vanzant’s motion for summary judgment on the indemnification claim, but denied TM2008 Investments’ motion for summary judgment on the counterclaims.  Just before trial, ProCon Capital voluntarily dismissed with prejudice counts 1 and 3.  After jury trial on the claim for breach of fiduciary duty, the jury returned a verdict in favor of ProCon Capital and against TM2008 Investments and the Vanzants personally for $1,039,754.  The losers appealed.

The primary issue before the Arizona Court of Appeals was whether or not Arizona’s limited liability company law provides that a member of an Arizona LLC owes a fiduciary duty to the other members of the LLC.  ProCon Capital argued that because Arizona corporate and partnership law create fiduciary duties on shareholders and partners, respectively, Arizona law must therefor create fiduciary duties on members of an Arizona LLC.  The appellate court disagreed.  The court said:

We decline in this case to mechanically apply fiduciary duty principles from the law of closely-held corporations or partnerships to a limited liability company created under Arizona law. The legislature did not explicitly outline any such duties for members of an LLC; instead, the LLC Act allows the members of an LLC to not only create an operating agreement, but also delineate in that agreement the duties members owe one another.”

Translation:  The court said Arizona’s LLC statutes do not subject members of Arizona LLCs to any fiduciary duties and neither do any Arizona appellate court opinions.

However, the court said that an Operating Agreement can contain language that creates one or more fiduciary duties on members.  The Operating Agreement of Doveland Developments, LLC, contained this clause that ProCon Capital aruged created a fiduciary duty on TM2008 Investments, Inc, and Bonnie and James Vanzant:

It is agreed any Member shall not be liable to the Company or any other Member for any damages or the like relating to any vote, decision, action, inaction or the like taken on behalf of the Company in accordance with these provisions and other provisions of this Agreement if such is done in good faith and with reasonable business judgment including the duty to make management decisions with the care of an ordinarily prudent person in a like position and similar circumstances and in a manner believed to be in the best interests of the Company.

The appellate court found that the above quoted language did not create a fiduciary duty on the members.

The court reversed the trial court and sent the case back to the trial court.

Lessons to Be Learned

The TM2008 Investments, Inc., vs. ProCon Capital Corp. case stands for the following:

  • Arizona’s statutes that govern Arizona limited liability companies do not create fiduciary duties on members.
  • Members of an Arizona LLC can create one or more fiduciary duties by inserting appropriate language in the LLC’s Operating Agreement.

The issue of whether the Operating Agreement of a multimember Arizona LLC should or should not contain fiduciary duty provisions is a topic for another article.  Hint:  A member in control of an Arizona LLC would not want any fiduciary duties in the Operating Agreement, but the minority member would want the opposite.

The post Do Members of an Arizona LLC Owe Fiduciary Duties to Other Members? appeared first on Arizona Limited Liability Company Law.

    

What is Piercing the Veil of an LLC & Why is Do You Need to Understand It?

Question:  I have heard the term “piercing the veil” of a corporation or a limited liability company.  What does the term mean and why do owners of LLCs need to understand it?

Answer:  “Piercing the veil” means that a court disregards the shield or veil created by state law that says the owners of a corporation or an LLC are not liable for the debts of the entity.

Example 1: Homer Simpson’s LLC called World Wide Widgets, LLC, borrowed $25,000 from Ned Flanders.  The LLC signed the promissory note, but Homer didn’t.  The LLC does not pay.  World Wide Widgets, LLC, doesn’t have any assets so Ned knows if he gets a judgment against the LLC he can’t collect it.  Ned never gets his money.

Example 2:  Same facts as Example 1, but in operating the LLC Homer did not follow Arizona LLC law and did not follow proper procedures.  Ned sues the LLC and Homer and asks the court to pierce the veil and hold Homer liable for the LLC’s debt.  The court finds there are grounds to pierce the company veil and holds Homer personally liable for the LLC’s $25,000 debt.  This is the bad result for the LLC member and frustrates the reason people form an LLC, i.e., to protect themselves from liability for the debts of the LLC.

Jay Adkisson, a nationally known asset protection lawyer, said the following in response to a recent court ruling in a case called Shermane Hector v. Mo–Dad Environmental Serv., LLC:

The veil-piercing/alter ego challenges to LLCs are going to be interesting because they start out with the intended lack of formality of corporations, and then their owners often get loosey-goosey about how the company is operated, how it is capitalized (and continues to be capitalized), etc.  IMHO, the real challenge for planners is not so much in the meticulous drafting of LLC management agreements and the like, but in the education of owners as to how the entity needs to be run after all the ink dries.

How true.  The vast majority of people think that if they file the Arizona Corporation Commission’s fill in the blanks form Articles of Organization they are home free and their life savings are protected from the LLC’s debts.  Ignorance may be bliss, but ignorance of the legal concept called “piercing the company veil” can cost LLC members big bucks.

Most people who form an LLC don’t know that they must comply with Arizona’s LLC law or risk a court piercing the veil and holding them liable for the LLCs debts.  For example, Arizona LLC law requires that every Arizona LLC maintain certain records.  If you own an Arizona LLC don’t you think it would be a good idea to comply not only with that statute, but other Arizona LLC laws too?

The Shermane Hector v. Mo–Dad Environmental Serv., LLC court said this about veil piercing:

Some of the relevant factors considered in determining whether to apply the alter ego doctrine include: commingling of corporate and shareholder funds; failing to follow statutory formalities for incorporating and transacting corporate affairs; undercapitalization; failing to maintain separate bank accounts and bookkeeping records; and failing to hold regular shareholder and director meetings”

In forming 4,000+ Arizona LLCs I learned a long time ago that I must educate my LLC clients about Arizona LLC law.  I accomplish this two ways:

  • The LLC Operations Manual:  This is a 170 page book I wrote that explains Arizona’s LLC law in great detail.  For example, chapter 3 of the Operations Manual contains a list of 31 tasks that every LLC should complete in its first 75 days.  Learn more about the LLC Operations Manual.
  • Informative Email Messages:  Everybody who hires me to form an Arizona LLC will be sent 30+ email messages during the first year informing them about Arizona LLC law and reminding them to do things like sign the Operating Agreement, open a bank account, set up the LLC’s bookkeeping system, consult with a CPA and document loans by members to the LLC.

To learn more about this very important topic read my article called “Two Phases in the Life of an LLC.”

The post What is Piercing the Veil of an LLC & Why is Do You Need to Understand It? appeared first on Arizona Limited Liability Company Law.

    

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