Arizona House Bill 2303 signed into law by Governor Doug Ducey contains a significant change to Arizona’s securities laws. The new law allows the issuance of LLC membership interests to as many as ten LLC “organizers” to be exempt from Arizona securities laws.
Arizona Revised Statutes Section 44-1844.A was amended to read (new language is in bold red text):
“sections 44‑1841 and 44‑1842, section 44‑1843.02, subsections B and C and sections 44‑3321 and 44‑3325 do not apply to any of the following classes of transactions: . . .
10. The issuance and delivery of securities of a corporation, limited liability company or limited partnership to the original incorporators, organizers or general partners, not exceeding ten in number, where the securities are not acquired by the incorporators, organizers or general partners for the purpose of sale to others and are not directly or indirectly sold to a third party within twenty-four months unless an incorporator, organizer or general partner experiences a bona fide change of financial circumstances within such time period, providing original incorporators, organizers or general partners are notified of their right pursuant to title 10 or 29 to review the financial books and records of the corporation, limited liability company or limited partnership at reasonable times.”
The term “organizer” is not defined in any Arizona statutes. The Arizona Corporation Commission’s hard copy form Articles of Organization contains the following statements in Section 9 of the document:
“ORGANIZERS and SIGNATURE – the individual or pre-existing entity submitting this document is the Organizer – list the name of the Organizer below. If the Organizer is an individual, that individual must sign below. If the Organizer is a pre-existing entity, provide the signature of the individual acting for that entity, then print the individual’s name.”
Without any statutory reference that supports the statements, the first paragraph of the ACC’s instructions for its hard copy Articles of Organization states:
“One or more persons can form an Arizona LLC by signing and filing Articles of Organization with the Arizona Corporation Commission. . . . These persons are called “organizers.” “Person” includes individuals and entities.”
Significance of the New Law
This change in Arizona law is very important for every Arizona LLC that will issue membership interests that the securities regulators would designate as a security. If you think an LLC must issue stock to investors before it is considered issuing a security you are wrong.
If the promoters of the LLC say to an investor give me your money for an X% membership interest in our LLC and the LLC will make a profit for you the LLC is issuing a security to the investor. This is an example of an “investment contract,” which is a type of security under federal and state securities laws.
When securities laws apply to the issuance of membership interests in an LLC the LLC must comply with federal and applicable state securities laws or the promoters and the LLC become guarantors of the investors’ investments. Promoters who cause an LLC to issue membership interests that are securities the issuance of which does not comply with applicable securities laws will have substantial liability to the investors and to the securities regulators.
To learn more about securities laws and how they can affect LLCs read the article my son and I wrote called “California LLCs & Securities Laws.” Although the article is about California LLCs, many of the concepts apply to Arizona LLCs.
If your to be formed Arizona LLC will be issuing membership interests to people or entities that are investing substantial amounts of money to purchase their membership interests, you must have EVERY INVESTOR (without exception, but no more than ten) sign the Articles of Organization as an organizer so the LLC can claim the exemptions provided from Arizona securities laws by Section 44-1844.A.10.
If you need your LLC to be able to use the ten exemptions provided in Arizona Revised Statutes Section 44-1844.A.10 hire us to form your LLC. Our Articles of Organization for LLCs that want to take advantage of Section 44-1844.A.10 contain special 44-1844.A.10 language.
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Arizona, like Nevada, provides that the sole remedy of a creditor that gets a judgment against a member of an LLC formed in the state is to serve a charging order on the LLC. The charging order is a court order that if money or property is to be distributed or paid to the debtor/member the money or property must be paid to the creditor instead.
The Kaplan vs. Miller case below illustrates how a creditor can win a judgment in state A against a member of an LLC formed in state B and get a court in state B to issue the charging order against the LLC. The creditor domesticates the judgment in the state where the LLC was formed and then asks a court in state B to issue the charging order.
STEPHEN KAPLAN, P.C., Plaintiff(s),
CAMERON L. MILLER, Defendant(s).
Case No. 2:15-CV-1395 JCM (PAL).
United States District Court, D. Nevada.
March 24, 2016.
JAMES C. MAHAN, District Judge.
Presently before the court is plaintiff Stephen Kaplan, P.C.’s (“Kaplan”) motion for charging order. (Doc. # 6). Defendant Cameron L. Miller, who has not made an appearance in this matter, has not responded. The time for doing so has passed.
On March 6, 2015, plaintiff recovered a judgment against defendant in the U.S. District Court for the Northern District of Texas. (Doc. # 6-1). Plaintiff initiated the present matter by domesticating that judgment in this district. It filed a motion for a writ of execution with this court (doc. # 4), which the court granted. (Doc. # 5).
Plaintiff, as a judgment creditor, now moves the court for an order charging defendant’s ownership interests in two Nevada limited liability companies (“LLCs”) with the domesticated judgment. (Doc. # 6). Plaintiff represents that after conducting discovery of various public records, it has determined that Mr. Miller, as judgment debtor, has ownership interests in RW AND ASSOCIATES, LLC and CLM DEVELOPMENT SERVICES, LLC. Plaintiff attached search results from the Nevada Secretary of State’s website that indicate defendant holds one or more officer positions in each entity. (Doc. ## 6-2, 6-3).
Under Nevada Revised Statute (“NRS”) 86.401, a judgment creditor of a member of an LLC formed under Nevada law may apply to a court of competent jurisdiction for an order charging “the member’s interest [in the LLC] with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest. See NRS 86.401(1) (emphasis added).
The statute provides the exclusive remedy by which a judgment creditor of a member of such an LLC may satisfy a judgment out of the debtor’s interest in the LLC. See NRS 86.401(2)(a). A charging order issued under NRS 86.401 does not give the judgment creditor any rights in the assets, management, or control of the LLC. See Weddell v. H20, Inc., 271 P.3d 743, 750 (Nev. 2012).
The judgment creditor-defendant in this matter appears to possess ownership interests in both of the above-referenced LLCs. He has not appeared in the case, despite apparently being properly served, and has therefore not presented any evidence to the contrary. Accordingly, the court will charge any ownership interests the judgment debtor-defendant owns in either LLC with satisfaction of the March 6, 2015, Texas judgment under NRS 86.401. See Weddell, 271 P.3d at 750.
IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that plaintiff Stephen Kaplan, P.C.’s motion for charging order (doc. # 6) be, and the same hereby is, GRANTED.
IT IS FURTHER ORDERED that defendant Cameron L. Miller’s ownership interests in RW AND ASSOCIATES, LLC be, and the same hereby are, CHARGED with satisfaction of the March 6, 2015, judgment (doc. # 6-1) against him pursuant to NRS § 86.401(1).
IT IS FURTHER ORDERED that defendant Cameron L. Miller’s ownership interest, if any, in CLM DEVELOPMENT SERVICES, LLC be, and the same hereby are, CHARGED with satisfaction of the March 6, 2015, judgment (doc. # 6-1) against him pursuant to NRS § 86.401(1).
The post Enforcing Charging Order on Foreign LLC appeared first on Arizona Limited Liability Company Law.
Question: People frequently ask me “why should I hire Richard Keyt to form my Arizona limited liability company rather than LegalZoom?
Answer: You should hire me, Arizona LLC attorney Richard Keyt, to form your AZ LLC instead of LegalZoom for the following major reasons:
- I’m cheaper for comparable services – $75 cheaper as of 1/30/16 (see the table below).
- I’m an Arizona attorney who has formed 5,000+ Arizona LLCs since I formed my first LLC in 1992.
- I don’t require my clients to agree to disclaimers like the following found in bold text in LezalZoom’s “Terms of Service Agreement“:
“I understand and agree that LegalZoom is not a law firm or an attorney, may not perform services performed by an attorney, and its forms or templates are not a substitute for the advice or services of an attorney. Rather, I am representing myself in this legal matter.”
Why would you hire a company that tells you it is “not a substitute for the advice or services of an attorney.” That language should cause people to run away, run away.
- My son Arizona LLC attorney and former CPA Richard C. Keyt (480-664-7472) and I (480-664-7478) answer LLC questions for free. I don’t know if LegalZoom answers LLC questions, but if it does, do you really want a nameless LegalZoom sales rep with unknown AZ LLC experience to answer LLC questions?
See a summary of services for my three LLC formation packages and detailed contents of the Bronze ($397), Silver ($597) & Gold ($997) LLC Packages.
How to Hire Richard Keyt to Form Your Arizona LLC
See the two easy ways to hire Richard Keyt to form an AZ LLC.
For a service by service comparison read the table below.
|LLC Formation Service||Richard Keyt||LegalZoom|
|LLC Formation Service||Richard Keyt||LegalZoom|
LLC formation package as of 2/1/16
Fee to file the Articles of Organization with the ACC on an expedited basis
Cost to publish the Notice of Publication in a newspaper
Statutory agent service for the first year. Arizona LLC law requires all AZ LLCs have a statutory agent.
Obtain the LLC's federal employer identification number from the IRS
Total cost to form an AZ LLC with similar formation services
Additional cost to hire LegalZoom to form your LLC
Unlimited phone calls with an AZ LLC attorney who has formed 4,800+ LLCs to answer your LLC questions for free
Name selection advice from an AZ LLC attorney
Confirm LLC's name with Arizona Corporation Commission (ACC)
Prepare and file ACC's form Articles of Organization
Prepare custom Attorney researched 4 page Articles of Organization with Springing Member & Noneconomic Member provisions and other provisions that tie into corresponding provisions in the Operating Agreement
Prepare a Notice of Publication required by AZ LLC law
Publish the Notice of Publication in an ACC approved newspaper in the appropriate county & deliver an Affidavit of Publication to the ACC
Custom 45 page Operating Agreement prepared by an AZ LLC attorney
Operating Agreement prepared by an unknown person
Arizona LLC Operations Manual, a 170 page book written by an Arizona LLC attorney who has formed 4,800+ AZ LLCs. We sell a pdf version of the
Operations Manual for $97 in our online store.
LLC legal audit 60 days after forming the LLC
Storage of all LLC documents in Adobe pdf format in a secure folder using Citrix' Sharefile service.
The Operating Agreement and other LLC documents can be digitally signed
Checklist of 29 tasks that the LLC must accomplish in the first 75 days after formation and the deadline for performing each task
Membership certificates for each member
Worthless, but cool looking seal that has no legal significance under AZ LLC law that misleads people into thinking it has value
LLC portfolio that contains the LLC's formation documents organized behind tabs
The post Should Richard Keyt or LegalZoom Form My LLC? appeared first on Arizona Limited Liability Company Law.
Question: I am the sole member of my Arizona limited liability company. Can I tell the public that I am the President of my LLC?
Answer: Yes, but I don’t recommend you use that term because some people may mistakenly think they are dealing with a corporation rather than an LLC. Arizona LLC law refers only members and managers of an Arizona limited liability company. The term “member” means a person or entity that holds an ownership interest in the LLC. The term “manager” means a person or entity of a manager managed AZ LLC that is a manager of the LLC. FYI: If your Arizona LLC is member managed, then it does not have any managers.
Although the terms President, Vice President, Secretary and Treasurer are most commonly used when referring to officers of a corporation, an Arizona LLC could elect to use any or all of those terms when referring to people who are associated with the LLC. If you own the LLC you can call people associated with the LLC anything you desire, but if the term is not member or manager it has no legal significance unless the term is defined.
If you insist on using a corporate term to describe somebody associated with your LLC I recommend that the LLC’s Operating Agreement specify the terms to be used and that it describe the duties and powers applicable to each position. For example, if your Arizona LLC is manager managed and you want to call the manager the “President” of the LLC, add the following text to the LLC’s Operating Agreement:
The manager of this Company may be referred to as the Company’s President both internally and in matters dealing with the public. The duties and powers of the President are identical to the duties and powers of the manager of this Company.
The post Can I be the President of My LLC? appeared first on Arizona Limited Liability Company Law.
Question: We discussed forming an LLC, but I’ve had some people recently tell me that I should create a C Corporation instead of an LLC. They said that the C Corporation gives the best tax advantages. I read on your website, that “Arizona recognizes that corporations may be formed for profit or not-for-profit, but not as C or S corporations.” So maybe what I’m hearing from these other people is that they are in other states and their laws are different from Arizona law regarding C corporations?
Answer: If a person tells you that you should form a C corporation you should run away as fast as possible because that person doesn’t know what he or she is talking about. No state in the U.S. has something called a C corporation. All states have for profit corps and nonprofit corps. The term C corporation refers to one of four methods of income tax under the Internal Revenue Code of 1986. The person that says form a C corp or form an S corp is confusing the type of entity formed under state law with the method of federal income tax under the Internal Revenue Code.
There is something in the Internal Revenue Code called subchapter S, which provides for how an entity that elects to be taxed under subchapter S is taxed. There is another subchapter called subchapter C, which provides how entities taxed under that chapter are taxed.
Before you form an entity the first question is what type of entity should you form under the law of a particular state. The types of entities are LLCs, LPs, LLPs, LLLPs, general partnerships, for profit corps and nonprofit corps. In Arizona, the LLC replaced the for profit corporation as the best entity to form. For an in depth discussion of whether to form a corporation or a limited liability company in Arizona to operate a business see my article called, “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?”
After you form the entity under the law of the chosen state the next question is how should the entity be taxed? An LLC can be taxed as a C corporation under subchapter C by filing an IRS Form 8832 with the IRS. When the LLC files the Form 8832 you can then say the LLC is taxed as a C corporation, but the entity remains an LLC.
To learn more about the four ways an LLC can be taxed read KEYTLaw attorney and former CPA Richard C. Keyt’s article called “How are LLCs Taxed?“
The post Should I Create a C Corporation? appeared first on Arizona Limited Liability Company Law.