Important Tax Day Reminder: Understand the Advantages of an LLC

With another annual Tax Day upon us, it’s a great time to reconsider whether you should create a limited liability company (LLC) to help protect your business and assets and to reduce your tax liability.  There are many small businesses and service providers out there still operating without the protection and benefits of an LLC. We’ve put together a general guide to help you understand the advantages of using an LLC in Arizona to hold your investments or operate your business. You might be surprised at the safeguards LCCs offer.

What is a Limited Liability Company in Arizona?

A limited liability company is a state-sanctioned corporate structure that allows you to separate your business liabilities from your personal liabilities.  They are statutorily-created entities that have a separate legal identity from the members that form it.  There are many advantages in this corporate form, but the liability limitations can be the most important to understand.  Only the LLC, not the agents through which the entity functions, derives liability so long as it is properly functioning and acted within the scope of the law.

There are risks and liabilities inherent in all business operations, whether you are operating a side business out of your home or own an investment property.  If you are operating or holding these assets in your name, you are assuming the risk of all liabilities of that business or investment. An LLC helps provide a veil of protection that separates your personal finances and liability from your business finances and liability.  Only upon limited circumstances of inequity can the veil of protection be pierced to hold an individual liable.

Risks of Not Using an LLC

As experienced legal professionals, one of our main jobs is to help you avoid legal risk where possible.  There may not be an obvious immediate risk with owning a second home in an individual’s name or running a small online business as a sole proprietorship.  Regardless of the function of the business, however, there are always going to be risks in holding these assets in your own name.  For starters, businesses can be sued for a variety of reasons, irrespective of whether the claims brought are meritorious.  Regardless of the likely outcome of the litigation, or anticipated ability to recover fees and costs as the successful party at the end of it, you will still need to defend yourself or your company against the claims in a court-ordered time frame.

But even more importantly, failing to correctly utilize an LLC can expose you to a judgment greater than the worth of the entity itself.  As a small business owner, you might not realize that larger companies view you as a competitor.  These companies may be willing to pursue legal remedies against your company as you are eating into their customer base or market share.  As a property owner, you might not realize any accident or injury on your property can result in a costly lawsuit.  While an LLC in Arizona will not prevent these potential legal issues, they will allow you to separate your personal assets and holdings from the LLC.  Simply put, this means the only thing at risk when a case is brought against your LLC are the LLC’s rights and assets.  If you are a sole proprietor without the protection of an LLC, all your personal assets, investments, and holdings are at risk.

Tax Day is Simpler with an LLC

Another important advantage of an LLC is option to use “pass-through” taxation for the entity.  This means that all profits or losses are passed-through to the owner’s personal income taxes and the LLC does not pay any taxes.  Only the individual members have income tax obligations.  This is a big difference from traditional C corporations that are taxed at the corporate level first and then taxed at the personal level for profits and income from the corporation. It gives you some wiggle room with your personal taxes where you can reduce your tax liability by using the benefits of pass-through taxation at a reduced rate.

LLC Ownership Control and Flexibility

Owners of an LLC have the maximum level of control and flexibility for the ownership structure of the company and profit distribution schedule.  The owners of an LLC can add or remove members based on the operating agreement and they do not have restrictions on the number of owners or shareholders in the company.  They can also choose when profits are distributed and how much each individual member of the LLC receives.  This means that the profits do not have to be distributed according to equity.  The owners, however, will need to reach an agreement on the distribution in accordance with the operating agreement.

New Arizona LLC Laws

There are some important changes to Arizona LLC laws that were passed as part of the new Arizona Limited Liability Company Act signed into law on April 10, 2018.  We put together a detailed post to all the important changes that all Arizona LLC owners and those considering creating an LLC will need to understand.  The biggest change is the requirements for a valid operating agreement in Arizona and the duties of managers, which have been updated to be more modern and accommodating for business owners.

Find an Experienced Attorney for LLCs in Arizona

The attorneys at MacQueen & Gottlieb have significant experience with creating limited liability companies in Arizona.  Our firm can assist with drafting operating agreements and on-going maintenance of an LLC.  Our attorneys can assist with strategic planning for employment agreements, financing agreements and other needs of a business owner in Arizona.  Contact us today at 602-533-2840 to schedule an initial consultation or make an appointment online.