The Business Advantages of Limited Liability Companies

The concept of a limited liability company is relatively new. In 1992, Arizona adopted the Arizona Limited Liability Com­pany Act. The Act authorizes the use of a business form called the limited liability company, commonly abbreviated “L.L.C.” Prior to the adoption of the Act, limited liability companies did not exist in Arizona or most other states. Now, all 50 states have adopted acts authorizing the formation and operation of limited liability companies. In Arizona, according to statistics published by the Corporation Commission, there are about half a million L.L.C.’s, as compared to about 160,000 business corporations.

There are three basic forms of business organizations in Arizona: corporations, partnerships, and limited liability com­panies. A limited liability company is a hybrid business form that offers favorable characteristics of both a corporation and a partnership. An L.L.C. gives its owners the “best of both worlds,” so to speak, by providing them with the limited liability of a corporation and the favorable income tax treatment of a partnership. If properly organized, an L.L.C. is not subject to federal or state income taxation; instead, the owners of the company are taxed on its profits.

A limited liability company may be organized in Arizona to conduct any lawful activity, except banking or insurance, and can even be organized to engage in professional services, such as accounting, engineering, law or medicine. An L.L.C. is formed by filing “articles of organization” with the Arizona Corporation Commission, and paying a filing fee in the amount of $50 for regular filing, and $85 for expedited filing. (These fees are always subject to change.)

An L.L.C. must be formed with one or more “members,” which are similar to the shareholders of a corporation or the partners of a partnership. A member’s liability for the com­pany’s debts and obligations is generally limited to the amount of his investment, which is similar to the limited liability afforded to a corporate shareholder.

The affairs of an L.L.C. and the conduct of its business normally will be governed by an operating agreement among the members. Although the Act does not require that an L.L.C. have an operating agreement, a written operating agreement is advisable because it controls the management of the company, profit and loss-sharing arrangements, and all other commercially important matters. A carefully drafted operat­ing agreement may also determine whether the company receives favorable classification as a partnership for federal income tax purposes.

Limited liability companies have a couple of distinct advantages over traditional business forms. First, an L.L.C. is not required to file annual reports or pay annual fees to the state. A corporation is required to do both. Second, an L.L.C. may be structured so that the members participate in the man­agement of the business without losing their limited liability. A limited partner involved in a traditional limited partnership, by contrast, may lose his liability protection if he takes part in the management of the limited partnership’s business.

A limited liability company is often the ideal business form for a family-owned business or an enterprise with a small number of investors. The ever-increasingly popular L.L.C. has replaced the corporation as the dominant form of business for non-publicly traded entities in Arizona.