The Arizona LLC Act was recently enacted by the state's governor, outlining the formation and operation requirements for limited liability companies (LLCs) operating within the state of Arizona.

What Is a Limited Liability Company?

An LLC is a business entity formed under the Limited Liability Company Act, A.R.S. § 29-601, et seq. As long as the LLC is formed under state laws, it is similar to a partnership in terms of its state and federal taxation, as well as to a corporation in its limited liability protection. An LLC operating in Arizona is often called a hybrid between a corporation and a partnership. Forming an LLC offers:

  • Operational flexibility
  • Tax advantages

These benefits are available to the LLC's owners, who are called the members.

The members of the LLC aren't typically held personally responsible for judgments against or debts held by the company. Within the state of Arizona, the process of forming and operating LLCs is governed by the Arizona Uniform Limited Liability Company Act (AULLCA) and each individual LLC's operating agreement.

What Is Limited Liability?

When a business isn't structured as a limited liability entity, its owners are held personally responsible for any business debts. This means that creditors and those taking legal action can make claims against the personal assets of the owner(s) of the business. Business formations that do offer limited liability protection include corporations, limited partnerships, and LLCs.

For example, John owns a company that distributes food to grocery stores. While making a delivery to a supermarket, one of John's employees gets into an accident and the other driver involved is seriously injured. That employee could be held responsible for the injury. Additionally, John could be held personally responsible for the damages because of respondeat superior, which means that the injured party can go after personal assets of a business owner in order to satisfy claims against that business.

When you structure a business as an entity that offers limited liability protection, this action builds a wall between the owner's personal assets and the assets owned by the business. In the previous example, if John had formed his business with a structure that offers limited liability protection, the injured person in the accident would only be able to use business assets to satisfy the claims, rather than being able to go after John's personal assets.

Another concerning example of the lack of limited liability is when an owner has at least two owners. This type of business is often formed as a partnership, which makes all partners responsible for the liabilities and debts of one another. However, partners in a partnership are entitled to seek indemnification from each other to pay for their portion of any business debts.

For example, Annie and Lisa co-own a restaurant that they structured as a partnership, which is the default business structure when two or more individuals form a business together. Without Lisa's knowledge, Annie signs a contract with a vendor to buy a pizza oven for the business, which costs $300,000. About six months after buying the oven, the restaurant is struggling to stay in business, so Lisa and Annie decide to shut it down. They sell the equipment they have but still have business debt totaling $100,000.

Annie isn't able to repay the debt, leaving her partner, Lisa, responsible for the remaining $100,000 in business debt, even though she wasn't aware of the decision to buy the oven. In this example, if Annie and Lisa had structured their business as a limited liability entity, each would only be responsible for business debts up to the amount that they initially invested. The only exception is if the business owners offer a personal guarantee when taking on business debt. Neither Annie nor Lisa would be held personally responsible for the $100,000 of business debt.

Uniform Limited Liability Company Act in Arizona

The Uniform Liability Company Act was enacted in 1977 by the state of Wisconsin. This state was the first to pass any type of law allowing its residents to form LLCs. Following this act, many other states soon adopted legislation that outlined how LLCs could be formed and operated. Arizona enacted its own act in 1997 to align with the uniform code.

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