Do I Need to Form an LLC in Arizona?
At Phelps LaClair we get a lot of estate planning questions from people who have started or are starting a small business. Many of our clients are semi or fully retired business people who have settled in the Phoenix Valley. One of the most common questions we hear is: Do I need to form an LLC in Arizona?
Why form a Limited Liability Company (LLC)?
For a small family or sole proprietor business, there are two main reasons to form an LLC. The first is personal asset protection. The idea here is to provide a boundary between the activity of the business and the personal assets of the owner. Generally, if the business is involved in a lawsuit that is not the result of negligence or malfeasance on the part of the members, the personal property of the members cannot be used to settle a claim against the LLC.
The second reason is similar: business asset protection. If the owner of the business is involved in a lawsuit or personal bankruptcy, the assets of the business are protected from creditor claims. This is important when the LLC has several members. If one member enters bankruptcy, the assets of the LLC cannot be seized.
Organizational advantages of an LLC
Every business has a structure. An LLC offers a way of organizing a business for operational hierarchy and efficiency so that each member has duties, responsibilities and authorities that are laid out in the articles of organization. The structure of an LLC should clearly state how decisions are made and carried out; how profits and losses are divided; and how to deal with new and/or departing owners.
Tax advantages of an LLC
There are good tax advantages to forming an LLC. Most LLCs are taxed in the same way as a sole proprietor or partnership. The LLC is not taxed itself, but the members are responsible to pay taxes on profits according to their level of investment. This may also include self employment taxes.
The LLC may choose to be taxed as an S or C Corporation. With an S corporation, some of the income is classified as salary and some as distribution. A member is responsible to pay taxes only on the salary portion.
With a C corporation, the business is taxed and the members are taxed, but a C corporation can set up employee benefits and medical reimbursements while deducting the costs of running these programs.
Do I need to form an LLC in Arizona?
Every LLC situation is different, so professional counsel is always a wise investment. Phelps LaClair understands the advantages and disadvantages of using an LLC for asset protection. It is the best estate planning option for some people. Your first consultation with us is free, so let us walk you through the best solutions for your estate planning needs. We have offices in Chandler, Mesa and Gilbert, and we look forward to seeing you.