Creating a Holding Company in Arizona Without a Second Partner

Lodmell & Lodmell often utilizes the approach of structuring a holding company for your asset protection plan.  We often recommend using an Arizona Asset Management Limited Partnership (AMLP), with the majority Limited Partner of the AMLP being the client's Asset Protection Trust (most often The Bridge Trust). However, there are times, when a client does not have a good option for a second person to be a partner in the AMLP. 

In this case the client has two options to achieve their business goals while ensuring strong asset protection and compliance with legal requirements. Below are the two main strategies:

Option 1. Use a Single-Member LLC with the Asset Protection Trust (APT) as the Sole Member

If you can't find a second partner, Using a Single-Member Arizona LLC is a straightforward approach. The advantages of this approach is that it simplifies the management and taxation of the holding company itself.

• Simplicity: A Single-Member LLC is easier to form and manage compared to a multi-member LP. There are fewer formalities, and you retain full control of the business.
• Asset Protection: Provides a level of personal liability protection by separating personal assets from business liabilities, which can protect your assets from business creditors.
• Flexibility: Offers flexibility in management and taxation, allowing you to choose how the entity is taxed (as a disregarded entity or C-Corp).
• Cost-Effective: Generally less expensive to maintain than a multi-member LP due to reduced legal and administrative requirements.

The Disadvantage of a traditional Single-member LLC is that in some cases it might offer less robust asset protection, especially in bankruptcy, where courts may allow creditors to bypass the charging order protection. However, to enhance asset protection, you may use an Asset Protection Trust (APT) as the sole member of the LLC.

When this is done, the single member LLC is improved in the following ways:

• Strong Asset Protection: An APT is specifically designed to protect assets from creditors by placing them in a trust that is difficult for creditors to access. When the APT serves as the sole member of your LLC, it adds a robust layer of protection against potential claims.
• Control: As the Manager of the LLC, you retain control, ensuring that your business assets are managed according to your wishes.
• Mitigates Weaknesses of Single-Member LLC: While a Single-Member LLC alone may offer limited protection in bankruptcy or creditor claims, the involvement of an APT can significantly enhance the LLC's protective features.

For most clients, who do not have a good option of a second partner, we recommend using this approach, which provides a sufficient level of overall protection, while simplifying the overall management of the plan. 

Option 2. Create an LLC Taxed as a C-Corp to Serve as the Second Partner

In cases where a multi-member holding company is preferred or needed, and the complexity and extra cost is justified, then an effective strategy is to create a second LLC that is taxed as a C-Corporation. This LLC can then serve as the second partner in the AMLP, usually in the role of the General Partner. It is also possible to use a jurisdiction like WY, which does provide some level of privacy, thus allowing for both the additional partner and a level of privacy for the overall plan.

The advantages of this approach is that the benefits of a multi-member entity will apply to the AMLP.  The disadvantages are that the complexity and costs to maintain are increased.  There will be 2 separate tax returns going forward, one for the LLC taxed as a C-Corp and one for the AMLP. 

This approach may be justified when the level of assets is high enough or the risk associated with the client is significant, thus justifying the additional maintenance and costs.

Conclusion

If you're facing the challenge of forming a multi-member LP in Arizona without a second partner, converting to a Single-Member LLC with an APT as the sole member or creating an LLC taxed as a C-Corp as the second partner are both viable options. Each approach has its benefits and considerations, so it's crucial to evaluate your specific needs with our office to help you choose the structure that best aligns with your goals.