Why I prefer an Arizona Limited Partnership as the Holding Company.

The AZ LP as my preferred choice as a holding company has to do with some specific features. Some have to do with the LP vs the LLC in General. Others are charging order specific and AZ is just one of the elite states, along with others which are also good; and some are very specific to AZ and in particular when connecting an asset protection trust to the plan.

Here is a summary:

• Exclusive Charging order protection in AZ as the only remedy available to a creditor of a partner. This is an absolute basic pre-requisite and any Jurisdiction which cannot offer this should not be considered. (This can also be achieved in some of the other very good states like WY, NV or DE)
• The Statutory Distinction between the General (controlling) partners and the Limited (ownership) partners. In an LP this is laid out by Statute which is a better construction vs. in the operating agreement alone. LLCs May achieve this distinction, but only through an operating agreement. Remember court interpretation is what we are shooting to get clarity around. Because LLCs are so widely used, come in literally hundreds of variations, and have a long history of courts interpreting them in every possible way, as a general rule I feel it is less clear how any one court will interpret your LLC if it ever comes to that. This is so much less true with Limited Partnerships. LPs always have 2 classes of ownership, always use multi-member, and are never disregarded entities, and a Limited Partner is always a non controlling, non liable limited partner. LPs have been around longer and have much more consistency on how courts see them. (This goes to the LP as a preferred entity choice vs an LLC)
• ARS 29-333 specifically allows for a Limited Partner to make a unilateral withdrawal from the LP “upon the occurrence of a predefined event”. This is truly unique to AZ and is an ideal section of the AZ code which comes in particularly handy when we connect an asset protection trust (Bridge Trust) as the majority Limited Partner. This is truly unique to AZ and is exactly what we need to allow an asset protection trust to “disconnect” from the holding company during a time of duress. The fact that this is statutory is a huge plus as well as the fact that the disconnection is being driven from the Limited Partner side as a “unilateral withdrawal “ and not a General Partner discretionary move is critically important. This simply cannot be done with the same statutory certainty and authority in an LLC in any other State without exposing the client directly to a claim or assisting in a potentially prohibited transfer and increasing client risk.
• AZ LP is perpetual. Virtually every state in every jurisdiction has an annual report and filing fee for LLCs, LPs and any other corporate structure. The exception is again in AZ and is only the LP, which once filed is perpetual and does not need to be renewed, file an annual report, or complete any other state maintenance. This removes a “moving part” from the planning and ensures that the centerpiece of your entire asset protection structure is a permanent fixture. (Unique to AZ)
• AZ does not require listing of the Limited Partners. Only the General Partner is listed with the Secretary of State in AZ. Limited Partners are by their statutory nature, completely private. This includes the Asset Protection Trust. In some cases, clients want even more privacy and do not want to list a known GP. In that case, we can use a WY LLC in the exclusive role as GP. This makes the entire structure completely private. However, I discourage this extra step unless complete privacy is absolutely critical. There is a big misunderstanding (especially on the internet) about the benefits of privacy. Some promoters make it seem like privacy alone is enough to protect assets. This could not be further from the truth. Privacy around any structure can ALWAYS be broken by placing the client under oath and asking about it. In many cases that very same privacy can actually work against a client as once the extent of the underlying structures is clear to the court a judge has every right to disregard the entire structure (even the private parts). Use of privacy is fine but should not substitute for a solid legal structure.
• No tax filing required in AZ. Not only do you NOT have to file an annual report or pay an annual fee to the State of AZ, but you also DO NOT have to file an AZ tax return or any AZ tax filings. Your AZ LP will need to file a Federal 1065 partnership tax return. This return is Informational and there is no additional layer of tax. All profits (or loss) pass through to the partners personal return on form K-1.
• Your holding company should never be a disregarded entity for tax purposes. I see this mistake a lot, especially when an LLC is used as the holding company. If an LLC has just one member then it is automatically considered a disregarded entity (DE) for tax purposes. This may seem like a benefit, but in reality, is a huge detriment. Disregarded Entities for tax purposes are also much more likely to be disregarded for liability purposes as well. Your holding company must maintain its legally distinct identity from you and must file its own tax return. By using an LP this is guaranteed because an LP can never be a disregarded entity. Also since the limited partners of an LP are never allowed to be in a position of Management, judges almost never disregard the LP as a legal entity (particularly true in AZ).
• On a more practical note, our office is also in AZ and we can serve as the required statutory agent as well as advise you on anything related to the LP or any court filings we may receive in your behalf.

The most common question I get is why not just use a WY LLC from the get go as the holding company. The answer is that while this is not “wrong” per se, overall it carries fewer benefits and more risk should we end up in a legal knife fight over the validity of the structure. For better or worse, states like NV, DE, and WY have become very popular as “privacy” jurisdictions and unfortunately, this also comes with a certain stigma. In other words, the “optics” in those jurisdictions often default to the “sketchy” In the eyes of a court and the view of entities created in those states.

The US is the largest tax-haven in the world. We shelter more foreign money and assets than all other countries combined. Most of that sheltering is done through those very same jurisdictions which are known for their privacy. I’m not saying this is bad or illegal or immoral. What I am saying is that when we have more benefits, better statutory construction, and a much better statutory connection through ARS 29-333 to the asset protection trust in the form of the AZ LP. Why wouldn’t we want to take advantage of it?