BUSINESS FORMATION BASICS

Kevin P. Nelson and May LuTiffany & Bosco, P.A.Camelback Esplanade II, Third Floor2525 E. Camelback RoadPhoenix, AZ 85016(602) 255-6028; (602) 255-6032kpn@tblaw.com; mlu@tblaw.com

Choice of Business Entity:Legal Forms (Pros and Cons)

Disclaimer Information presented here is general

information. Choice of the right entity for your specific

situation depends on your fact situation and how the law and market conditions apply to that situation.

Consult professional advisors such as your accountant, insurance professional and business attorney.

Legal Forms a Business May Take Sole Proprietorship Partnerships

General Partnership Limited Partnership Limited Liability Partnership

Legal Forms a Business May Take Corporations

‘S’ Corporation ‘C’ Corporation

Limited Liability Company

Sole Proprietorship Sole Proprietorship

Default for one person ‘owning’ their own business Simplest form Unlimited Personal Liability! May be ineligible for tax-free fringe benefits

Sole Proprietorship Business not a “going concern,” nothing

to sell at death or retirement Fictitious name filing No reason to use, considering allowance

of one-member LLC in Arizona

General Partnership An association of two or more persons to

carry on as co-owners a business for profit. All parties are equally ‘involved’ All partnerships have the benefit of flow-

through taxation (i.e. entity does not pay tax itself, with some exceptions)

General Partnership In a general partnership, all partners subject to

personal liability! Should create a written partnership agreement,

otherwise at-will and subject to default rules of state of formation Revised Uniform Partnership Act (RUPA) in

Arizona

Limited Partnership Still need at least one general partner

Can be a corporation, another limited partnership, etc

At least (1) partner more involved – general partner (unlimited liability) Control issues (use of name) Usually ‘money’ person and ‘manager’

Limited Partnership Some liability protection – still minimal Gives limited liability to the “passive

investor” Only liable to extent of capital contribution

Additional filing = additional cost Should create separate partnership agreement Self-employment taxes! (Income vs.

Guaranteed Payments)

Limited Liability Partnership If general partnership or limited

partnership, easy and wise to switch to LLP

Limited liability for all partners Generally, Limited Liability Company is

the better entity form if you can afford to plan

Limited Liability Partnership Why not LLP?

Flexibility in Taxation Cannot be a partner of yourself Flexibility in management (binding partnership) and

rights (partnership property)

C Corporation Default whenever a corporation is created

Taxed at corporate level – income, including dividend income, of shareholders is also taxed (Double Taxation!)

But no Self-employment tax of distributions Corporate Formalities

C Corporation Management structure fixed

Shareholders; Board of Directors; Officers

Deductible Benefits to Employees Can cut tax liability

Losses incurred by C corporation do not flow through to owners

Should form if plan to go public soon

S Corporation Election of a C Corporation or Limited Liability Company Avoid Double Taxation – Flow-through Still some corporate tax:

accumulated earnings tax No self-employment taxes on distributions Good for close corporations

S Corporation Four relatively confining requirements

Must be corporation of state or U.S. territory; partnerships and corporations cannot be

shareholders (s/h); no more than 100 s/h; only citizens or residents of U.S. may be s/h; and only one class of stock (can have voting/non-

voting)

Limited Liability Company Limited Liability – Even for one member Ability to Elect Federal Taxation as Corporation or

Partnership Closest to Corporation Without Tax Attributes Very Flexible Organization Some Risk Because New Entity Form Self-employment Taxes

Choice of Business Entity: Cost & Timeline

In General Takes approximately nine (9) days to file Articles of

Incorporation or Articles of Organization with the Arizona Corporation Commission on an expedited basis. $35.00 to expedite filings.

Other states will vary Should seek advise of local professionals Check/Reserve Name ($10.00) Name appropriately Do not forget the Internal Revenue Service (EIN, S Election)

C Corporation Articles of Incorporation ($60)

Statutory Agent

Certificate of Disclosure (Included) Organizational Meeting Minutes (Attorney) Bylaws (Attorney) Certificate of Good Standing ($10.00)

C Corporation Filing: Tucson or Phoenix Keep Originals – Corporate Book (approx. $80 for

leather, with certificates, etc.) Employer Identification Number Publication of Articles – local newspaper; 3

consecutive weeks (Cost Varies) Get affidavits from each newspaper – at least two

originals from each Annual Filings ($45)

S Corporation Very Similar to C Corporation Tax Election – Flow-through Taxation Make Sure to Meet All Requirements

Partnership Default entity for two or more persons Partnership Agreement! RUPA – A.R.S. §§ 29-1001 et seq. CAVEAT “An association of two or more persons to carry on

as co-owners a business for profit forms a partnership, whether or not the persons intended to form a partnership.” A.R.S. § 29-1012(A)

Limited Partnership Certificate of Limited Partnership ($10 fee;

$3.00 per page) File Certificate (Two signed copies)

Partnership Agreement (Attorney/CPA)

Limited Liability Partnership Partners Must Agree

By Vote or Partnership Agreement If agree, file a statement of qualification

$ 3.00/page A.R.S. § 29-1101(C)

Annual Report – Simple ($3.00)

Limited Liability Company Articles of Organization ($50 + $35 if expedited)

Professional LLC? Operating Agreement! (Attorney/CPA)

Member-Managed Manager-Managed

File Articles – Tucson/Phoenix Publish Articles – same requirements as corporation

(Cost Varies)

QUESTIONS?