COMPARISONS OF BUSINESS STRUCTURES
The information contained
herein does not constitute legal advice. It is provided only for
informational purposes. The Arizona Corporation Commission has no opinion
with respect to the applicability or validity of this information as it
may change from time to time. Consult your tax specialist
or attorney to determine which entity type best suits your business
needs.
What
is it?
The sole proprietor is the
simplest form of business. It is a business run by an individual without
creation of a separate legal entity.
Requirements.
Although the sole
proprietor should maintain adequate records, there are no administrative
requirements, such as maintaining minutes of meetings, publication of
documents, or filing of Annual Reports (with the Commission). Sole
Proprietorships may be required to file with various municipalities, State
agencies, as well as agencies on the federal level. A sole proprietorship
can secure a name by filing a trade name with the Secretary of State.
Practical
and Legal Issues,
The sole proprietorship is
the least regulated and most common form of business organization. Legally
and for tax purposes the individual owner is the business. The liabilities
and profits are personal to the owner. The sole proprietor (owner) has
total control of the business.
All of the personal and
business assets of the sole proprietor are at risk. This unlimited
liability is the greatest disadvantage of this type of business form.
However, different types of insurance coverage are available to lessen the
perils of having ones personal assets at risk. Taxes are reported on The
sole proprietors personal income tax forms. The Corporation Commission
does not have jurisdiction over sole proprietorships.
What
is it?
There are various types of partnerships. They are General partnerships, limited partnership, limited liability partnerships, and limited liability limited partnerships.
Requirements.
Practical
and Legal Issues,
Ease of formation and there are direct rewards with a broader management base. The disadvantages are that there is unlimited liability of general partners. Permits divided authority and management responsibilities. Difficult to dispose of partnership interests. The formation is nontaxable, unless disguised sale or the partner is relieved-from-debt. Entity is not subject to federal income tax at entity level so long as entity meets the Internal Revenue Code tests. Upon liquidation the partner's is not taxed to the extend of the member's tax basis.
For information on partnerships contact
the Arizona Secretary of State Business Services Division at 602-542-6187.
The Corporation Commission does not have jurisdiction over partnerships.
What is it?
A corporation is a legal
entity that is separate from its owners, the shareholders.
It is created by filing Articles of Incorporation with the
Corporation Commission.
The structure of a
corporation is comprised of three different levels. There are the
shareholders, directors and officers. Each have different
responsibilities, obligations and authority. The shareholders are the
owners of the corporation. They, as the owners, elect the directors. The
directors haves legal duty to act in good faith, use good care and to act
in the best interest of the
corporation. The directors are responsible for the general state of
affairs of the corporation, and in that capacity appoints officers who
conduct the day-to-day business operations. In small corporations, it is
not uncommon for the same person to be a shareholder, director, and
officer.
Limited liability is the
most important reason to incorporate. The debts incurred by the
corporation cannot generally be collected from the officers, directors or
shareholders of the corporation. Limited liability allows a person to
protect their personal assets from the debts and obligations of the
corporation. There are certain situations, however, when limited liability
does not apply. Consult your attorney for advice to avoid such situations.
It is critical to thoroughly consider all corporate acts and to keep
personal business dealings separate from the corporation’s business.
Requirements.
The corporation structure
can be somewhat complex and costly. All corporations must comply with
Arizona Corporations Code, A.R.S. Title 10. A corporation may have
perpetual existence, meaning that it may continue indefinitely
notwithstanding the status of its individual shareholders (owners). Since
the corporation is a separate entity, it must file tax returns and pay
taxes on its income. This can mean additional accounting and legal costs.
Additional expenses include a requirement that a copy of the Articles of
Incorporation be published for
three consecutive publications in the county of the known place of
business, Also, an Annual Report must be filed with the commission each
year.
Practical
and Legal Issues.
“Profit" corporations are
subject to what is commonly phrased "double taxation". The corporation
pays tax on the income earned by the corporation
and its shareholders pay tax on the dividends they receive (personally)
from the corporation. An S corporation, however, is not subject to double
taxation, as it is taxed in a manner similar to a partnership. With
respect to incorporating and operations of the corporation, there is no
difference between a profit corporation and S corporation. S corporations
and other corporations are however, very different from a tax perspective.
After the corporation is established pursuant to Arizona Law, it may
elects corporation status for Federal tax purposes by filing Form 2553,
Election by a Small Business Corporation. Several requirements must be met
before S corporation status can be elected. Eligibility requirements
include imposing a limitation on the maximum number of shareholders (75),
a provision prohibiting non-residential aliens to be shareholders, and a
limitation that shareholders be either individuals, certain trusts or
estates. Also, The corporation can only have one class of stock. A tax
professional should be consulted to determine whether the shareholders
will benefit from the corporation electing to be an S corporation - An
attorney should also be consulted to obtain advice on how to maintain S
corporation status.
What is it?
The Limited Liability
Company (LLC) is a business entity organized by filing Articles of
Organization with the Corporation Commission. It offers limited liability
like a corporation.
Requirements.
The LLCs owned by the
members. The LLC allows the members to manage the entity unless it elects
in the Articles of Organization to designate a specific manager who may or
may not be a member, to manage the entity, as is done in many
corporations. Like a corporation, an LLC has the advantage of “perpetual’
existence, meaning that it may continue indefinitely notwithstanding the
status of its individual members. Also, similar to corporate shares, ownership interests are
transferable. LLCs are a cross between a partnership and a corporation.
The business form itself can be less complicated than the corporation but
the operation agreement can be somewhat complex, depending Upon The needs
of the individual owners. Like a partnership agreement, the agreement
determines the conduct of the business including the rights
and powers at the members, managers,
and employees. Although
less complicated than the corporation, there are some costs associated
with the LLC form of business. The LLC a required to publish specific
information enacted from its Articles of Organization in the county of the
known place of business, for three consecutive publications. Also, the LLC
is required to file Articles of Amendment in certain situations when a
member or manager Changes.
Practical
and Legal Issues.
As its name implies, the
LLC provides limited liability (or its owners similar to shareholders in a
corporation. The LLC owners risk only their investment in the business.
Other personal assets are not at risk, unless the owners personally
guaranteed a debt. But, a member maybe liable for any action not made in
good faith. Consult an attorney
for advice on how to avoid personal liability. Generally, however, unlike
a partnership, none of the members of an LLC are personally liable for its
debts. With respect to taxation, an LLC may be classified for Federal
income tax purposes as a partnership avoiding double taxation, unless it
elects corporate treatment for federal tax purposes.
A single member LLC may
elect to be classified as a sole proprietorship or a corporation. If the
LLC does not elect its
classification, a default classification of partnership or sole
proprietorship (single member LLC) will apply.
The sale of shares of a
corporation or interest in a limited liability company may require
registration with the Arizona Corporation Commission Securities Division,
and may involve other legal requirements.
You are strongly advised to consult with an attorney.