The decision regarding which business structure is best for your business should be made after consultation with an attorney and accountant. In determining the proper entity choice you should consider issues regarding tax, liability, management, continuity, transferability of ownership interests, and formality of operation.
Generally, businesses are created and operated in one of the following ways:
• Sole proprietorship: The most common and the simplest form of business is the sole proprietorship. In a sole proprietorship, a single individual engages in a business activity without necessity of formal organization. If the business is conducted under an assumed name (a name other than the surname of the individual), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
• General partnership: A general partnership is created when two or more persons associate to carry on a business for profit. A partnership generally operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement in Arizona. If the business of the partnership is conducted under an assumed name (a name that does not include the surname of all of the partners), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
• Corporation: An Arizona corporation is created by filing a Articles of Incorporation with the Arizona Corporation Commission. A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. The owners of a corporation are called “shareholders.” The persons who manage the business and affairs of a corporation are called “directors.” However, state corporate law does provide for shareholders to enter into shareholders’ agreements to eliminate the directors and provide for shareholder management. We can assist you to choose the best management structure for your corporation. Many people believe that there are two types of corporations: “S” corporations and “C” corporations however, this is incorrect. Whether you determine to be an “S” or a “C” corporation is purely a function of which federal tax election you make. For example, a for-profit corporation elects to be taxed as an “S” corporation by filing an election with the Internal Revenue Service. Please contact the IRS or competent tax counsel regarding the decision to be taxed as an “S” corporation and the requirements for filing the election. Simmons & Gottfried are not tax advisers and strongly encourage you to seek tax advice from a professional.
• Limited Liability Company: An Arizona limited liability company is created by filing Articles of Organization with the Arizona Corporation Commission.
The limited liability company (LLC) is not a partnership or a corporation but rather a hybrid of the two that has the benefits and advantages of both a corporation and a partnership but few of the disadvantages of either. Depending on how the LLC is structured, it may be likened to a general partnership with limited liability, or to a limited partnership where all the owners are free to participate in management and all have limited liability, or to an “S” corporation without the ownership and tax restrictions imposed by the Internal Revenue Code. Unlike the partnership, where the key element is the individual, the essence of the limited liability company is the entity, requiring for its creation more formal requirements.
The owners of an LLC are called “members.” A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a partnership. As a result of federal tax classification rules, an LLC can achieve both structural flexibility and favorable tax treatment. Nevertheless, persons contemplating forming an LLC are advised to consult competent legal counsel.
A limited liability company can be managed by managers (including a non-member manager) or by its members. The management structure must be stated in the Articles of Organization. Management structure is a determination that is made by the LLC and its members. It is strongly advised that the members create an Operating Agreement which sets forth the agreement under which the entity will operate, and each members’ duties, rights and obligations.
• Limited Partnership: An Arizona limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. The limited partners are viewed as distinct from the partnership and are usually liable only to the extent of their capital contributions.
• Limited Liability Partnership: In order to limit the liability of its general partners, a general or limited partnership may opt to register as a limited liability partnership.
Jared C. Simmons is a Scottsdale business mediator and attorney in Arizona. If you have questions about mediation,he can be reached at: 480-998-1500 or jared@sglawaz.com. This is a general interest article only and is not intended to be legal advice. See a legal professional before making legal decisions.