STARTING OFF ON THE RIGHT
FOOT: BUSINESS FORMATION
AND OWNER AGREEMENTS
James P. O’Sullivan & May Lu
Tiffany & Bosco, P.A.*
Camelback Esplanade II, Third Floor
2525 E. Camelback Road
Phoenix, AZ 85016
(602) 255-6017; (602) 255-6032
jpo@tblaw.com; mlu@tblaw.com
* Offices in Phoenix, AZ and Las Vegas, NV
Disclaimer

Information presented here is general information.

Choice of the right legal strategies for your business
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.
INTRODUCTION

Why Bother?
CHOOSING A BUSINESS ENTITY
FORM

Comparison of Business Structures Chart
Available Legal Forms
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Sole Proprietorship
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Partnerships
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Corporations
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Limited Liability Company
Sole Proprietorship
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Limited value, considering allowance of onemember LLC in Arizona and many other
states
Partnerships
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General Partnership
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Limited Liability Partnership
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Limited Partnership
General Partnership
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In a general partnership, all partners
subject to personal liability!

Innocent Partner Still Liable
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“Thelma and Louise” Rule
Limited Liability Partnership

If general partnership or limited
partnership, easy and wise to switch to
LLP
Limited Partnership

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Still need at least one general partner
 Usually ‘money’ person and ‘manager’
Unlimited liability for general partner
Corporations
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‘S’ Corporation
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‘C’ Corporation
C Corporation
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Default whenever a corporation is created
Limited liability for shareholders
Corporate Formalities
S Corporation
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Tax Election of a C Corporation or
Limited Liability Company

Protection still the same
S Corporation

Relatively confining requirements

Corporation of state or U.S. territory;
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Limits on who can be shareholders;
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No more than 100 shareholders;
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Only citizens or residents of U.S. may be shareholders;
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Only one class of stock (can have voting/non-voting).
Limited Liability Company
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Limited Liability – Even for one member
Ability to Elect Federal Taxation as
Corporation or Partnership
History of LLC Statutes
Limited Liability Company

Management
 Member-managed
 Manager-managed

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Very Flexible Organization
No Annual Reports in AZ
Typically, Less Formalities to Operation
than Corporations.
Arizona Corporation Commission

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
www.cc.state.az.us
Search Corporations, LLCs, Trade
Names, & Trademarks
Check Name Availability
Forms, Instructions, and Fees
Arizona Secretary of State

http://www.azsos.gov/business_services/filings.htm

Search Partnerships, Trade Names &
Trademarks
Checklist for Limited Partnership Filings
Applications for Trade Names & Trademarks
Forms, Instructions, and Fees
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
OWNER AGREEMENTS

Different Types, But Similar Issues:

Partnership Agreement (Partnership)

Articles of Incorporation, Bylaws, Shareholder
Agreement (Corporation)

Articles of Organization, Operating Agreement
(Limited Liability Company)
Money Concerns
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How does money come in?


Debt (Personal Guaranties)
Equity

“Sweat” Equity
Money Concerns

How does money come
out?
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Return on Investment
Profits and Losses
Compensation to
Owners/Employees
Governance and Management

Differences Among Business Entity Forms



Board of Directors, Officers and Shareholders
Partners
Managers and Members
Governance and Management

You’re not the boss of me! (Are you?)

What duties and rights do the parties have?

A.R.S. Section 10-732
Governance and Management
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When, Where and How Do They Meet?
What Must They Do to Act?
Records and Oversight
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Access to Internal Information
Audits
Financial Reporting
Tax
Protection From the Outside
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Insurance
Indemnification
Restrictions on Transferability
Spousal Provisions/Consents
Grounds for Business Divorce
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Breaches
Dissolution
Release from Guarantor

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Indemnification
Security for Payment
Exit and Termination
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Triggering Events
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Death, Disability
Divorce
Termination
Tag Along/Bring Along
Non-Compete/Trade Secrets
Exit and Termination

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Call Right?
Right of First Offer/Refusal?
Buy-Sell Rights?
Shotgun?
Valuation of Business

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
Book Value
Fair Market Value Determined by Appraisal
Fixed Initial Price + Annual Increase Based
on Earnings/Other Factor
Amount Offered by Bona Fide 3rd Party
Purchaser
Value on Company’s Earnings * Some
Multiplier
Payment Terms
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Cash
Promissory Note
Cash and Promissory Note
Life Insurance/Disability Insurance Proceeds
Security for Payment


Pledge of Stock
UCC Lien


Against assets of the company and/or owner
Personal Guaranty
Saving the Marriage (or at least the business)

Alternative Dispute Resolution


Informal Negotiations
Formal Negotiations


Mediation
Arbitration
Saving the Marriage (or at least the business)

Litigation

Restraining Order/Injunction
More Legal Considerations
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Notices
Choice of Law
Attorneys’ Fees
Attorney Representation Provision
QUESTIONS?