BUSINESS FORMATION BASICS
Kevin P. Nelson and May Lu
Tiffany & Bosco, P.A.
Camelback Esplanade II, Third Floor
2525 E. Camelback Road
Phoenix, AZ 85016
(602) 255-6028; (602) 255-6032
kpn@tblaw.com; mlu@tblaw.com
Choice of Business Entity:
Legal Forms (Pros and Cons)
Disclaimer
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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
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Sole Proprietorship
Partnerships
 General Partnership
 Limited Partnership
 Limited Liability Partnership
Legal Forms a Business May Take
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Corporations
 ‘S’ Corporation
 ‘C’ Corporation
Limited Liability Company
Sole Proprietorship
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Sole Proprietorship
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Default for one person ‘owning’ their own business
Simplest form
Unlimited Personal Liability!
May be ineligible for tax-free fringe benefits
Sole Proprietorship
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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
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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 flowthrough taxation (i.e. entity does not pay tax
itself, with some exceptions)
General Partnership
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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
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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
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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
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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
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Why not LLP?
 Flexibility in Taxation
 Cannot be a partner of yourself
 Flexibility in management (binding partnership) and
rights (partnership property)
C Corporation
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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
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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
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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
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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/nonvoting)
Limited Liability Company
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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
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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
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Articles of Incorporation ($60)
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Statutory Agent
Certificate of Disclosure (Included)
Organizational Meeting Minutes (Attorney)
Bylaws (Attorney)
Certificate of Good Standing ($10.00)
C Corporation
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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
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Very Similar to C Corporation
Tax Election – Flow-through Taxation
Make Sure to Meet All Requirements
Partnership
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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
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Certificate of Limited Partnership ($10 fee;
$3.00 per page)
 File Certificate (Two signed copies)
Partnership Agreement (Attorney/CPA)
Limited Liability Partnership
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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
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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?