Choosing an Arizona Business Entity
Ronald P. Adams
Selecting the right type of entity to conduct your business must be given
careful consideration. Selecting the wrong type can adversely impact both your
protection against creditor claims and your tax liability. The following briefly
describes the various alternatives from which you can choose.
Sole Proprietorship. The simplest legal structure. Assets and liabilities belong entirely to one
individual. The owner does not have protection from liability risks associated
with the business. Income and expenses from the business are reported on
Schedule C of the owner’s individual tax return (Form 1040). Net income is
subject to both social security and income taxes.
Partnership. Two or more individuals or entities are needed to form a partnership. In both
general and limited partnerships, business income and expenses are channeled to
the partners to be reported on their individual tax returns. The general
partners in a limited partnership are personally liable for the entity’s
obligations, while the limited partners are liable only to the extent of their
capital contributions.
Limited Liability Partnership.
An LLP is essentially a partnership, general or limited, that has filed a
registration statement with the Arizona Secretary of State's Office. As a
result, the LLP’s owners have liability protection. Annual filings are
thereafter required to maintain that liability protection.
Limited Liability Company. The owners of an LLC (members) generally are not liable for the debts of the
business, except to the extent of their investment. Unlike an S corporation,
there are no limitations on the number and type of owners of an LLC. Unlike a C
corporation, the earnings of an LLC are not subject to an entity-level tax.
Rather, the net income flows through to the owners in proportion to their
interests in the entity’s profits. The proportional earnings are included in the
members’ individual returns.
S Corporation.
An S corporation is a corporation that elects to comply with a special set of
tax rules. These entities have traits of both C corporations and partnerships.
Owners of an S corporation have the same liability protection available in a C
corporation structure; however, business income and expenses are passed through
to the owners (as in a partnership). An S corporation is limited to 75
qualifying shareholders, and can have only one class of stock.
C Corporation. Under a C corporation, the business is a separate and distinct legal entity with
its own rights and responsibilities. The owners (shareholders) of a C
corporation are not personally liable for the corporation’s debts. C corporation
earnings are taxed twice -- first at the corporate level, and again when
earnings are distributed to shareholders. C corporations must comply with
several legal and accounting formalities (for example, establishing and
operating under documents of incorporation, electing officers and directors,
holding directors’ meetings, keeping minutes of such meetings, filing corporate
annual reports and income tax returns). Hoopes,
Adams & Alexander, PLC, is a Chandler, Arizona, law firm offering services to
Phoenix-area clients in the areas of estate planning, entity formation,
commercial and real estate transactions, and civil litigation. |
