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Information Forms - Small Business Considerations


Corporations are individual entities.  The corporation, not individual shareholders, is responsible for the actions of the business.  If something goes very wrong, only the assets of the corporation are at stake, not the owners’ personal assets.  There are some exceptions to this, but generally, your personal liability is greatly limited.  See the following chart for additional explanation of "S" and "C" corporations.

It is wise to look for a legal form that allows for the profits of the company to "pass through" without having to pay corporate taxes first.  You don't want to pay taxes twice; once on the income for the business and then again when the income is distributed a profits to you.

Entity   Advantages   Disadvantages

Sole Proprietor

Simple! There is no legal structure. Requires a Schedule “C” with 1040.   No liability protection.  Can lose everything if sued.  

 Limited Liability (LLP)

Personal liability protection for partners.
No double taxation, as profits pass through to the partners.
Limited partnership is owned by two types of partners:  general and limited.
General partners are responsible for managing the business and affairs of the partnership.
Limited partners may have certain limited rights granted by a partnership.
No annual report (except LLPs).  No annual fees.
If there is no filing with the AZ Secretary of State, there can be unlimited personal liability, including actions taken by other partners.  If you go into business with others, you've got a partnership in the viewpoint of the law, regardless of whether you have a Partnership Agreement in place.  LLPs require publication and filing of affidavit of publication with the AZ Secretary of State.  Enter with caution as a limited partner as Arizona law provides that a limited partner who participates in the control of the business may become liable for the obligation of the partnership.  A.R.S. 29-319 A.

Limited Liability Company 

Personal liability protection for all owners & pass-through profits without corporate taxes, e.g., profits can be distributed unequally; a 60% shareholder can take only 10% of the profits.  Allows for more flexibility for tax planning and rewarding owners who bear more management responsibility.
No Annual Reports required by the Arizona Corporation Commission.
Can be taxed as an "S" corporation.
more than 80% ownership in a separate corporate entity.
Disproportionate ownership. 

Can have limitation as to the number of investors, a/k/a members (75).
May be more difficult to make a public offering than with a corporation.  

“S” Corporation  

Personal liability protection but permits pass-through taxation.
Limited to 35 shareholders.  
Cannot distribute profits unevenly as you can do with an “LLC.”
IRS 2553 required after receiving EIN.

“C” Corporation  

No limit of people can own stock.  Legal form for companies that are going to be publicly traded.

Double taxation (explained in the second paragraph at top of page)

This document for information only and can be accessed through multiple sources.  It is not to be construed or interpreted as legal advice.

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