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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.

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Presentation on theme: "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."— Presentation transcript:

1 BUSINESS FORMATION BASICS Kevin P. Nelson and May Lu Tiffany & Bosco, P.A. Camelback Esplanade II, Third Floor 2525 E. Camelback Road Phoenix, AZ (602) ; (602)

2 Choice of Business Entity: Legal Forms (Pros and Cons)

3 Disclaimer  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.

4 Legal Forms a Business May Take  Sole Proprietorship  Partnerships General Partnership Limited Partnership Limited Liability Partnership

5 Legal Forms a Business May Take  Corporations ‘S’ Corporation ‘C’ Corporation  Limited Liability Company

6 Sole Proprietorship  Sole Proprietorship Default for one person ‘owning’ their own business  Simplest form  Unlimited Personal Liability!  May be ineligible for tax-free fringe benefits

7 Sole Proprietorship  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

8 General Partnership  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 flow- through taxation (i.e. entity does not pay tax itself, with some exceptions)

9 General Partnership  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

10 Limited Partnership  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’

11 Limited Partnership  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)

12 Limited Liability Partnership  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

13 Limited Liability Partnership  Why not LLP? Flexibility in Taxation Cannot be a partner of yourself Flexibility in management (binding partnership) and rights (partnership property)

14 C Corporation  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

15 C Corporation  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

16 S Corporation  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

17 S Corporation  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/non- voting)

18 Limited Liability Company  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

19 Choice of Business Entity: Cost & Timeline

20 In General  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)

21 C Corporation  Articles of Incorporation ($60) Statutory Agent  Certificate of Disclosure (Included)  Organizational Meeting Minutes (Attorney)  Bylaws (Attorney)  Certificate of Good Standing ($10.00)

22 C Corporation  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)

23 S Corporation  Very Similar to C Corporation  Tax Election – Flow-through Taxation  Make Sure to Meet All Requirements

24 Partnership  Default entity for two or more persons  Partnership Agreement!  RUPA – A.R.S. §§ 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. § (A)

25 Limited Partnership  Certificate of Limited Partnership ($10 fee; $3.00 per page) File Certificate (Two signed copies)  Partnership Agreement (Attorney/CPA)

26 Limited Liability Partnership  Partners Must Agree By Vote or Partnership Agreement  If agree, file a statement of qualification $ 3.00/page A.R.S. § (C)  Annual Report – Simple ($3.00)

27 Limited Liability Company  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)

28 QUESTIONS?


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