BUSINESS FORMATION BASICS

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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
• [phone] [phone]
• kpn_at_tblaw.com mlu_at_tblaw.com

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Choice of Business EntityLegal Forms (Pros and
Cons)
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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.

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Legal Forms a Business May Take

• Sole Proprietorship
• Partnerships
• General Partnership
• Limited Partnership
• Limited Liability Partnership

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Legal Forms a Business May Take

• Corporations
• S Corporation
• C Corporation
• Limited Liability Company

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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

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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

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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)

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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

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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

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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)

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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

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Limited Liability Partnership

• Why not LLP?
• Flexibility in Taxation
• Cannot be a partner of yourself
• Flexibility in management (binding partnership)
  and rights (partnership property)

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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

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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

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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

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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)

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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

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Choice of Business Entity Cost Timeline
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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)

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C Corporation

• Articles of Incorporation (60)
• Statutory Agent
• Certificate of Disclosure (Included)
• Organizational Meeting Minutes (Attorney)
• Bylaws (Attorney)
• Certificate of Good Standing (10.00)

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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)

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S Corporation

• Very Similar to C Corporation
• Tax Election Flow-through Taxation
• Make Sure to Meet All Requirements

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Partnership

• 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)

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Limited Partnership

• Certificate of Limited Partnership (10 fee
  3.00 per page)
• File Certificate (Two signed copies)
• Partnership Agreement (Attorney/CPA)

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Limited Liability Partnership

• 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)

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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)

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QUESTIONS?