Legally Speaking: Business Entities
Are you a small business owner in Arizona? Do you need to protect your business assets and your personal assets? Are you worried about being sued as a business owner, putting your business assets or personal assets at risk?
As a business owner, there are several types of entities you can form to suit your needs. Each entity is a bit different in terms of liability protection, taxation, as well as the administrative burden and expense of maintaining the entity.
C-Corporation (C-Corp):
- Liability: While the corporate veil protects owners from corporate liabilities, owners are not protected from lawsuits.
- Taxation: Double taxation: taxed at a corporate level, then owners are taxed on dividends or profits received.
- Maintenance: Annual filing with State, annual meetings with shareholders to vote on directors and meetings to elect corporate officers. Careful record keeping in terms of meetings minutes to be taken for all important meetings. This type of business entity requires the highest level of maintenance and formality.
S-Corporation (S-Corp):
- Liability: Like C-Corps, owners are protected from corporate liabilities, but owners are not insulated from lawsuits. Ownership restrictions exist: only US Citizens can be shareholders, there’s a limit to the number of shareholders, among others.
- Taxation: An informational tax return is filed, but taxes are not paid by the corporation. This is a “Pass-through entity”, meaning all profits are passed through to owners and recognized on personal tax returns.
- Maintenance: Annual filings with State required, but with less formality than a C-Corp.
General Partnerships:
- Liability: Partners are subject to unlimited “joint and several” liability: no liability protection for owners!
- Taxation: A “pass-through entity”. An informational return is filed; partners show their share of profits on their personal return.
- Maintenance: No annual filings required by State.
Limited Partnerships (LP):
- Liability: Limited liability for the Limited Partners, but unlimited liability for General Partners. Partnership assets protected from personal liability.
- Taxation: Pass-Through entity, taxed like other Partnerships.
- Maintenance: Usually no annual filings required by State. **Note: There are special types of partnerships in Arizona that offer additional liability protection, but may have additional annual formalities (LLPs, and LLLPs).
Limited Liability Company (LLC): Probably the most commonly used business entity!
- Liability: All owners protected from company liabilities; entity is protected from owner liability.
- Taxation: Choice of being taxed as a Corporation, Partnership, or a “disregarded entity” where no return is filed except for the personal tax return of the owner.
- Maintenance: No annual filings required by State.
Sole Proprietorship: Virtually never recommended.
- Liability: Unlimited liability for owners; no protection of business assets from personal liabilities & no protection of personal assets from business liabilities.
- Taxation: Disregarded entity, no tax return except for the personal return of the owner.
- Maintenance: No formalities required, except you need to keep track of income and expenses.
Depending on your goals and risk aversion, you should thoughtfully consider which entity to use for your business. If you have an existing business and are unsure if you need to change, consult with a business attorney to conduct a “legal audit” to examine whether the structure meets your needs. Often, it is relatively simple to amend the entity. If you are running a business without any legal business entity then you should consider forming one so you have at least some protection from liabilities or lawsuits. Choosing and organizing your small business correctly will allow you to better…
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