BUSINESS FORMATION BASICS

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 85016 (602) 255-6028; (602) 255-6032 kpn@tblaw.com; mlu@tblaw.com

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. §§ 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)

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. § 29-1101(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?