Types of Business Organizations in Arizona
When starting a new company, it is important to decide what type of business structure you are going to form. Each structure has its own advantages and disadvantages, depending on your individual circumstances and what your long-term business goals are. Here is an introductory look at the different types of business organizations available.
Sole proprietorships are one of the most common types of small business organizations. This means there is a sole owner who owns a business operation and its business assets. He or she carries on the business as the sole owner, and there is no requirement for a business charter like a corporation. The owner can hire employees to work for him or her, but that individual is still the sole owner of the business.
People like sole proprietorships because of their inherent flexibility and lack of strict rules like those that apply to corporations. As long as the business is run within the confines of the law, there is more latitude in how the business can be run.
Although there is more flexibility than with other types of organizations, sole proprietorships still require filing various legal documents and forms. If you plan to sell goods, you will need a sales tax license. If you hire employees, you will need state and federal tax identification numbers. Certain types of businesses, like child care and taxi services, require their own special licensing.
Sole proprietorships are treated like an extension of the individual who owns it for income tax purposes, which means you may be able to claim some business losses against your personal income when it comes to computing tax liability.
One downside to sole proprietorships is the personal liability risk. Because the sole proprietorship is treated as a personal extension of the owner, it means that liability is unlimited. If the business assets are not enough to satisfy creditors, they will come after the personal assets of the sole proprietor.
Another potential disadvantage to a sole proprietorship is that the duration of the business is limited by the life of its owner. When the owner dies, the business is often liquidated, which can have its own share of challenges.
A general partnership is when two or more people come together to create and operate a business for profit. General partnerships are governed under the Uniform Partnership Act. In this case, the term ‘person’ can include individuals, partnerships, a corporation, or other entity. Entities such as charitable, fraternal, and religious organizations are not able to enter into a general partnership, as the “for profit” requirement is a requirement to form a general partnership.
General partnerships are like sole proprietorships in that they require similar forms and licenses in order to get the business up and running. Members should consider having a formal partnership agreement drafted that outlines the rights and obligations of each member.
A partnership can exist for any length of time that the partners specify. However, when a partner is no longer associated with the business, the partnership is dissolved. If there are two or more remaining partners, they can elect to continue on with the business, although it is technically classified as a new partnership. Partnerships can also dissolve by agreement of the partners. Maybe a specific event, like the extended disability of a partner, is included in the official partnership agreement as a possible reason for dissolution.
Taxation is slightly different with partnerships in that they are treated as a “pass through” entity. This means each partner is taxed on his or her proportionate share of everything – deductions, credits, and profits and losses — at the applicable personal tax rate. The partnership is not taxed as a separate entity.
Like the sole proprietorship, general partnerships carry the same liability risk wherein individual members are personally liable for the business debts.
Limited partnerships are a special partnership of two or more persons that is formed in compliance with the specific state’s limited partnership statute, with one or more general partners and one or more limited partners. In Arizona, Title 29 of the Arizona Revised Statues governs limited partnerships. There are three types of limited partnerships in Arizona:
- Limited Partnerships (LP)
- Limited Liability Partnerships (LLP)
- Limited Liability Limited Partnerships (LLLP)
There is also a differentiation based on where the limited partnership is domiciled. This means that if it is located within Arizona, it is a domestic limited partnership, whereas a limited partnership that is domiciled outside of Arizona, but plans to do business in Arizona, is a foreign limited partnership.
Limited partnerships are also governed under the Revised Uniform Limited Partnership Act (RULPA), as well as the former ULPA for some states. Limited partnerships differ from regular partnerships in several key ways. A limited partnership can only be formed by complying with the specific statute requirement, including filing a certificate to provide notice to creditors that some partners have limited liability for the partnership’s debts. The limited partners in the business cannot participate in management or exercise control over the business.
There are some other rules in place when it comes to business names under limited partnership rules. In most cases, you cannot use the surname of a limited partner in the official name, unless it is also the same surname as a general partner or it existed in the firm name prior to admitting the limited partner. Also, you must include the term “limited partnership” as part of the firm name.
Limited partners are only liable to the extent of their investments in most cases, unless they violate one of the rules like,
- Limited partner’s name appearing in the name of the LP,
- Limited partner participates in management in an unlawful manner, or
- False statements are made in the certificate at filing and the limited partner makes no effort to correct.
Limited Liability Company
Limited liability companies, or LLCs, are a hybrid of partnerships and corporations in that they often combine the best of both worlds. Statutes vary from state to state, but in general, they provide the limited liability benefits of a corporation and the income “pass through” of a partnership for tax purposes.
LLCs require filing Articles of Organization with the state, which is a service our knowledgeable document preparation staff at Arizona Statewide Paralegal can handle. The document outlines members, versus shareholders or partners. Members should include an operating agreement that outlines a series of important aspects, like the LLC’s business purpose, member investment, allocation of income, transferability of member interests, and dissolution procedures.
Unlike a partnership, an LLC does not cease to exist if a member is deceased. Instead, an LLC can exist for a specific amount of time or in perpetuity, however it is defined in the certification of organization. The basic guidelines are covered under the Uniform Limited Liability Company Act, but most states have their own LLC statutes that you should consult with a qualified attorney on if you have legal questions relating to LLC formation.
Corporations can be the most complex type of business organization to file and set up as they have more strict guidelines and rules. The reason is because a corporation is treated as an artificial person that is created to do business, which is entirely separate from its owners, creators, and investors. This type of business organization can exist forever because it is unaffected by changes in ownership.
A corporation can do many things a natural person can do, like buy property, initiate a lawsuit, be sued, enter into a contract, and be found criminally liable. A corporation is held liable for unlimited corporate debts and obligations, whereas owners’ liability is typically capped by the amount of their investment.
There are different types of corporations, as well. A public corporation is one that is created by a government entity to administer specific government business. A local government can create a municipal corporation to handle the city’s affairs. Entities like the Federal Home Mortgage Association is an example of a public corporation. The federal government created the FHMA to administer specific federal programs related to home mortgages.
On the flip side, you have private corporations which are created by private people to handle private business needs. Private corporations are then classified as either non-profit or for profit. Non-profit corporation are typically formed for charitable, educational, or religious purposes. It is forbidden for those who run a non-profit corporation to benefit financially. For profit corporations are typically just called corporations and operate with the purpose of making money with proceeds distributed to its owners.
There is also the publicly held corporation, which is owned by a group of shareholders. The corporation issues shares, which can be bought and sold on the open market. Do not confuse public corporations with publicly held corporations as they are very different.
Rules governing incorporation procedures and required contents of the articles of incorporation vary by state, but they generally follow some similar guidelines. Requirements typically include:
- Name of corporation
- Planned duration of the corporation (specific and limited or perpetual)
- Purpose of the corporation’s formation
- Statement of authorized stock classes, authorized number of shares, the value per share, and rights of shares and shareholders
- Name and addresses of original directors that make up the initial board of directors
- Address of the corporation’s registered office and the corporation’s registered agent’s information for notices and service of process
- Name and address of each incorporator
Corporations also need bylaws, which are the written rules that follow the articles of incorporation and govern the corporation’s internal affairs.
One reason people like the corporation structure is the lack of personal liability, but there is an important term called ‘piercing the corporate veil’ that may open up individual shareholders to personal liability. Debts and obligations of the corporation can only be satisfied by the corporation’s assets, unless a court decides that shareholders are hiding behind the corporate shield. There are a variety of reasons a plaintiff attorney may be able to pierce the corporate veil. One example is the commingling of business assets and personal funds. This may be something as seemingly innocent as depositing a business check into a personal account or using personal funds to pay for corporate debts.
Learn More about Our Services
Arizona Statewide Paralegal serves the entire state of Arizona and is certified by the Arizona Supreme Court. We have a staff of expert paralegals who have been helping customers with legal documents since 1992.
While you may need to retain legal counsel for advice on business organizations, our team can handle simple matters like filing LLC documents. Why spend thousands of dollars in attorney’s fees just to have simple legal documents drafted, when we can provide the same service for much less? From preparing your documents to ensuring that they are filed and served (when necessary), we can handle all your Arizona document preparation needs. We also offer in-person consultations for those who prefer to handle these matters face to face.
You will find many Arizona legal services listed online who offer to fill out your paperwork; however, they offer no additional benefits. Once your documents are filed, you are left to figure things out yourself. Any documents that need to be filed with the court or served to other parties are left for you to handle. They do not help with other aspects of your legal matters, either. If you have any questions about the processes involved with legal document filing, you would have to pay for assistance from another legal service.
Arizona Statewide Paralegal is a full-service agency that will not leave you confused and to fend for yourself with a mountain of paperwork. It is important to point out that we are not licensed, practicing attorneys, which means we cannot legally engage in the practice of law in Arizona. This means that we cannot give you any legal advice, but we can prepare your documents and guide you through the process itself. If you have specific legal questions related to types of business organizations, what is best for your situation, etc., we will need to refer you to a qualified and licensed business law attorney.
If you just need an LLC filed, contact the team at Arizona Statewide Paralegal to see how we can help. We provide fast, friendly service, and offer convenience at a low price. Contact our office today to learn more about Arizona document preparation services regarding LLC filings and all your other business organization document needs.