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We help startups get started. We help new business ventures proactively confront a myriad of legal and non-legal challenges. This includes intellectual property protection, business capitalization, contract considerations, logistics, and model analyses and projections.

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Understanding the different types of business entities and their respective benefits will help you make the right entity choice when you officially form your new business.

Sole Proprietorships

It is not always required to form any business entity to conduct business. However, by not doing so, the business owner is exposed to personal liability for business obligations, including potential lawsuits. The greatest advantage of forming a business entity is that it is a way to create a legally recognized entity to be responsible for business obligations.

Corporations

Incorporation is favored by businesses who want to raise capital by outside investment, namely through the issuance and sale of stock. Corporations insulate shareholders from most types of personal liability and stock is easily transferrable to allow investors to trade their ownership stakes. Corporations may be subject to corporate income tax and any distributed to its shareholders may be subject to additional personal taxation. Small businesses often incorporate as an “S Corp” to avoid this “double taxation.” S Corps can function as a passthrough so that income is only taxed at the personal level. Additionally, corporations are subject to greater regulatory formality than other entity types.

Limited Liability Companies

A limited liability company (“LLC”) is an organizational structure intended to provide personal liability protection of a corporation without its rigid formalities. LLCs are typically more flexible and it some ways offer superior protection against liability, though it still is possible for creditors to pierce the LLC’s “corporate veil” in certain situations. An LLC consists of its “members” whose ownership interests are usually defined by an operating agreement. This can offer more flexibility in creating different classes of membership than a corporation. LLCs also have no annual meeting or reporting requirements.

Partnerships

Unlike LLCs, which can be formed with only a single member, partnerships require at least two members. Partnerships can be “general” or “limited”. A general partnership is a business association between at least two individuals and, by statute, may be formed impliedly even without the intention of either individual. Notably, general partners are individually and jointly liable for the obligations of the partnership. This can be especially problematic when the law also presumes that general partners each have complete authority to act on behalf of the partnership and bind the partnership to debt obligations. By contrast, limited partnerships require the partners to file a certificate with the Secretary of State. Limited partnerships should also formalize a partnership agreement to specify rights and responsibilities of each partner.

Below are some resources related to forming a business in Arizona and some of the legal challenges that businesses must be able to identify and navigate.

We offer free consultations to help determine which business structure would be best for your new business.

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