TAX NEWS - March 2009

arizona tax: Business Structures and Registration in Arizona

When organizing a new business, one of the first and most important decisions to be made is choosing the structure of a business. In Arizona, several business structures exist. The most common are:

- Sole Proprietorship
- General and Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- Limited Liability Company (LLC)
- Corporation
- Sub S Corporation

Tip To Remember: Although this information defines the basic forms of business structure, it is good, sound business judgment to seek both business and legal advice from an accountant and attorney before starting a business.


Sole Proprietorship

The sole proprietorship is the simplest and most common form of business organization. A sole proprietorship is defined as a business that is owned by one individual. The creation of a business as a sole proprietorship requires no formal Arizona filing.

The owner is personally responsible for all debts of the firm. Profits and loss are reported on a separate schedule within your personal tax return.

Advantages:
- Ease of formation
- Minimum legal restrictions
- Low startup costs

Disadvantages:
- Unlimited liability
- Less available capital than in other types of business organizations
- Relative difficulty in obtaining long-term financing


Trade Name Registrations

The registration of a trade name (business name, DBA) is not legally required in Arizona, but is an accepted business practice. In addition, the registration of the trade name may be required to open business bank accounts and help obtain additional licenses.

As a sole proprietor or partnership, you can register your business name with the Office of the Secretary of State. Through their website you can search for existing names registered and guidelines. The trade name application can be downloaded from this website and can be either mailed in or applied in person.

Special Instructions:

- Construction companies need to check name availability with the Arizona Registrar of Contractors by calling 602-542-1525.
- Mortgage companies need to check name availability with the Arizona Department of Financial Institutions by calling 602-255-4421.

Note: If you are filing as a LLC or corporation with the Arizona Corporation Commission, it is not necessary to register your corporate name as
a trade name with the Secretary of State's office as names are cross-referenced with the Corporation Commission.


General Partnership

A general partnership is an association of two or more persons joined together to carry on trade or business for profit. Each partner is personally responsible for all debts of the firm.

The partnership's existence is usually formalized through preparation of a partnership agreement. In general, partnership agreements outline each partner's share of income, gain, loss, deductions, credits and methods to dissolve the partnership under various situations. It is not required to file your agreement with the State.

Advantages:
- Ease of formation
- Direct rewards
- Broader management base

Disadvantages:
- Unlimited liability of general partners
- Divided authority in decision-making
- Difficulty in disposing of partnership interest

Your earnings are reported at the end of the year with your personal income tax return.


Limited Partnership (LP)

The Limited Partnership (LP) is similar to the general partnership with some major differences:
- At least one person must be identified as a general partner and be responsible for the operation and liability of the organization.
- Limited partners are not active managers of the business and are not liable for the organization's debts.

To ensure that all legal requirements are satisfied, it's a good idea to consult an attorney to organize this type of partnership.

If the business is a limited partnership, you are required to register with the Arizona Secretary of State. The checklist form for Limited Partnership filings can be found on the Secretary of State website.

Limited partnerships transacting business in Arizona may register their trade name with the Arizona Secretary of State.


Limited Liability Partnership (LLP)

The Limited Liability Partnership (LLP) is the newest form of business entity in Arizona. To ensure that all legal requirements are satisfied, it's a good idea to consult an attorney to organize this type of partnership.

If the business is a limited liability partnership, you are required to register with the Arizona Secretary of State. The form can be downloaded from the Secretary of State website.

Limited liability partnerships transacting business in Arizona may register their trade name with the Arizona Secretary of State.


Foreign Limited Partnership (LP) and Foreign Limited Liability Partnership (LLP)

If the business is a foreign limited partnership (LP) or foreign limited liability partnership (LLP) (an entity organized under the laws of another state or country), it also must register with the Arizona Secretary of State. The form can be downloaded from the Secretary of State website.


Limited Liability Company (LLC)

A Limited Liability Company (LLC) offers businesses the protection of a corporation and the single taxation feature of a partnership.

Advantages:
- Limited disclosure of owners
- Limited documentation
- No public disclosure of finances
- Lower filing fees
- Can build in buy or sell and owner compensation provision
- Ease in transfer of ownership
- Can use special allocations between owners
- Can use different classes of owners
- Can assign management to a non-member

Disadvantages:
- Out-of-state business complicates status if the other state does not recognize LLC
- Large number of owners complicates status
- Death, bankruptcy or withdrawal of owner could cause problems Corporation

A corporation, sometimes referred to as a "C Corporation," is the most complex type of business organization. It is formed by law as a separate entity, completely distinct from those who own it, and has its own rights and responsibilities.

The primary advantage of incorporating lies in the area of liability. A corporation has its own legal identity, completely separate from its owners. The corporation safeguards the business owner's personal assets, and its protection alone justifies the additional expense and paperwork.


Advantages:
- Separate legal entity
- Limited liability for stockholders
- Unlimited life of the business
- Relative ease in raising capital
- Transfer of ownership through stock sale

Disadvantages:
- Complex and expensive to organize
- Activities limited by the corporate charter
- Extensive regulation and record-keeping requirements
- Double taxation – once on corporation profits and again on dividends In forming a corporation, potential shareholders offer money and/or property in exchange for capital stock. The stockholders are the owners of the corporation, and the managers of the firm may or may not be stockholders.

Businesses that incorporate in this state must publish Articles of Incorporation within 60 days after the Arizona Corporation Commission approval of the Articles. The Articles must be published in three consecutive issues of a newspaper in general circulation in the Arizona county of the corporation's known place of business. Within 90 days after Commission approval of the Articles, an affidavit of this publication must also be filed with the Arizona Corporation Commission..

To review the full breadth of legal requirements for all Arizona corporations, please review Title 10 of the Arizona Revised Statutes which can be found at your local library or at http://www.azleg.gov.

An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN. You may apply for an EIN at http://www.irs.gov/businesses or call 800-829-4933.


S Corporation

Subchapter S Corporations, sometimes referred to as an "S Corporation," allows you the protection of a corporation with some of the financial flexibility of a partnership and elects not to be subject to federal corporate income tax.


The shareholders, however, include their shares of the corporation's items of income, deduction, loss and credit, or their shares of non-separately computed income or loss, as part of their personal income.

To qualify as an S Corporation, a corporation must meet the following:
- It must be based in the United States
- It must have only one class of stock
- It must have no more than 75 shareholders
- It cannot have any nonresident alien as a shareholder

A corporation that meets all of the above criteria can become an S Corporation if:
- All shareholders consent to the corporation's election of S Corporation
- The corporation has a permitted tax year
- Filed with the Arizona Corporation Commission (see Corporation in this section)

To elect to be an S Corporation, a corporation must file Form 2553 with IRS. The election permits the income of the S Corporation to be taxed to the shareholders of the corporation rather than to the corporation itself, except as noted in the IRS general information booklet regarding Sub S Corporations entitled "Instructions for Form 2553, Election by a Small Business Corporation." For instructions and Form 2553, visit the IRS website at http://www.irs.gov/pub/irs-pdf/i2553.pdf and http://www.irs.gov/pub/irs-pdf/f2553.pdf.



Foreign Limited Liability Company (LLC), Foreign Profit Corporation or Foreign Non-Profit Corporation

If your business is organized under the laws of another state or country and you want to conduct business within Arizona, you will need to register as a foreign limited liability company (LLC), foreign profit corporation or foreign

Corporation Commission. Visit the Arizona Corporation Commission's Corporations Division website for filing instructions and to download the proper forms.



Non-Tax Exempt Non-Profit and Tax-Exempt Non-Profit Corporation

There are more than a dozen different types of corporations approved by the Internal Revenue Service as "Non-Profits."

These organizations usually are developed and operated exclusively for one or more of the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition (under certain restrictions) or the prevention of cruelty to children or animals.

The organization may be a corporation, community chest fund or foundation. A sole proprietorship or partnership will not qualify.

The Arizona State University Lodestar Center for Philanthropy and Nonprofit Innovation provides knowledge and tools for those who lead, manage and support nonprofit organizations, including technical assistance, research, professional development and academic degrees.

For more information and a schedule of professional development offerings, visit http://nonprofit.asu.edu or call 602-496-0500.

The Arizona Department of Revenue publishes many informational brochures including the Non-Profit Organizations. To view, check their website at http://www.aztaxes.gov and click on "View/Print Brochures."

The IRS publication 557 "Tax Exempt Status for Your Organization" is available on their website at www.irs.gov. This publication discusses the rules and procedures for organizations seeking to obtain recognition of exemption from federal income tax. For a free IRS Booklet on Tax Information for Charities and Other Non-Profits, visit their website at http://www.irs.gov/charities/index.html.




Business Considerations

Home-based Location

A home-based business must comply with the same license and permit requirements as a business located at a commercial site. This includes applicable sales tax licenses, business or occupational licenses, trade or professional certifications or licenses. In addition, homebased businesses must comply with residential zoning and homeowners' association rules.

Other considerations:
- Check with city/county zoning regarding rules prohibiting a business with employees or street traffic.
- Check with your accountant regarding state and federal income tax deductions for home office space.
- Check with your insurance agent about additional insurance needs.


Commercial Location

One of the first decisions you must make is whether to purchase property and construct a new building, modify an existing building or lease a site.

There are many issues to consider in making this decision. You should obtain professional assistance in negotiating a commercial lease.

Lease negotiations may directly affect the success or failure of your business. In addition, you should obtain the professional assistance of your own broker, attorney, accountant, insurance agent, banker and architect.


Environmental Compliances

The Arizona Department of Environmental Quality's Compliance Assistance Unit is dedicated to providing Arizona small businesses with information and guidance on environmental compliance and pollution prevention. For more information, visit the ADEQ website at http://www.azdeq.gov/environ/air or call 602-771-2300; 800-234-5677.