Business Structures Explained
Most frequent questions and answers
A sole proprietorship is the simplest and most common form of business organization. It 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. Profits and losses are reported on a separate schedule within your personal tax ret urn.
A sole proprietor has complete control and decision making power over the business.
- There is usually very little reporting required with the sole
- Sale or transfer can take place at the discretion of the sole prop riet or.
- All responsibilities and business decisions fall on the shoulders of the sole
- It is relatively difficult to obtain long-term Investors generally do not invest in sole proprietorships.
- The sole proprietor of the business may be held personally liable for the debts and obligations of the business .
A limited liability company (LLC) is a flexible form of enterprise that blends elements of the partnership and corporate structures . LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. There is no maximum number of members. LLCs are required to file with the Arizona Corporation Commission.
- Owners have limited personal liability for business debts even if they participate in
- Profit and loss can be allocated differently than ownership
- LLCs are more expensive to create than partnership or sole proprietorship.
- A large number of owners complicates
- Death, bankruptcy or withdrawal of owner may cause problems.
A 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.
In forming a corporation, potential shareholders usually offer money and/or property in exchange for capital stock. The shareholders are the owners of the corporation, and the directors and officers of the corporation may or may not be shareholders. Corporations are required to file with the Arizona Corporation Commission.
- A corporation is a separate legal entity with unlimited life of the business .
- There is limited liability for shareholders and transfer of ownership through stock
It is relatively easy to raise capital.
- Corporations are complex and expensive to organize with extensive regulation and record-keeping requirements.
- Activities are limited by the corporate charter.
- Corporations are subject to double taxation – once on corporation profits and again on dividends.
An S corporation sometimes referred to as a “Subchapter 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, and
- 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, and
- It is filed with the Arizona Corporation Commission as a corporation .
To elect to be an S corporation, a corporation must file Form 2553 with IRS. The election permits the income to be taxed to the shareholders of the corporation rather than to the corporation itself, except as noted in the IRS general information booklet entitled “Instructions for Form 2553, Election by a Small Business Corporation .” For instructions and Form 2553, visit the IRS website at www.irs.gov
Arizona allows the formation of a non -profit corporation, but if the corporation intends to be tax-exemp t, it must apply for that status through the Internal Revenue Service (IQS). There are more than a dozen different types of corporations approved by the Internal Revenue Service as “t ax-exemp t non -p rofi t.” 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 may not qualify. Non-pro fit corporations are required to file with the Arizona Corporation Commission .
IRS Tax Information for Charities and Other Non Profits, (IRS), discusses the rules and procedures for organizations seeking to obtain recognition of exemption from federal income tax.
The Arizona Department of Revenue publishes “Non Profit Organizations”
For a listing of organizations supporting non-profits, visit the Arizona Commerce Authority’s website