Table of Contents
Selecting The Best Business Entity For Your Situation
Prospective business entrepreneurs in Arizona must select the business entity that best suits their competitive needs. Their choices are as follows:
SOLE PROPRIETORSHIP
What is it?
The sole proprietor is the simplest form of business. It is a business run by and individual without creation of a separate legal entity.
Requirements.
Although the sole proprietor should maintain adequate records, there are no administrative requirements, such as maintaining minutes of meetings, publications of documents, or filing of Annual reports (with the Corporation Commission). Sole Proprietorships may be required to file with various municipalities, State agencies, as well as agencies on the federal level. A sole proprietorship can secure a name by filing a trade name with the Secretary of State.
Practical and Legal Issues.
The sole proprietorship is the least regulated and most common form of business organization. Legally and for tax purposes the individual owner is the business. The liabilities and profits are personal to the owner. The sole proprietor (owner) has total control of the business. All of the personal and business assets of the sole proprietor are at risk. This unlimited liability is the greatest disadvantage of this type of business form. However, different types of insurance coverage are available to lessen the perils of having one's personal assets at risk. Taxes are reported on the sole proprietor's personal income tax forms. The Corporation Commission does not have jurisdiction over sole proprietorship's
PARTNERSHIP
There are various types of partnerships. They are general partnerships, limited partnerships, limited liability partnerships and limited liability limited partnerships. The Corporation Commission does not have jurisdiction over partnerships.
CORPORATIONS
What is it?
A corporation is a legal entity that is separate from its owners, the shareholders. It is created by filing Articles of Incorporation with the Corporation Commission. The structure of the corporation is comprised of three different levels. These are the shareholders, directors and officers. Each has different responsibilities, obligations and authority. The shareholders are the owners of the corporation. They, as the owners, elect the directors. The directors have a legal duty to act in good faith, use good care and to act in the best interest of the corporation. The directors are responsible for the general state of affairs of the corporation, and in that capacity appoint officers who conduct the day to day business operations. In small corporations, it is not uncommon for the same person to be a shareholder, directors and officer.
Limited liability is the most important reason to incorporate. The debts incurred by the corporation cannot generally be collected from the officers, directors or shareholders of the corporation. Limited liability allows a person to protect the personal assets from the debts and obligations of the corporation. There are certain situations, however, when limited liability does not apply.
Requirements.
The corporation structure can be somewhat complex and costly. All corporations must comply with the Arizona Corporations Code, A.R.S. Title 10. A corporation may have perpetual existence, meaning that it may continue indefinitely notwithstanding the status of its individual shareholders (owners). Since the corporation is a separate entity, it must file tax returns and pay taxes on its income. This can mean additional accounting and legal costs. Additional expenses include a requirement that a copy of the Articles of Incorporation be published for three consecutive publications in the county of the known place of business. Also, an Annual Report must be filed with the Commission each year.
Practical and Legal Issues.
Profit corporations are subject to what is commonly phrased as "double taxation." The corporation pays tax on the income earned by the corporation and their shareholders pay taxes on the dividends they receive (personally) form the corporation. An S corporation, however, is not subject to double taxation, as it is taxed in a manner similar to a partnership. With respect to incorporating and operating the corporation, there is no difference between a profit corporation and an S corporation. S corporations and other corporations are, however, very different from a tax perspective. After the corporation is established pursuant to Arizona Law, it may elect S corporation status for Federal tax purposes by filing Form 2553, Election by a Small Business Corporation. Several requirements must be met before S corporation status can be elected. Eligibility requirements include imposing a limitation of the maximum number of shareholders (75), a provision prohibiting non-resident aliens to be shareholders, and a limitation that shareholders be either individuals, certain trusts or estates. Also, the corporation can only have one class of stock. A tax professionals should be consulted to determine whether the shareholders will benefit from the corporation electing to be an S Corporation.
LIMITED LIABILITY COMPANY
What is it?
The Limited Liability Company (LLC) is a business entity organized by filing Articles of Organization with the Corporation Commission. It offers limited liability like a corporation.
Requirements.
The LLC is owned by the members. The LLC allows the members to manage the entity unless it elects in the Articles of Organization to designate a specific manager who may or may not be a member, to manage the entity, as is done in many corporations. Like a corporation, an LLC has the advantage of "perpetual" existence, meaning that it may continue indefinitely notwithstanding the status of its individual members. Also, similar to corporate shares, ownership interests are transferable. LLCs are a cross between a partnership and a corporation. The business form itself can be less complicated than the corporation, but the operating agreement can be somewhat complex, depending upon the needs of the individual owners. Like a partnership agreement, the agreement determines the conduct of the business, including the rights and powers of the members, managers and employees. Although less complicated than the corporation, there are some costs associated with the LLC form of business. The LLC is required to publish specific information extracted from its Article of Organization in the county of the known place of business, for three consecutive publications. Also, the LLC is required to file Articles of Amendment in certain situations when a member or manager changes.
Practical and Legal Issues
As its name implies, the LLC provides limited liability for its owners similar to shareholders in a corporation. The LLC owners risk only their investment in the business. Other personal assets are not at risk, unless the owners personally guarantee a debt. But a member may be liable for any action not made in good faith. Generally, unlike a partnership, none of the members of an LLC are personally liable for its debts. With respect to taxation, an LLC may be classified for Federal income tax purposes as a partnership avoiding double taxation, unless it elects corporate treatment for federal tax persons.
A single member LLC may elect to be classified as a sole proprietorship or a corporation. If the LLC does not elect its classification, a default classification of partnership (multi-member LLC) or sole proprietorship (single-member LLC) will apply.
The information contained above is taken directly from Arizona Corporation Commission publication entitled Business Entities.
What is a Non-Compete Agreement and Is It Enforceable in the State of Arizona?
A non-compete agreement is a separate document or a clause included within another employment agreement, such as a separation or non-disclosure agreement. Non-compete agreements are often combined with non-disclosure, anti-piracy and anti-solicitation agreements. Your employer might ask you to sign such documents when you are hired, during your employment, when you leave your job, or all of the above.
Regardless of the where, what and when, they are contracts or contractual provisions. If you sign a non-compete agreement, typically you are agreeing that you will not compete with your employer by engaging in any business of a similar nature, as an employee, independent contractor, owner, part owner, significant investor, and whatever else your employer chooses to cover all bases. It might even broadly limit you from working in the same field, even if you don't work for a direct competitor. It might also restrict you in both time and geography. These agreements not only restrict your right to work for others while you are employed for that employer, but also for a certain period of time after your employment ends or is terminated.
If you don't sign a non-compete agreement, you may be out of a job, benefit or perk, such as a severance package. You might even be subject to a lawsuit, depending on when you chose not to sign. Employers often also utilize anti-piracy, anti-solicitation and non disclosure agreements. These agreements protect against employees and/or former employees borrowing or steeling employer's trade secrets, other employee or principals or confidential information.
There are issues regarding whether non- compete agreements are legally binding. There is not a simple answer. It varies from case to case, and can depend on state law, on how restrictive the agreement is (how much it limits someone from working in their field or location), and on what the employer construes as competition.
In Arizona, enforceability of a non-compete must be looked at on a case by case basis. Generally a covenant no to compete must be reasonably limited as to time and territory. Arizona courts have repeatedly approved use of the blue-pencil rule, whereby a court is empowered to cross out overbroad, unreasonable provisions in an agreement, while keeping in place less onerous, enforceable provisions. Arizona attorneys often use 'step down provisions' whereby, if the judge believes the original term or geographic area of restriction as suggested in the contract is unfair, he or she can approve alternative provisions included in the agreement and adopt what he or she believes is fair. The court determination can also be influenced by whether it is just an employer-employee situation or there is included the sale of a business.
In any event, this is an important area of business law in our mobile and technological society. It is complicated enough that, if an employer or employee is confronted with these issues, legal assistance can be of great help.
[Much of the the information contained above is taken directly from Non-compete Agreements With Step-Down Provisions, Will Arizona Enforce Them? by Ali J. Farhang & Ray Harris, an article in Arizona Attorney, December 2005, p. 26]
