Small businesses make up 97 percent of Arizona business entities and are the state's largest employer. The state's commitment to small business and new ventures makes Arizona a great place for business formation.
One of the hardest decisions facing entrepreneurs is what kind of business entity to form. Would your business make a good sole proprietorship, corporation, partnership or limited liability corporation (LLC)?
A sole proprietorship is a great, low-impact way for new entrepreneurs to get into the business game quickly and inexpensively. Since they are unincorporated, sole proprietorships give the owner complete control over operations and generated income. However, sole proprietors face unlimited liability and can sometimes have difficulties securing funding.
If your business has/will have more than one owner, you may want to consider a partnership. A partnership is an incorporated entity with two or more owners. Each owner shares responsibilities, profits and losses. Like a sole proprietorship, a partnership is fairly easy and inexpensive to form.
However, there are risks inherent in sharing liability and risks with another person. It is important to formalize an agreement with your partner(s) that outlines each partner's share of income, losses, credits and how to dissolve the partnership under various situations.
A corporation is owned by its shareholders but faces limited liability for their its own debts and actions. Corporations have several advantages over other entities: they can generate capital by selling stock, enjoy significant tax benefits and are attractive to potential employees. Owners of a corporation can elect to turn it into an S corporation by filing certain tax documents. S corporations combine elements of corporations and partnerships.
A limited liability corporation (LLC) is neither a partnership nor a corporation but a different kind of entity that combines elements of each. Owners of an LLC are called "members" and can be individuals, trusts business structures or any other legal or commercial entity. LLCs offer a great deal of flexibility and can be managed like a partnership or S corporation with varying degrees of liability and owner participation.
Choosing the right structure can make a big difference for your budding business. Be sure to consult with a qualified business attorney to make sure your business structure makes sense for you.