1. Why Obtain an Entity Form? There are several benefits.
A. Separate and Perpetual Existence: An LLC or corporation (here,
called a “company”) is a legal entity separate from the people who
operate it. A company is able to sue, be sued, enter into contracts,
receive funds, incur debt, and generally conduct business, in its own
name. It has a perpetual legal existence, which means it ceases to exist
only if certain action is taken to dissolve it. Because it continues to exist
despite changes in management, the perpetual existence assures
customers that the company’s activities will continue.
B. Limited Liability: Obtaining a corporate form, rather than remaining an
unincorporated sole proprietor or partnership, protects owners from
personal liability. Debts of the company and lawsuits brought against it
can only reach the corporate assets. The bank accounts, homes, and
other property owned by individuals who own the organization are
protected from lawsuits.
C. Structure: Corporate formalities, such as state filings and operating
agreements, may seem like a burden. Yet they can actually be a benefit
in operating and managing a business. These formalities provide
structure as a diverse group of individuals creates and maintains rules
for decision-making, dispute resolution, organizational vision and
mission, delegation of authority, etc.
2. Minimal Requirements for Obtaining an Entity Form
A. Filing Fees: The Arizona Corporation Commission charges an $85
filing fee. The ACC also requires new companies to publish their articles
of incorporation in a local newspaper. The newspaper charges about $50.
B. Statutory Agent: Since the company has its own legal existence, it can
sue and be sued in its own name. Accordingly, it must provide a person
or another corporation to serve as a statutory agent. This person or
corporation must be identified in the articles of incorporation with a name
and physical street address - not a P.O. Box.
3. LLCs Versus Corporations
A. Advantages of LLCs:
(a) Pass-through Taxation. No entity-level tax.
(b) Minimal Paperwork: LLCs do not require paperwork that is necessary
with a corporation. An LLC need not file an annual report with the ACC,
hold annual board meetings, take written minutes, file an IRS election to
receive pass-through taxation under Subchapter S, nor follow other
formalities.
(c) Flexibility in Ownership:
• S-Corp Shareholders must be U.S. citizens, cannot be more than
75 in number.
• S-Corps cannot have partial ownership in another business entity
and therefore have trouble with a variety of entity levels, or family
business structures.
• S-Corps cannot have more than one class of stock and therefore
have trouble raising capital.
• Even only one shareholder could terminate the S-election, whereas
the majority rules in LLCs.
B. Advantages of S-Corps
(a) Pass-through Taxation.
(b) Employment Tax on Earnings: No 2.9% Medicaid tax.
(c) Comfort level with a long-standing body of law.
C. Advantages of C-Corps
(a) Can “go public”, and have tax-free stock exchanges.
4. Piercing the Corporate Veil
In exchange for receiving the benefits of the entity form, the government
requires companies to follow corporate formalities. Each LLC, including
parent companies and subsidiaries that are wholly owned by or own
another LLC, must maintain their own corporate formalities. This includes
having an EIN, bank account, contracts, signature lines, insurance
policies, and other documents – all in the name of the LLC. It is crucial to
comply with these formalities, properly manage the paperwork, and meet
filing deadlines.
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