Part I: Starting Your Business and Avoiding Litigation

You will see that this manual covers a lot of different topics (see major topics at left). Each topic has its own immense body of law with many details. As a result, today’s business requires access to a number of different professionals.

• Legal consultants
• Accountants and bookkeepers
• IT professionals
• Banking and investment professionals
• Benefits specialists
• Insurance specialists

Starting Your Business

What form of business should I use?

There are four general types of business structures you might contemplate. You should always consult your accountant or other tax professional in making a decision as to which business form is best for you.

1. Sole Proprietorship

The simplest type of business entity is a sole proprietorship, which simply means you are doing business in your name. There is nothing to form or create. You do not have to register with the Corporation Commission, but it is recommended you register any tradename. The advantage of a sole proprietorship is that it is simple to create. Taxes are paid through your personal tax return. The downside is that you remain individually liable for all ab debts and obligations created as a result of that business operation.

2. Limited Liability Company

This is the most preferred business entity for new small businesses. An LLC is created by members, as opposed to partners, and you can have a single-member LLC. An LLC has the advantage, like a corporation, of limiting liability to simply the company itself. In other words, the member or members are not liable for the business’s debts and obligations.

To form an LLC, you: (1) choose a name which will include the designation LLC; (2) identify a registered agent; (3) file articles of incorporation with the Arizona Corporation commission; (4) publish notice that you formed the LLC; (5) create an operating agreement; (6) obtain an employer identification number from the IRS, which you can do online; and (7) as with any corporation, you want to make sure to keep separate corporate accounts and expenses from personal accounts and expenses. In other words, treat the company like a business that is separate from yourself.

For tax purposes, an LLC is not a separate entity. It is what is referred to as a “pass-through entity,” like a partnership or sole proprietorship. A single-member LLC is taxed like a sole proprietorship. A multiple-member LLC is taxed like a partnership. The partnership itself does not pay a tax, but the members pay taxes based on their ownership share. The partnership files an information return with the IRS and then issues a K-1 statement to each partner showing their share of profit and loss of the partnership.

An LLC can also elect to be classified as an S corporation or C Corporation for tax purposes. This form is typically used by high net worth individuals.

3. Corporation

A corporation is formed by filing articles of incorporation with the Arizona Corporation commission. A corporation consists of shareholders. There can be one shareholder or hundreds of shareholders. Corporations, not the shareholders, are liable for the company’s debts and liabilities. There are more formalities of the corporation such as creating bylaws, conducting meetings, and keeping minutes of meetings. Corporations also pay taxes. A business owner who forms a corporation may pay himself or herself a salary or receive dividends from a corporation, which are taxed as well. This is sometimes referred to as a “double taxable,” which is one of the major downsides of operating through a C corporation.

4. Partnership

A partnership is created when two or more people agreed to combine their money, labor and skill in conducting a business enterprise. Profits and losses are shared equally. Partnerships are technically not considered separate legal entities for tax purposes, meaning partnership income, gains and losses simply flow directly through the respective partners and are reported on their personal income tax returns. Partners are “jointly and severally liable” for all of the partnership’s debts and obligations, which means each partner can be held liable for the full liability.

Joint Venture

A joint venture is technically not a separate business entity, but instead is the concept employed when two business entities join forces for a specific project or enterprise.

A joint venture is created generally when there exists (1) a contract, (2) a common purpose, (3) a community of interest, and (4) an equal right of control. Typically, the two business enterprises joining together will themselves form a separate business entity to conduct the joint venture. Taxes are paid through that newly formed business entity.

Do I Need a Business License?

Not every business in Arizona needs a license. It depends on the type of business you’re engaged in. There may be licensing requirements from both the state and the city where you are located. Construction, childcare, food service, and spas/salons businesses are typically heavily regulated.

You should start by checking with the agency that regulates your business to see if any licensing, certification, permit is required you may want to search the guide for taxes for Arizona businesses published by the Arizona Department of revenue. You want to check with the state to see if you are subject to the transaction privilege tax.

Protecting Your Assets

One of the major considerations in choosing what business entity to form relates to protecting your personal assets. But simply choosing the correct business form does not guarantee that your assets are protected.

For instance, the typical rule is that, if you do business through a corporation, only those assets owned by the corporation are at risk. But that is generally true only if you continue to treat the corporation as a separate business segment entity. If you fail to keep the necessary books and records and simply treat it like your own business, a party with a claim against the corporation can “pierce the corporate veil” and collect against your personal assets.

Make sure to treat a business separately. That applies to the equipment and materials used as part of that business. If equipment is owned by the business, then it is part of the assets that can be collected if there is a judgment against the business. You might consider owning the equipment individually and then leasing or renting it to the corporation. But you need to follow formalities.

Avoiding Litigation

In today’s society, the simple fact of the matter is if you do enough business, you are most likely to be threatened with or involved in litigation. Litigation should be avoided as much as possible because it is inherently unpredictable.

Lawyers who actually try cases know that the outcome of a lawsuit is affected by dozens of different factors, most of which the parties have no control over. You can have a very good case and a very good lawyer but a bad outcome at trial.

While no business owner likes being held for ransom on what they consider to be a bogus or trivial claim, it is important to keep in mind that lawsuits take time and money and distract the business owner from running their business. In the overwhelming majority of instances, a business is best served by resolving the matter early on and avoiding the ongoing cost, time commitment, and uncertainty of ongoing litigation.

Take our advice on this: Our firm makes its living from litigating and trying lawsuits.