Many new businesses are started without the proper understanding of the possible legal and financial ramifications that may arise from improper designation of their entity. This in part is caused by the many legal ways to structure a new business, such as S Corporations, limited liability companies, regular corporations and partnerships.
The most common forms of structuring a new small business are the Limited Liability Company (LLC) and the Sole Proprietorship. Both of these designations greatly benefit small businesses as they are formatted to assist and protect small business owners as they their businesses take off.
What is a Limited Liability Company?
A limited liability corporation does just that, it provides limited liability for owners. An LLC is a corporation where the owners, often called members, usually will not be held personally responsible for the LLC’s debts or lawsuits.
What are the Advantages of an LLC:
- No double taxation: as an LLC, there is no need to file a corporate tax return. Instead, the owner of the LLC will report their share of the profits and losses on their personal tax returns.
- No residency requirements: Owners of an LLC are not held down by the same residency requirements that other business owners are. This also allows the owner of an LLC to not be a U.S. citizen or permanent resident.
- Liability Protection: Creating an LLC can act as a personal and financial safeguard due to the limited liability for business debts and obligations.
What are the Disadvantages of an LLC?
- Limited growth potential: LLC owners are unable to issue stocks or shares and this means that there will be an added burden on the owner to attract potential investors.
- Varying laws: Each state is different in how it treats an LLC and therefore a lack of uniformity throughout the states may negatively impact business.
- Different taxes: Whereas the owner of an LLC will not have to file a corporate tax return, they will have to pay a self-employment tax which will pay into social security and medicare.
How Do I Form an LLC in Arizona?
These are the steps in forming an LLC:
- Choose a name for your LLC
- File Articles of Organization with the Arizona Corporation Commission
- Appoint a statutory agent to accept legal documents on behalf of the LLC
- Publish the articles of organization in an approved newspaper within 60 days of the Commission approval
- Obtain an Employer Identification Number (EIN)
- Obtain business licenses
- Register your LLC with the Arizona Department of Revenue if you will be selling goods and collecting an Arizona sales tax
What is a Sole Proprietorship?
A sole proprietorship is the easiest and most basic form by which a business can be run and is subsequently not considered to be a legal entity. Since it is not considered to be a legal entity a sole proprietorship will refer to the individual who owns the business and that owner is held personally responsible for its debts.
What are the Advantages of a Sole Proprietorship?
- They are the cheapest and easiest form of business to set up. An individual can become a sole proprietor by merely running a business
- The owner maintains ownership and controls 100% of the business
- Tax advantages
What are the Disadvantages of a Sole Proprietorship?
- The owner is personally liable for any debts or obligations of the business
- Lawsuit claimants or creditors have to ability to collect from the owner’s personal accounts
- There can only be one owner. If the ownership grows, the sole proprietorship will need to be dissolved and a new business entity will need to be made
In the case that a sole proprietorship will need to be dissolved, it can easily be converted into an LLC due to the state licenses and employer identification number that were obtained.
How do I Form a Sole Proprietorship?
Unlike an LLC or other forms of business entities, no legal documents need to be filed with the Arizona Secretary of State to create a sole proprietorship. Rather to create a sole proprietorship, a business needs to do the following: choose and file a business name with the Arizona Secretary of State, obtain licenses and permits and finally obtain an employer identification number.
Even though no legal documents need to be filed with the Arizona Secretary of State to create a sole proprietorship, documents will need to be filed to efficiently and legally run the business. This means that obtaining state licensure as well as required permits are a necessity to ensure your business runs smoothly.
What is a Single Member LLC?
A single member LLC is similar to a sole proprietorship as there is only one owner, however unlike the sole proprietorship they will be protected with limited liability. A single member LLC will have to follow the same formation guidelines as a normal LLC, but they are not allowed to have multiple owners.
What is Better for My Business, an LLC or Sole Proprietorship?
Both an LLC and a sole proprietorship offer distinct benefits for small business owners, and this makes choosing either one potentially challenging. Even though the decision may require the owner to create a personal business plan, a decision must be made as a sole proprietorship and an LLC are not one in the same.
This means that business owners will need to decide for themselves how they want to begin their business. If a business owner is looking to hire employees they will need an LLC and if a business owner wants to act for and by themselves, then a sole proprietorship would fit their needs.
A decision is not final. For instance, if a business owner decides to start out as a sole proprietorship and eventually decides to add employees and other owners, the sole proprietorship can be dissolved and transitioned into an LLC.
Knowing which type of business entity your company should use is not always simple, as each business entity has differing pros and cons.
Having an experienced business law attorney explain the differences between your options and lead your business in the right direction is priceless.
Call JacksonWhite’s Small Business Law Team at (480) 464-1111 to discuss your case today.