Business And Corporate Law
For over 20 years, Benavidez Law Group, P.C., has served as general counsel for many different types of organizations, including municipal corporations, limited liability corporations (LLCs), partnerships, closely held corporations, and professional corporations (PCs). With our breadth of knowledge and experience, we can help you start your new company, and we can also act as general counsel to your existing company. Our services as general counsel include completing the corporate minutes, assisting in completing the annual report and being available to answer basic questions. Fees for these services are as follows:
Creating a new company: $1,200
Acting as general counsel: $350 (annual fee)
Starting a business can be a scary and daunting task. For those who have never created a company before, there may be numerous questions and concerns. Below are some of the questions most commonly asked by people starting a business, and answers to them.
- What kind of business arrangement is best for me?
- Do I need a business formation agreement?
- What kind of business arrangement is best for me?
There are several types of companies, each with its own advantages and requirements. When choosing the type of company you wish to form, you should consider the benefits that each provide, and choose the one that best suits your needs. You can learn about the various types of companies in Arizona by clicking on the links below.
This is a business that is completely owned by one individual and is not a corporation. This kind of business has several drawbacks. The biggest drawback is that the owner is directly liable for any obligation of the business, including legal liabilities that arise because of the conduct of the business’ employees. Additionally, the owner is responsible for paying all taxes of the business. Because of these disadvantages, sole proprietorships generally are not recommended.
This is a business owned by two or more individuals. Otherwise, it is much like a sole proprietorship. Each partner is responsible for all the partnership’s obligations, even if he or she only owns part of the business. This includes liability for the actions of the other partners. For these reasons, general partnerships, like sole proprietorships, are generally not recommended.
This is a business owned by partners, where at least one partner is a “general partner,” and at least one partner is a “limited partner.” Like partners in a general partnership, a general partner is liable for all the partnership’s obligations. A limited partner, on the other hand, is not responsible for the partnership’s obligations, unless he or she participates in the control of the business. For tax purposes, limited partnerships are treated as “pass-through” entities, which indicates that the partnership files an income tax return, but the taxes are paid by the partners with their personal returns.
Limited Liability Partnership (LLP)
An LLP must first be organized as a general or limited partnership. To form an LLP, the partnership must file a “statement of qualification” with the Arizona Secretary of State. When the partnership converts into an LLP, the partners gain protection from personal liability for the partnership’s obligations. Businesses operating as general partnerships thus should consider converting the business into an LLP. Furthermore, forming an LLP is less expensive than forming an LLC (another type of business that also provides limited liability). An LLP therefore, is a good arrangement for those who want to limit their liability, but who do not have a great deal of capital.
Limited Liability Company (LLC)
Like an LLP, an LLC allows its members to avoid personal liability for the company’s obligations. However, LLCs are more complex than LLPs. For example, an LLC may be classified as either a partnership or a corporation for tax purposes. In addition, an LLC may be managed directly by its members, or it may appoint a manager. If you are considering forming an LLC, you should schedule an appointment so that we can discuss the options available to you and help you decide the best course of action.
A single-member LLC is basically the same thing as a sole proprietorship, except that the owner is not personally liable for the company’s obligations. Single-member LLCs also may be treated as separate entities for tax purposes, which means that they pay their taxes — not the owners. For these reasons, single-member LLCs are preferable to sole proprietorships.
An S corporation is a shareholder-owned corporation that receives certain benefits unavailable to other corporations. To be eligible for this classification, a corporation must meet certain requirements relating to its stock and shareholders. Once it receives the S classification, the corporation may pass its losses and tax liabilities to its shareholders. For more information on S corporations, please schedule an appointment.
Whereas S corporations may pass their liabilities to their shareholders, C corporation shareholders are generally liable only for the amount of their investment in the corporation. C corporations thus are similar to LLPs and LLCs. The shareholders must pay income tax on their dividends, but otherwise are immune to tax liability for the corporation. C corporations have other tax advantages as well, including the ability to designate a fiscal year for taxation, rather than use the calendar year. For more information on C corporations, please schedule an appointment.
Do I need a business formation agreement?
Forming a corporation or partnership is much like getting married. Like a compatible couple, business partners who work well together build on each other’s strengths, making the partnership greater than the sum of its parts. The wrong business partners, on the other hand, result in a stressful and destructive work environment. Because establishing a good working relationship among business partners is so important, prospective partners should spend some time getting prepared before forming their business.
An important step in the formation of a new business is for the partners to work through the various management and ownership issues that may arise. Addressing those issues up-front will result in a better understanding between the partners and will allow them to address potentially sensitive and divisive issues in a positive and cooperative manner before they become problems. In some cases, discussing management issues before the business is formed may convince the prospective partners not to start the business at all, and avoid conflict and possible litigation.
Business formation agreements should set out the rights, duties and obligations of each of the partners. Such agreements create a clear understanding of what is expected of each partner and can also place limitations on each partner’s ownership requirements. A business formation agreement can be a separate document such as a Shareholders Agreement, or it can be included as part of the Operating Agreement or Partnership Agreement.
Business formation agreements can cover a wide variety of issues. Typical issues included in a business formation agreement include the following:
1. Transfer of Ownership Shares. Each owner’s share of the company is a separate asset belonging to that owner. Ownership shares may take the form of stock (in a corporation), partnership units (in a general or limited partnership), or membership units (in a limited liability company). Ownership shares can be sold, used as collateral for a loan, or given away (as long as the gift complies with federal and state securities laws). A person whom receives a share of a company gains the right to participate in the business, contribute to management decisions, and receive profits. Depending on the exact nature of the ownership share, those rights may be limited in certain aspects. Usually, business partners want the right to prevent a co-owner from transferring his or her ownership shares without their approval. This can assure that the recipient of the ownership shares is compatible with the other owners of the business and their goals. A good way to accomplish this is by giving each partner a right of first refusal to purchase any ownership share before it is transferred to another person.
2. Management and Control. Running a business involves making numerous decisions on a daily basis. Those decisions can be so important that they directly affect the success of the company, or they can be so routine that they will not interest all owners. Business partners should have a clear understanding at the outset of which decisions each partner wants to be involved in making, and they should include that understanding in the business formation agreement. The agreement should list important decisions and should state which partner’s consent is required for each decision. Important decisions of this type may include:
- Selling the business.
- Buying a new business.
- Major refinancing.
- Restructuring the business.
- Creating a new business division.
- Non-budgeted expenses over a certain amount.
3. Financial Contributions. Potential partners should discuss and agree to the amount of financial contributions required from each partner. The amount contributed by each partner may be influenced by factors such as the partner’s financial resources or level of expertise. Potential partners should also consider that unforeseen events may require them to contribute additional funds. Each partner’s obligation to contribute future funds should be clearly established at the outset. This will ensure that the company will be prepared for future obstacles, while giving each partner a sense of safety. At the same time, the partners should decide what should be done if a partner cannot make his or her financial contributions. Many business formation agreements allow one partner to satisfy another partner’s funding requirements and assume the non-contributing owner’s share of the business. Such an arrangement provides a method for the business to ensure future funding without requiring litigation against a non-paying partner.
4. Dissolution. Sometimes, as in marriage, business partners may decide that they cannot continue working together. Arizona law provides for several options in dissolving a business, all which involve enormous expense, litigation, and hardship to everyone. It is possible to avoid these pitfalls by establishing a procedure in the business formation agreement for terminating the business relationship without destroying the business. One such procedure is to allow each partner a “put” right. When a partner exercises a “put” right, the other partner must either purchase that partner’s ownership share or sell his or her own share to that partner at the same price. Such an outcome is preferable to settling a dispute through litigation, which generally results in destroying the business in the process.
If potential business partners spend a relatively small amount of time and effort before forming their company to agree on the partnership requirements, they will enjoy a stronger and healthier company and avoid some problems that could disrupt their entire business. Several options are available for addressing the concerns that partners may have when forming a business. A business formation agreement can be structured to addresses those concerns in the way most comfortable to the partners.