What You Should Know About Corporations in Arizona
1. What is a Corporation?
A corporation is a form of business entity ownership in Arizona and all other states. Each owner is referred to as a shareholder. The general intent behind the corporation is to encourage business development and investment by offering enhanced creditor protection to the shareholders.
2. How does a Corporation protect the shareholders?
First, a shareholder can isolate corporate liability from personal liability. If the corporation is legally responsible for a harm caused to another person or property, the creditor should only be able to enforce a judgment against the corporate assets and not the shareholder’s personal assets.
Second, a shareholder can isolate corporate debt from personal debt. If the corporation is legally responsible for a debt – generally due to business failure – the creditor should only be able to collect against the corporate assets. The shareholder’s personal assets are protected. Of course, this benefit is irrelevant if the shareholder personally guarantees a debt.
3. How does a Corporation compare to a Limited Liability Company?
One major disadvantage of the corporation (when compared to a limited liability company) is weak protection of the corporate assets from seizure by a creditor of a shareholder.
For example, if a creditor obtains a judgment against a shareholder, a court may permit the creditor to seize the shareholder’s corporate stock, and then vote to remove the shareholder from control of the corporation. This places the corporate assets at risk, even if there are innocent shareholders. A limited liability company can be structured to minimize this risk, but a corporation cannot.
4. What is the difference between a C-Corp and an S-Corp?
For income tax purposes, a corporation may elect treatment as either a C-Corp or an S-Corp. A C-Corp is considered a completely separate entity from its shareholders. The C-Corp pays income tax on its profits each year using a special tax table specific to corporations.
The S-Corp operates a little differently. Any income “flows through” to the shareholders, who pay their share of the taxes on their personal tax returns. The corporation pays no tax.
5. Should a Non-Profit entity incorporate?
A Non-Profit organization may want to incorporate for the same reasons that a business owner would. The corporate structure can isolate corporate liability from personal liability of the organization’s members and directors. In addition, the organization can obtain loans using its corporate assets rather than using the personal assets of its members or directors as collateral.
6. What is the process to incorporate?
The primary task is to file articles of incorporation with the Arizona Corporation Commission. The articles contain essential information about the corporation. They become public record. If the articles are approved, they must be published in a newspaper in the county where the corporation is registered. Simple forms are available from the Arizona Corporation Commission, although it is wise to consult with a business attorney before proceeding.
The next step, although not required to incorporate, is preparation of the corporate bylaws. This document includes the details regarding the entity’s management and operation.
7. What about Directors and Officers?
A corporation is managed by its board of directors. There need be only one director, although most corporations will have more. The officers (President, VP, Secretary, Treasurer) are chosen by the board of directors and need not be identified on the articles of incorporation.
In a simple for-profit business, the sole shareholder might also serve as sole director. However, a church might have a multi-member board of directors, elected officers of the board, and hundreds of members. The members are comparable to shareholders, but of course, there are no profits to share.
8. How much does it cost to incorporate?
The filing fee to incorporate is $60 for a regular business or $40 for a non-profit organization. There will also be a fee to publish the articles of incorporation in a newspaper.
An attorney and accountant should be consulted when choosing the type of entity and tax classification. The bylaws of the corporation should be drafted by a business or asset protection attorney familiar with corporations and their legal issues. The fee may be several thousand dollars, depending on the complexity of the issues involved.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
Thomas J. Bouman, Attorney
Bouman Law Firm
7650 E. Broadway Blvd. #108
Tucson, AZ 85710
(520) 546-3558
