A corporation is a legal entity created to run a business. It’s an appealing option for investors because of the formal structure it offers, as well as the unique benefits it provides.
There are four types of corporations, do you know which one is right for your unique situation?
Keep reading as we discuss how corporations work, advantages and disadvantages, and if you need assistance in starting one.
How to Start an Arizona Corporation:
8 Simple Steps
There are eight steps required to start a corporation in Arizona:
Select a Corporate Name
The corporation’s name must be different from any other business name on file with the Arizona Corporation Commission. Additionally, the state requires that corporations end in “Association,” “Bank,” “Incorporated,” “Corporation,” “Company,” or “Limited,” or the abbreviations for these names.
You can check for name availability at the Arizona Corporation Commission website.
Arizona requires that corporations have at least one director. Ideally, corporations want a board of directors to help make big decisions.
File Articles of Incorporation
Articles of Incorporation consist of the names and addresses of those who will serve on the board of directors, as well as details about the business. Filing fees vary based on the type of corporation you plan to start.
Create Corporate Bylaws
You’re not required to file bylaws with the state, but this is an important document to have for any business. Bylaws are the internal rules and regulations that discuss issues like the number of directors, election terms, responsibilities, shareholders, and more.
Hold First Meeting & Issue Stock
The first meeting is where the directors are officially appointed. This meeting is also where the corporate bylaws are adopted, and stocks are issued.
Obtain EIN and Required Licenses/Permits
One of the final steps to starting a corporation is obtaining all necessary business licenses and permits, including your Employer Identification Number (EIN). This can be done online with no filing fee!
Do you need help starting a corporation?
Forming a corporation is more expensive and more complicated than forming another business structure such as an LLC or partnership. Correct paperwork must be filed with the Secretary of State, a board of directors must be appointed, and stocks must be issued. Corporations also have a more complex tax structure, therefore it’s generally preferable to seek assistance from an experienced business lawyer.
What are the Different Types of Corporations?
There are 3 different types of corporations that can be formed in Arizona.
- S corp
- C corp
As previously mentioned, S-corps can avoid double taxation and are given pass-through taxation – which is why many business owners choose this type of structure. S-corps are not as easy to form as some may think. You must have less than 100 shareholders that are all individuals, estates, or trusts. Plus, shareholders cannot be in any other partnership or corporation.
Unlike S-corps, C-corps are easier to form but are subject to double taxation. C-corp are the most common structure to form due to the ability to raise capital and transfer ownership.
Non-profit corporations are those that have to follow specific rules about how they earn profits. These corporations are designed for charity, religious, or educational work. The work that they do benefits the public and is therefore tax-exempt.
Reasons to Start a Corporation in Arizona
Here are a few reasons to start a corporation in Arizona.
Saying that your business is a corporation holds a lot of professional power. Vendors, partners, and employees often view corporations with more credibility than other business structures. A corporation also has access to capital, so it’s easier to obtain loans.
C-corporations are known for double taxation, which is often a drawback. However, S-corporations offer tax benefits to those who have their income disturbed correctly. Plus, corporations are given specific tax deductions that other entities may not have access to.
The biggest advantage to starting a corporation is the personal liability protection it provides. A corporation is considered a separate entity from its owners, therefore, if the corporation goes bankrupt or is sued, shareholders are not held responsible.
Arizona is not a state that allows the formation of anonymous corporations. However, there are ways to establish your business in states that do allow anonymous formation. Also, using a registered agent as the public name of the business adds a layer of protection and privacy.
Disadvantages of a Corporation
Maintenance is Difficult vs. LLC – More paperwork, time, and money is required for the formation of a corporation than that of an LLC.
Potential Double Taxation – LLCs have the flexibility to choose how they are taxed. C-corporations are taxed on both the individual and corporate levels.
Reporting to State, Investors, IRS – Corporations must document meetings, maintain bylaws, and report back to the state on an annual basis.
Management – Depending on how the corporation is set up, the structure of management could be confusing and you could have a team operating without direction from upper management.
Should You Start a Corporation?
Now that you know the details about corporations, who exactly are they best for and what is the benefit?
Corporations are a good option for business owners that want to raise capital, scale, grow, and eventually sell their business. Some owners form a corporation simply for the separation and limited liability protection. Corporations are often formed by businesses who plan to make a lot of profit or who are already making profits.
If you’re interested in forming a corporation, it’s best to consult with an experienced business attorney to help save you time and money.