In the United States generally, and Arizona specifically, there are many different types of business entities to choose from: a traditional corporation (Corp), a subchapter s corporation (S-Corp), a partnership, a limited partnership (LP), a limited liability partnership (LLP), a limited liability limited partnership (LLLP), or a limited liability company (LLC).
The two main concerns when choosing a business entity are taxes and liability.
TaxesTraditional corporations are separate legal entities from their owners. As a result of this separation, the actual business is taxed and any distribution of profits to its shareholders are taxed as well, this is referred to as “double taxation.” However, most other entities are not subject to “double taxation,” specifically S-Corps, LP’s, LLPs, LLLPs, and LLCs. Moreover, the owners of these entities are taxed as if the retained earnings of the entities are their personal earnings; this is often referred to as “pass-through” taxation. This single-level of taxation means a lower effective tax rate for the owner’s the businesses.

So why would anyone choose a traditional corporations business entity form? Well, the answer is a bit lengthy, suffice it to say the new “pass-through” entities are fairly new constructs; they were developed within the past 30 years, generally. Moreover, the ownership units of these entities are not as readily marketable as the ownership units of traditional corporations, e.g. they are not generally sold on large stock exchanges.

LiabilityThere are a few entity choices that do not provide any shield of liability to the business’s owners, specifically partnerships and sole proprietorships. In a partnership or a sole proprietorship, creditors can access not only the assets of the partnership or the sole proprietorship, but also the assets of the individual partners or the sole proprietor. This is actually because partnerships and sole proprietorships are not actual legal entities. This can be a problem if the partnership or sole proprietorship incurs significant debts that it cannot pay. When this occurs, creditors can collect those debts from the individual partners in the partnership or the sole proprietor.

However, with the exception of sole proprietorships and partnerships and their various derivatives, the vast majority of business entities are legally separate from their owners and provide a shield of liability.

In general, if a business decides it require a substantial amount of control over how its workers accomplish their tasks; there will be significant tax consequences at both the state and federal levels. Moreover, the tax burden imposed upon the business may exceed 13% of the business’s worker’s wages.