Small Business Entity Formation

I often get email questions about starting a new business. In particular, I get questions about incorporating a new business, or about creating a limited liability company (LLC). Sometimes they contact me after he or she has created these entities on his or her own. This can be quite "dangerous" and certainly ultimately more expensive than using a certified document preparer (or an attorney) in the first instance. For example, if an incorporation or creation of a limited liability company is not done properly, one can find that he or she has failed to create the limited personal, or shield from personal liability, envisioned by the individual in the first instance. Then too, there are tax implications involved in the choice of entity and perhaps, tax elections to be timely made. Also, many people stop at the formation itself and do not 'flesh out' the entity with appropriate documentation like by laws, issue of stock, stockholders' agreements, formation and subsequent minutes in the case of corporations and minutes in the case of the llc.

According to the "Arizona Business Lawyer", 2006 alone nearly 6,000 new corporation filings and nearly 7,000 limited liability company filings were initially rejected by the Arizona Corporation Commission. For corporations, 15% of the filings were rejected for failure to properly file a certificate of disclosure along with the articles of incorporation. For limited liability companies, 13% of the rejections were because the documents did not properly set forth the management structure required by statute, indicating whether the business would be a "member managed" or "manager managed" limited liability company. I personally have two member managed LLCs and am the "manager" of another LLC in which I am not a member.

Many rejections resulted from failure to have utilized a name sufficently distinguishable from an existing name. For corporations, 7% of the rejections were the result of an inappropriate name; 16% of limited liability companies were rejected for this reason. That's amazing to me because a potential name can be searched and investigated on the Arizona Corporation Commission website and reserved for a $45.00 fee, holding the name for 120 days.

Creating any new business is a substantial endeaver, both financially and emotionally. I have financed many as a banker and even started one (outside of real estate) myself. For a certified document preparer I use Don Steward at LRC in Phoenix.

NOW READ THIS: PUTTING YOUR PROPERTY IN AN LLC