Question: Should I form an Arizona C corporation or an S corporation?
Answer: I form for profit corporations, nonprofit corporations, limited liability companies, and limited partnerships. I’ve formed 7,500+ LLCs since 2001. However, I do not form C corporations or S corporations because Arizona corporate law does not recognize or care about C corporation or S corporations. Those two terms describe one of four methods of federal income tax applicable to entities. Nobody forms S or C corporations in the United States. People form:
- for profit corporations (obsolete in Arizona except for limited circumstances)
- nonprofit corporations
- limited liability companies (most popular entity in Arizona)
- limited partnerships (obsolete in Arizona except for limited circumstances)
- general partnerships (never ever form a general partnership because every partner is 100% liable for everything that goes wrong)
- sole proprietorships (never ever operate a business this way because the owner is 100% liable for everything that goes wrong)
- business trusts (rarely used and not appropriate in Arizona)
The first four types of entities are formed pursuant to the statutory law of each state. No state in the U.S. allows for the formation of a C or an S corporation, both of which are methods of taxing an entity under the federal income tax code.
Before forming an entity, the first question is in what state should I form the entity? The second question is what type of entity should I form? After you form the entity, the next question is how should the entity be taxed for federal income tax purposes?
If you form a corporation, it can be taxed two ways:
- C corp – the default method, or
- S corp – if the corp is eligible to be an S corp and all of the owners sign and submit an IRS form 2553 to the IRS before the deadline.
If you form a limited liability company, it can be taxed four ways:
- C corp
- S corp
- Partnership if it has two or more owners
- Sole proprietorship if it has one owner or a husband and wife owners who own the company as community property
One of the many reasons Arizonans are forming LLCs 12 times more often than corporations is because of the four methods of tax available to the LLC vs. the two methods of tax available to a corporation.
I recommend that as soon as possible after forming your entity, but not later than 75 days, you talk to your tax advisor to determine which method of tax is best for you and the entity.
I do form for profit corporations when there is a good reason to do so or if I cannot convince my client that the Arizona LLC is a much better entity than the Arizona for profit corporation. To date, I have formed 7,500+ Arizona LLCs.
For an in depth discussion of whether to form a corporation or a limited liability company in Arizona to operate a business or hold real estate, see my article on my website called, “LLCs vs. Corporations: Which Type of Arizona Entity Should You Form?“
See also my article called “If My New Business Will Have Start Up Losses, Should It be an LLC or an S Corporation?.”