Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Arizona, the choice of entity for operating a business is an important decision that affects liability, taxation, investment attractiveness, employee incentives, and administrative requirements. A corporation provides limited liability protection to its shareholders, but it may be subject to double taxation unless it elects S corporation status. General partnerships offer simplicity but do not protect personal assets from business liabilities, while limited partnerships provide limited liability for limited partners. A Limited Liability Company (LLC) combines the liability protection of a corporation with the tax benefits of a partnership, making it a popular choice for many businesses. Sole proprietorships are the simplest form, with no separate legal entity from the owner, leading to personal liability for business debts. Arizona law requires different formation, operation, and maintenance processes for each entity type, including filing documents with the Arizona Corporation Commission. Tax considerations, the ability to raise capital, and the cost of formation and maintenance are also critical factors in the decision-making process. An attorney can provide guidance on the best entity choice based on the specific goals and needs of the business.