Formation, Governance & Compliance: What Arizona Business Owners Should Know

Are you thinking of starting a small business, and don’t know the necessary steps to take? Are you running an existing business, but have begun running into issues with your basic entity formation documents created on that simple online platform? Well-drafted business and legal documents help define how your business is structured and ultimately functions, provide legal protections, and ensure compliance with federal and state laws. Whether you are a potential or current business owner in Arizona, you should be aware of these issues related to formation structure, leadership organization, SEC compliance, and employment law.

Formation Structure: What Kind of Business will Best Set You Up to Succeed?

You will need to consider many factors to determine the best type of business for you and any business partners, as different structures may provide certain tax benefits, liability protections, responsibilities, and ultimately, money. Your decision will also determine the type of documents you need to validly create and run a business.

1. Corporations: A corporation can be created by an individual or a group of people with a shared goal or desire. A corporation is a separate and distinct entity from its owners, but an entity that possesses similar rights and responsibilities as individuals – i.e., to enter contracts, loan and borrow money, sue and be sued, hire employees, own various assets, and pay taxes. It would be best if you created company bylaws, which define the purpose of the corporation, board members, officers, control of corporate decision-making, shareholder rights, how dividends will be distributed, etc.
2. Limited Liability Company (LLC): A limited liability company is a hybrid entity created by the law of the state in which the LLC is created, but which combines certain characteristics of corporations with partnerships. The LLC structure protects its owners from personal responsibility for debts and liabilities while providing availability for certain tax benefits to members. You need to create an operating agreement, which defines the roles and titles of those involved, whether the LLC is manager or member-managed, percentages of equity, and distribution of profits and losses.
3. Partnership: A partnership can be created, formally or informally, based upon an agreement between two or more individuals to operate a business and share in profits. Various partnership structures are available, including general partnerships (individuals generally sharing legal and financial liability equally), limited liability partnerships (usually for professionals, including accountants, attorneys, and architects), and limited partnerships (a hybrid of the two prior forms with general partner(s) and silent partner(s)).

Leadership Organization: Who is in Control of Your Business?

This answer may depend on your decision(s) above. For example, corporations can be run by and give decision-making authority to boards of directors or officers, whereas one manager or multiple members can run many LLCs.

1. Board of Directors: If the business form you choose needs a board of directors, the board needs to be properly created and constituted, and in compliance with Arizona corporate law. Those board members may owe fiduciary duties to the company and its shareholders.
2. Officers: You should consider whether your business needs to appoint officer(s) to manage the day-to-day operations of the company. These officers should be properly appointed and their roles and responsibilities should be clearly defined.
3. Shareholders: You should also consider whether the company will hold shares internally, or offer shares to investors or the public at large. The issuance of shares implicates certain rights and obligations of shareholder(s) in the company, as well as certain corporate formalities to be followed. For example, Arizona law requires corporations to hold annual meetings of shareholders and to provide certain disclosures to shareholders.

SEC Compliance: Are You Selling Shares?

Once again, this answer may depend on your decision(s) in the above sections. If you offer shares to investors or the public at large, you will likely need to comply with federal and state securities laws.

1. Securities Laws: If you intend to raise capital by selling securities (shares), certain federal and state securities laws may apply, including registration requirements under the Securities Act of 1933.
2. Disclosure Requirements: You should ensure that any offering materials provided to potential investors comply with the applicable securities laws and that any material information about the business is disclosed.

Employment Law: How Do You Properly Categorize and Treat Individuals Working for You?

Regardless of the formation structure, if your business is growing and succeeding, you are likely going to be hiring individuals to assist you. You need to be aware of various federal and state employment laws that relate to the hiring, classification, pay, and safety of those individuals.

1. Hiring: You need to be aware of the federal and state laws governing hiring practices, including discrimination laws and the use of background checks. You should also have (or review) your written employment offers and employee-related documents, which we recommend covering the lifecycle of an employee from hiring to firing.
2. Employee Classification: You need to be aware of the classification of employees as either employees or independent contractors. Misclassifying employees can result in significant legal liability. TALG previously published an article on classification if you need further guidance (Independent Contractor vs Employee | TALG® (talglaw.com)).
3. Wage and Hour Laws: You need to be aware of the federal and state laws governing minimum wage, overtime, and other wage and hour issues. TALG also previously published an article on wage issues if you need further guidance (TALG’s 2023 Arizona Employment Law Update | TALG® (talglaw.com)).
4. Workplace Safety: You should ensure that the workplace is safe for employees and complies with federal and state safety regulations.
5. Trade Secrets: You should consider whether employees have any confidential, privileged, or proprietary information or documentation as part of their job, which may constitute trade secrets. If so, you should consider implementing protections for your company’s trade secrets, which may include a confidentiality agreement and a non-disclosure agreement.

Takeaway?

Creating your business using an online platform, or utilizing template legal documents you found online, can help get you started but may ultimately result in issues down the road as your business grows. Expanding a small business in Arizona requires careful attention to several governance issues related to formation structure, leadership organization, SEC compliance, and employment law.

TALG stands ready to consult with and advise our clients on these issues. Please do not hesitate to reach out if you have any questions or if you need assistance.