Incorporation
Incorporating a for-profit corporation and a non-profit corporation in Arizona initially entails the same three-step process: (1) file articles of incorporation with the Arizona Corporation Commission (“ACC”); (2) publish the Articles of Incorporation in a newspaper of general circulation; and (3) submit an affidavit of publication to the ACC.
Once these three requirements have been satisfied, the existence of the corporation begins as of the date that the Articles of Incorporation are filed with the ACC. In addition to accomplishing these three ministerial acts, there are a number of additional tasks to be completed to properly incorporate in the State of Arizona. And, there are ongoing formalities to adhere to, as well as issues to consider, to ensure that the business is operating within the best entity for its purposes. It is many of these additional tasks and issues that distinguish for-profit corporations from the characteristics of non-profit corporations.
| Distinguishing characteristics | |
|---|---|
| For Profit Corporation | Non-Profit Corporation |
| May name one or more directors in the Articles of Incorporation | Must name at least three directors in the Articles of Incorporation |
| Shareholders are authorized to receive stock in exchange for capital investments in the corporation, including cash, real property or personal property | Cannot issue shares and cannot pay dividends |
| Shareholders only receive a return on their investments when dividends are declared and paid | Does not have shareholders; it may or may not have members; the choice whether to have members is made by the incorporators and depends on the nature of the proposed activities |
| May be formed for engaging in any lawful activity | May be formed only for limited purposes, including: religious, charitable, educational, literary or scientific purposes |
| Most pay applicable federal and state taxes on profits | Can be either a taxpaying entity, or an entity exempt from taxes for federal income tax purposes |
| Upon dissolution, so long as the corporation has satisfied all outstanding liabilities, its remaining assets are distributed to the corporation’s shareholders | Upon dissolution, it must distribute its remaining assets to another nonprofit group |
Governing Bodies of Profit Corporations and Non-Profit Corporations
In both profit and non-profit corporations, the board of directors is charged with the responsibility of establishing the corporate policy and managing the corporation. The board of directors typically elect the officers of the corporation, which may include the president, vice president, secretary and treasurer. Corporate officers are responsible for the day-to-day activities of the profit corporation. Both directors and officers of profit and non-profit corporations owe certain fiduciary duties to the corporation and these individuals may be exposed to liability for breaches of these duties. However, for both types of entities, directors, trustees and officers are typically afforded limited liability status, meaning that the creditors of a corporation can only reach as far as the corporation’s assets to satisfy corporate debts. Personal assets of the director, officer or trustee are protected from the reach of the creditors of the corporation.
Profit corporations issue shares in exchange for the shareholder’s capital investment in the corporation. Depending on the structure of the corporation, particularly with close corporations, shareholders may exercise broad decision-making powers in connection with the business and affairs of the profit corporation as a result of their ownership of the corporation. One important exception to the limited liability status outlined in the paragraph above is that shareholders may be held personally liable for corporate debts where corporate formalities are not observed. For example, if a shareholder’s personal funds are commingled with corporate funds, or if stock is never formally issued, the court may “pierce the corporate veil” and hold the shareholders personally liable for the debts of the corporation.
With non-profit corporations, if a corporation has not yet established a credit rating, banks and other creditors may require a personal guarantee from a corporate director before it will extend credit to the corporation. In this situation, if the corporation is unable to satisfy this obligation when due, the director that guaranteed the debt becomes personally liable for the corporate obligation.
Taxation
Finally, perhaps the most significant difference between profit corporations and non-profit corporations is the respective tax treatment of these entities. In general, a profit corporation is taxed on its own profits. In addition, any profits paid out as dividends are taxed again to the recipient as dividend income at the individual shareholder’s tax rate. However, the majority of close or small profit corporations rarely pay dividends. Rather, the owners are paid salaries and fringe benefits that are deductible to the corporation, resulting in only one level of taxation: income taxation to the owner-employees. This often avoids double taxation.
A profit corporation may have the option to elect the “subchapter S” status under the Internal Revenue Code for federal income tax purposes. Unlike a “C corporation” which is a taxpaying entity, S corporations are not taxpaying entities, and the profits, losses and other tax issues of an S corporation are passed on directly to the shareholders in proportion to their stock ownership in the profit corporation. If a corporation meets the requirements promulgated by the Internal Revenue Code to qualify as an S corporation, this is an alternative way to avoid double taxation on the profits of a profit corporation.
An Arizona non-profit corporation can be either a taxpaying entity or a non-taxpaying entity for federal income tax purposes. In addition, non-profit status may qualify a corporation for certain state benefits, including state sales, property and income tax exemptions. Although most federal tax-exempt entities are non-profit corporations, being organized as a non-profit corporation at the state level does not guarantee the exemption from federal income tax.
To qualify as tax-exempt from federal income taxes, the non-profit corporation must satisfy the requirements set forth in Section 501(c)(3) of the Internal Revenue Code. Exempt status for non-profit corporations can be invaluable, especially considering that a non-exempt corporation may be subject to income tax rates as high as 34% on income over $75,000.
Although incorporating in the State of Arizona appears to be a fairly simple process, it is only the beginning of the process. In order to take advantage of the protections a corporation may offer its shareholders, directors and officers, and to ensure that all of the corporate formalities and filings are adhered to by those responsible for operating the business and affairs of the corporation, it is advisable to consult with corporate and tax counsel, as well as a Certified Public Accountant for professional advice.
