A partnership is an association of two or more individuals to operate a business and share its management and profits. Partnerships in Arizona are not required to register with the state to gain legal status, but corporations are required to register articles of incorporation with the Arizona Corporation Commission. A corporation’s shareholders are not personally liable for the debts and liabilities of the corporation; however, partners are personally responsible for the debts and liabilities of the partnership. As a result, partners often decide to incorporate their businesses to avoid liability for future company debts and liabilities.
Convene a partnership meeting and vote to dissolve the partnership. Dissolving the partnership needs to precede incorporation because partnerships and corporations are separate entities for tax purposes. Taxes on partnership income are paid by the individual partners, not the partnership. Federal taxes on corporate income are paid by the corporation -- not the shareholders -- but profits distributed by the corporation to the shareholders as dividends are subject to capital gains taxes.
Payoff all partnership debts and obligations, and divide the remaining assets among the partners. Final Internal Revenue Service Forms K-1 should be issued to the partners, and a final partnership tax return should be filed with the IRS.
Access the ACC online database and check whether the dissolved partnership’s name is available for use. It is possible to reserve a company name with the ACC office for 120 days, if you are not ready to register. The ACC rejects registrations submitted with company names that are the same or deceptively similar to names already in use in Arizona.
Retain a local statutory agent in Arizona. The purpose of the statutory agent is to receive and accept service of court papers. A corporation cannot serve as its own statutory agent, but it can designate a company officer or director as an individual statutory agent.
Download templates of the Arizona Articles of Incorporation and Certificate of Disclosure from the ACC website. The completed Articles of Incorporation and Certificate of Disclosure should be filed with the ACC, along with a Cover Sheet and the Statutory Agent Acceptance Form. The Articles of Incorporation disclose the purpose and location of the business, incorporator’s name, and number of shares authorized to be issued. The Certificate of Disclosure sets forth any criminal felony convictions of the company’s directors, officers or incorporators, as well as any bankruptcies or civil judgments involving fraud. The corporation comes into existence when the Articles of Incorporation are approved by the ACC.
Elect a minimum of three members to the corporation’s board of directors and convene a board meeting to adopt corporate bylaws and appoint company management officers. The bylaws set out the rules that govern the structure, management and operations of the corporation, and can contain any provisions not prohibited by law. Issue shares of stock to the former partners, now shareholders, in exchange for their capital contributions.
Close the IRS Employer Identification Number tax account for the dissolved partnership, and obtain another EIN for the new corporation. An EIN application (IRS Form SS-4) can be downloaded from the IRS website. It can also be filled in and filed online with the IRS, with an EIN issued instantaneously. The EIN application can also be filed via fax or postal mail.
Publish the Articles of Incorporation in a newspaper published in the same county as the new corporation for three weeks in a row. The Articles of Incorporation must be published within 60 days after they are filed with the ACC. File an affidavit of publication with the ACC within 90 days of filing the Articles of Incorporation as proof of compliance with the publication requirements.
Convert all business accounts from the partnership into the name of the corporation. It should be noted, however, that responsibility for business debts and obligations will not transfer automatically from the partnership to the new corporation. All partnership creditors should be contacted concerning changing the name of the account holder. Most creditors can be expected to add the new corporation to the account without releasing the partnership or partners from personal liability. This is because, under Arizona law, the effects of conversion from a partnership to a corporation will be prospective, not retrospective. Creation of the new corporation only affects future personal liability -- it will not protect the former partners (now shareholders) against personal liability for past actions or events.