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Arizona is a great place for budding business owners to launch their ventures. But before you start crowdfunding or marketing your product, consider your business structure. LLCs are one of the most common business types entrepreneurs choose when establishing a new venture. Read on to learn what LLCs are, and how to form one in the state of Arizona.
What is an LLC?
A limited liability corporation (LLC) is a type of business structure that you can think of as a step up from a sole proprietorship and a step down from a corporation in terms of complexity. Forming an LLC affords its owners certain advantages when it comes to legal action brought against the business. For example, owners’ personal assets are considered separate from the business’s assets if somebody sues the business.
It’s important to remember that an LLC is a legal business structure but not a financial structure. For tax purposes, generally speaking, LLCs are pass-through organizations. What that means is that the business itself is not taxed. Instead, profits “pass through” to its owners, who pay tax on it the same way they would pay income tax. But LLCs also have the ability to choose other taxation styles, such as an S corp.
Is an LLC right for you?
The following considerations can help you decide if the LLC entity type is right for your business:
- How important is liability protection? Forming an LLC means your personal assets are protected against any defaulted loans or lawsuits brought against your business. However, this protection is contingent upon completion of paperwork, and you must keep your business finances separate from your personal finances. Is the liability protection important enough to you to justify this effort?
- Do you need to fundraise? LLCs are not able to raise money by issuing stock to investors. Is fundraising part of your business plan? Or will you bootstrap your business with your own funds?
- Can you afford corporate taxes? Corporations are taxed twice—the company pays corporate taxes on profits, and then shareholders (owners) pay personal taxes on the share of profits they receive. But LLCs are only taxed once—when profits “pass through” to owners and are recorded as income on their personal taxes. If you need to fundraise, you’ll also need to pay corporate taxes. Can you afford them?
1. Name your Arizona LLC
Aside from the usual considerations of naming your business—which is to say, developing a name that communicates what you do and ideally connects with your target market—you’ll need to keep Arizona’s regulations regarding LLC names in mind as you submit your formation documents.
LLC names in Arizona need to include “limited liability company,” “limited company,” “LLC,” “L.L.C.,” “LC,” or “L.C.” By the same token, they can’t include the words “association,” “corporation,” “incorporated” or any other language that implies any of those words.
The Arizona Corporation Commission (ACC) offers an online search tool to find out if your business name is already taken. And if you plan on forming an LLC with a given name but want to buy yourself some time, the Arizona Secretary of State allows you to register or reserve a trade name for up to five years.
2. Create a business plan
It’s a good idea for every business, no matter how simple or complex, to have a business plan that lays out basics like:
- Your business’s value proposition
- Clearly defined parameters of what kinds of goods and/or services your business provides
- Your target market
- How you plan to reach that target market
- Where your financing will come from and how you plan to keep your business afloat
If you have a business in Arizona, the state provides its own resources to help you formulate a business plan (like this checklist from the Arizona Commerce Authority). It also offers referrals to the Small Business Development Center Network, an organization that helps new business owners get the counseling and services they need to get set up correctly.
3. Get an employer identification number (EIN)
To file any of the necessary paperwork for your new LLC, you’ll need to obtain an employer identification number (EIN) from the IRS. This is like a Social Security number for businesses. It’s easy to apply for one, which is a good thing, since it’s absolutely mandatory.
4. File Arizona articles of organization
Once you’re ready to make it official, you’ll need to file articles of organization (Arizona’s version of articles of incorporation) with the ACC. These are the key formation documents for becoming an entity in the eyes of the state. You can submit your documents either in person or by mail to the Arizona Corporation Commission, Corporations Division, 1300 W. Washington Street, 1st Floor, Phoenix, AZ 85007-2929.
5. Choose a statutory agent in Arizona
In Arizona, you’ll also need to designate a statutory agent, which largely serves the same purpose as registered agents in other states. If the state needs to contact your business or if someone wants to serve your business with papers, they go to the statutory agent.
To accept an appointment as a statutory agent, you’ll need to fill out and submit form M002 on the ACC’s website.
6. Obtain business licenses and permits
You don’t need any particular business license to operate your business on the state level, but the local government or municipality where your business is based may have its own requirements. Phoenix, one of Arizona’s largest cities, has zoning and permit regulations in place for businesses including liquor stores, massage parlors, betting institutions, and escort services. You can check local governments’ individual requirements using the state’s checklist.
Depending on the nature of your business, you may need to apply for a transaction privilege tax (TPT) license, which Arizona uses in lieu of a sales tax. Applying for one costs only $12. Businesses that need to collect TPT include retail operations, contractors, and hospitality providers. You can see if your business needs a license as well as apply for one on the Arizona Department of Revenue’s website.
Certain professions, like nursing, lobbying, teaching, and real estate, require licensing to operate within the state as well.
7. Understand Arizona state tax requirements
In addition to paying TPT, businesses in Arizona are required to collect and remit a state withholding tax from their employees. You can learn more about the details of how to register and pay that tax through the Department of Revenue.
Otherwise, since your LLC is likely a pass-through organization, you’ll pay an income tax to the state as part of your personal taxes.
8. Prepare an operating agreement
As is the case in many other states, Arizona doesn’t require business owners to submit an operating agreement. That said, it’s a good idea to have one since it lays out important details about your company that could stave off conflict or difficulties later on. A good operating document includes things like what each LLC owner’s stake and relationship in the business is as well as the terms if one of them plans to exit the business.
9. Examine business insurance options in Arizona
If you will be hiring employees, you need to pay workers’ compensation insurance for each of those employees. Depending on the nature of your particular business, it might be a good idea to look into other forms of coverage as well. For example, if you rely on a vehicle for business purposes, you need separate insurance for the vehicle even if you also have insurance for personal use. Many businesses also purchase liability insurance, which protects them in the event of a lawsuit, and commercial property insurance, which protects business facilities and equipment.
10. Understand financial considerations
Unless you need rush service, it’s very inexpensive to submit your LLC paperwork to the state. If you work in a profession that requires licensing from a governing body, you’ll need to factor those licensing costs into your operation as well.
But starting an LLC usually involves more than those upstart costs. For example, you may need to budget for:
- A domain name and website hosting
- Rent on an office or retail space
- Materials to make products
- Contract labor to perform services
- Marketing expenses, like advertising
- A point-of-sale system, payment processor, and hardware
- Tax advisory services or accounting support
Luckily, there are many ways your business can raise money.
- Personal savings. The first line of defense is to use your own money when starting a business.
- Crowdfunding. Crowdfunding platforms like Kickstarter can help you raise money from your community.
- Friends, family, or private investors. Friends, family members, angel investors, and even venture capitalists might consider investing in your business. If your investors want to be compensated with a share of the business, make sure your business structure allows you to issue shares.
- Traditional small-business loans. Offered by banks and backed by the federal government, small-business loans can help fund a new venture.
- Nontraditional small-business loans. Programs outside of the banking system may be able to offer funding that is easier to obtain and allows for more flexibility in payment plans. Shopify Capital also provides funding for small businesses with flexible repayment plans.
11. Market your LLC
Your marketing plan will vary from business to business, and you’ll want to tailor it to your target audience. Some standard steps to take to market your business include:
- Registering a domain name and launching a website
- Taking out ads in local publications or online
- Sending out mailers to people in your community advertising the business and any relevant deals
- Creating social media accounts to connect with your audience
Starting an LLC in Arizona FAQ
How much does it cost to start and maintain an LLC in Arizona?
The paperwork associated with starting an LLC in Arizona is minimal—less than $100. Filing articles of organization costs $50, and applying for a TPT license is $12.
Do you need a registered agent for your LLC in Arizona?
Arizona doesn’t call them “registered agents,” but yes, you do need a statutory agent for your LLC in Arizona to receive business-related paperwork from the state.
How do state taxes work for LLCs in Arizona?
If your business is subject to TPT, you will need to apply for a license from the state to collect that tax and then pay it to the state. Businesses that are required to collect TPT include retail stores, restaurants, bars, and contractors. Otherwise, there is no state sales tax. And since LLCs are pass-through entities by default, your state business taxes may boil down to simply paying income tax on your profits.