Incorporating in Arizona

Advantages of Starting a Company in Arizona

Arizona is increasingly becoming a popular choice for entrepreneurs to incorporate their businesses. With a robust economy, thriving industries, and a suite of business incentives, the state presents a compelling case for both residents and non-residents.

Business Environment and Opportunities

Arizona is home to a diverse range of thriving sectors including manufacturing, healthcare, information technology, and aerospace & defense. Startups and established businesses alike can tap into these vibrant industries and benefit from the state’s robust economy.

Business Incentives

In Arizona, businesses can benefit from a variety of state-offered incentives. Notable among these is the Enterprise Zone Program, designed to improve the economies of distressed areas within the state. This program offers incentives such as financial or economic incentives, improved infrastructure, increased public services, and regulatory simplification. For instance, in Pinal County, businesses are offered incentives like low-interest business financing, Rural Development (RD) funds, and more.

Moreover, Arizona offers other incentive programs such as the Angel Investment Tax Credit Program, Arizona Innovation Challenge, AZFAST Grants for Small Business Innovation Research (SBIR), and several others. These programs provide income tax credit to qualified investors, grants for early-stage tech ventures, and a variety of other benefits.

Personal Liability Protection and Privacy

Incorporating a business in Arizona provides personal liability protection to the owners, irrespective of whether the business is structured as a Corporation or an LLC. If the business incurs debts or faces legal judgments, the personal assets of the owners are protected. Moreover, an LLC in Arizona is not required to maintain any minutes of the meetings or resolutions, offering more privacy.

Costs to Incorporate

The costs associated with incorporating a business in Arizona are relatively modest. Registering a domestic LLC costs $50, with an additional $85 fee for the expedited process. For corporations, the Articles of Incorporation cost $60 to file. Corporations doing business in Arizona must also file an annual report with a $45 filing fee.

Taxes

Arizona has a corporate income tax rate of 6.97%. However, if the business is not conducting any activities in the state, it typically will not be liable for these taxes. It is recommended to consult a tax advisor for specific situations.

Considerations for Non-Residents

Non-residents can indeed open a company in Arizona. They will generally not have to pay state taxes if there is no business activity in the state, but it’s always wise to consult with a tax professional to understand the specific tax obligations.

Comparison with Other States

In comparison to states popular for incorporation like Delaware, Wyoming, Nevada, and Texas, Arizona offers competitive advantages. While states like Wyoming, Nevada, and Texas do not have corporate income tax, Arizona’s rate is lower than Delaware’s 8.7% and is competitive with many other states. Additionally, Arizona’s low cost of incorporation, combined with its business growth incentives, makes it an attractive option for new businesses.

In conclusion, Arizona provides an excellent environment for starting a company. With robust industries, diverse business incentives, and competitive incorporation costs, the state is a great choice for both residents and non-residents looking to form a business.

Choosing a Business Structure in Arizona

When starting a business in Arizona, one of the most crucial decisions you’ll have to make is choosing the right legal structure for your business. The type of business entity you choose will significantly impact various aspects of your business, including tax obligations, liability, and management structure. Here, we will delve into the most common types of business entities in Arizona – LLC, C Corporation, S Corporation, and Partnership – and explore their advantages and disadvantages.

Limited Liability Company (LLC)

An LLC, or Limited Liability Company, is a type of business structure that provides its owners (known as members) with limited liability protection. This means that the members are not personally liable for the company’s debts or legal judgments. This is one of the key advantages of an LLC and can provide peace of mind for business owners.

An LLC in Arizona also offers flexibility in terms of profit distribution. Unlike a corporation, which has a set structure for distributing profits, an LLC can choose different forms of distribution, providing more freedom to structure the business in a way that best meets the needs of its members.

Another key advantage of an LLC is that it is a “pass-through” entity for tax purposes. This means that the business itself does not pay taxes. Instead, profits and losses are passed through to the owners, who report them on their personal tax returns. This avoids the issue of double taxation, which can occur with other types of business structures.

However, it’s worth noting that members of an LLC may be subject to self-employment taxes on their share of the business’s profits. Additionally, in some cases, an LLC may be dissolved if a member leaves the business or passes away, which is something to consider when choosing this type of business structure.

C Corporation

A C Corporation is a more complex business structure that is typically used by larger businesses or those planning to seek venture capital. One of the primary advantages of a C Corporation is the ability to raise additional funds by selling stock. This can be particularly beneficial for businesses that need a significant amount of capital to start or expand.

Like an LLC, a C Corporation provides its shareholders with limited liability protection, which means that they are not personally liable for the company’s debts or legal judgments. In addition, corporations have an unlimited life, meaning they continue to exist even if a shareholder leaves the business or passes away.

However, one of the key drawbacks of a C Corporation is the issue of double taxation. The corporation pays taxes on its profits, and then shareholders pay taxes again on any dividends they receive. Furthermore, corporations face more regulatory requirements than other types of businesses, including the need to hold regular meetings and keep minutes of those meetings.

S Corporation

An S Corporation is a special type of corporation that is created through an IRS tax election. It combines the limited liability benefits of a corporation with the pass-through taxation benefits of an LLC or partnership. This means that like an LLC, an S Corporation avoids the issue of double taxation.

However, there are certain restrictions associated with an S Corporation. For instance, an S Corporation can have no more than 100 shareholders, and all shareholders must be U.S. citizens or residents. Additionally, like a C Corporation, an S Corporation is required to hold regular meetings and keep minutes of those meetings.

Partnership

A partnership is a business that is owned by two or more people, known as partners. Partnerships are relatively easy and inexpensive to form, and like LLCs and S Corporations, they are pass-through entities for tax purposes. This means the business itself does not pay income tax; instead, the income or loss is passed through to the partners, who report it on their personal tax returns.

However, partners in a general partnership are not only responsible for their own actions, but alsofor the actions of their other partners. In a general partnership, each partner is personally liable for the business’s debts and obligations. This means that if the business is unable to pay its debts, creditors could potentially go after the personal assets of the partners.

Moreover, disagreements between partners can lead to significant issues. Without a well-drafted partnership agreement, disputes about management decisions, profit distribution, or other aspects of the business could potentially lead to the dissolution of the partnership.

Which Structure is Right for Your Business?

The ideal structure for your business largely depends on your specific circumstances and objectives. If you’re a startup without definitive investors lined up, an LLC may be a suitable choice given its simplicity, flexibility, and lack of double taxation. It’s also less formal to set up and maintain compared to a corporation.

On the other hand, if you’re planning to attract investors or need to retain earnings in the company, a C Corporation might be the better option. It allows you to issue various types of stock, which can be an attractive point for potential investors.

Lastly, a partnership could be a good choice if you’re planning to start a business with one or more other people and prefer a simple, flexible business structure. However, it’s important to consider the potential liability issues and the need for a solid partnership agreement.

Considerations for Nonresidents

Nonresidents can open a company in Arizona. However, they should consider how running a business from afar might affect operations and be aware of any additional state taxes or reporting requirements. Even if there is no business activity in Arizona, they may still be subject to certain state taxes or regulations depending on the nature of the business and the state in which they reside.

Remember, it’s always recommended to seek professional advice when deciding on a business structure and operating a business as a nonresident. This can help ensure that you’re making the best decisions for your situation and that you’re in compliance with all relevant laws and regulations.

The Incorporation Process

Incorporating a business in Arizona involves several key steps:

1. Naming the company: The company name must be unique and not in use by any other business entity in the state. You can check for the availability of a business name on the Arizona Corporation Commission’s website.
2. Choosing a registered agent: This is a person or business entity that agrees to receive legal papers on your corporation’s behalf. The registered agent must have a physical street address in Arizona.
3. Filing the Articles of Incorporation: This document contains important information about your business and is filed with the Arizona Corporation Commission. The filing fee is $60​¹​​²​. I wasn’t able to find the exact time it takes for the approval of the Articles of Incorporation, but typically, it could take anywhere from a few days to a few weeks depending on the workload of the commission and the method of filing. For an expedited process, additional fees may apply.
4. Creating an Operating Agreement or Bylaws: Bylaws are a document that guides the internal management of your corporation. They are not filed with the state but kept internally. Operating agreements are similar but are used by LLCs.
5. Registering for state taxes: If your business has employees, sells goods, or will be a corporation, you’ll need to register for state taxes. I didn’t find specific information on how to register for state taxes in Arizona during my search, but typically this involves applying for an Employer Identification Number (EIN) from the IRS, and possibly registering for specific state-level tax identification numbers depending on your business activities.

In terms of tax rates, the corporate income tax in Arizona is 6.97%.

Post-Incorporation Steps

1. Obtain an Employer Identification Number (EIN) from the IRS. This can be done online, but if you are a nonresident without a Social Security Number, you will have to mail in Form SS-4 to the IRS.
2. Open a business bank account. As a nonresident, you’ll need to check with the bank’s policy. Some banks may allow you to open a business account remotely, while others may require you to visit a branch in person.
3. File annual reports. In Arizona, all corporations are required to file an annual report with a $45 filing fee​¹​.
4. Obtain the necessary business licenses. The exact licenses you need will depend on the type of business and the specific regulations of the state and city where you are operating.
5. Consider getting business insurance. This isn’t mandatory, but it can provide additional protection for your business.

Considerations for Nonresidents:

Nonresidents can start a business in Arizona, but there are some additional considerations. If you do not have a Social Security Number, you will not be able to get an EIN online and will need to mail in Form SS-4 to the IRS. You may also face additional requirements when opening a business bank account, and the specifics will depend on the bank’s policies.

Resources

for Entrepreneurs in Arizona:

1. The Arizona Entrepreneur’s Edge is a comprehensive resource guide to starting, operating, and growing a business in Arizona. It includes information on business planning, registration, licensing, financing, hiring, and more​²​.
2. The Arizona Commerce Authority provides numerous resources and programs for small businesses, including a Small Business Checklist, Incentive Programs, and a Small Business Digital Academy.
3. There are also Small Business Development Centers and local chambers of commerce throughout Arizona that provide resources and support for new businesses.

General Resources for Starting a Business in the USA

• U.S. Small Business Administration (SBA): The SBA offers a wealth of resources for small businesses, including guides to starting a business, information on business financing, and more.
• IRS Small Business and Self-Employed Tax Center: This is a great resource for tax information related to businesses.

SCORE: A nonprofit organization that provides free business mentoring and education.

FAQs

What are the key considerations when selecting a business entity type in Arizona?

One of the most critical decisions when starting a business in Arizona is the choice of business entity. The type of business entity you select will have significant implications for your liability, taxation, and business operations.

When choosing a business entity, you should consider the following key factors:

1. Liability Protection: One of the main reasons entrepreneurs opt for a Limited Liability Company (LLC) or a Corporation is to protect their personal assets. In these types of entities, owners’ personal assets are typically not at risk for business debts or liabilities.
2. Taxation: Different business entities are taxed differently. Sole proprietorships and partnerships are subject to pass-through taxation, which means profits are taxed on the owners’ personal income tax returns. In contrast, corporations are subject to double taxation, where profits are taxed at the corporate level and again when distributed to shareholders as dividends. However, corporations can choose to be taxed as an S corporation, which allows profits to pass through to shareholders’ personal tax returns, avoiding double taxation.
3. Management and Ownership Structure: Corporations have a formal management structure, including a board of directors and officers, while LLCs offer more flexibility. Ownership in a corporation is easily transferable through the sale of stock, while transferring ownership in an LLC can be more complex.
4. Funding Considerations: If you plan to raise capital from investors, they may prefer the familiar structure of a corporation, particularly a Delaware corporation.
5. Regulatory Compliance: Corporations tend to have more regulatory requirements, such as holding annual meetings and maintaining meeting minutes. In contrast, LLCs have fewer state-imposed annual requirements and ongoing formalities.
6. Future Needs: Consider your long-term business goals. Some entity types are more suitable for small, locally-operated businesses, while others are better for larger companies with the ambition of going public.

Before you decide, it’s essential to discuss your specific circumstances and objectives with a lawyer or a business advisor.

How does Arizona law treat foreign businesses?

Arizona law allows foreign businesses, which are businesses formed outside of Arizona, to operate within the state. However, before conducting business in Arizona, a foreign business must obtain a certificate of authority from the Arizona Corporation Commission.

To apply for this certificate, foreign businesses typically must submit an application along with a certificate of good standing or a similar document from their home state, verifying that the business is in good standing there. The application will require information about your business, such as its name, the state and date of its formation, its business purpose, and the address of its principal office.

Once the certificate of authority is obtained, the foreign business must comply with all the same rules and regulations as domestic businesses operating in Arizona. This includes filing annual reports and paying any necessary taxes and fees.

What are the annual requirements for a corporation in Arizona?

To maintain good standing as a corporation in Arizona, there are several annual requirements that must be met. First, every corporation must file an annual report with the Arizona Corporation Commission. This report provides updated information about the business, such as the names and addresses of the directors and officers, the address of the known place of business, and a brief description of the business activities. The filing fee for the annual report is $45.

In addition to filing the annual report, corporations in Arizona must also hold an annual meeting of shareholders. At this meeting, shareholders elect directors and conduct other business as necessary. Corporations must keep minutes of these meetings and other corporate records at their principal office.

Corporations in Arizona are also required to pay state and federal income taxes. The state corporate income tax rate in Arizona is 6.97%.

Remember that these requirements aregeneral in nature and there may be additional requirements depending on the specific nature of your corporation. Always consult with a corporate lawyer or business advisor to ensure you are meeting all necessary legal obligations.

What is the process of dissolution for a business in Arizona?

The dissolution of a business in Arizona involves a series of steps designed to ensure that a company closes down its operations legally and responsibly. The specific process can vary depending on the type of business entity, but here are the general steps:

1. Vote to Dissolve: For corporations, the board of directors must propose dissolution and the shareholders must approve the proposal. For LLCs, the members typically must approve the dissolution, as per the company’s operating agreement.
2. Filing of Articles of Dissolution: Once a decision has been made to dissolve, the business must file Articles of Dissolution with the Arizona Corporation Commission. A filing fee will apply.
3. Winding Up: Winding up involves settling the company’s affairs. This includes notifying creditors and claimants, settling liabilities, collecting and liquidating assets, and distributing any remaining assets to the owners.
4. Tax Clearance: Businesses must also ensure that all outstanding tax obligations are met. This typically involves filing final federal, state, and local tax returns.
5. Notice to Creditors: Arizona law requires that a dissolving business notify its creditors of the impending dissolution and provide information about how to submit claims.

Remember, dissolving a business is a serious decision and involves many legal responsibilities. It’s highly recommended to seek the advice of a business lawyer to ensure that the dissolution process is handled correctly.

Are there specific regulations for e-commerce businesses operating in Arizona?

E-commerce businesses operating in Arizona must comply with the same laws and regulations as any other business in terms of formation, taxation, and licensing. However, there are additional considerations that e-commerce businesses should be aware of.

Sales Tax: Arizona imposes a transaction privilege tax (TPT) on the gross receipts of retail sales, including online sales to Arizona residents. If your e-commerce business has a physical presence or ‘nexus’ in Arizona, you’re generally required to collect TPT from Arizona customers and remit it to the state.

Privacy Laws: If your e-commerce business collects personal information from customers, you must comply with applicable federal and state privacy laws. This includes providing a privacy policy that explains how you collect, use, and share customer information.

Consumer Protection Laws: E-commerce businesses must also comply with consumer protection laws, which prohibit deceptive business practices and ensure fair trade. This includes providing clear and accurate information about products, pricing, and return policies.

Remember, laws and regulations can change and vary by industry, so it’s important to consult with a business lawyer who is familiar with e-commerce.

How are online businesses taxed in Arizona?

Online businesses in Arizona are generally subject to the same tax laws as any other business, with additional considerations for online sales.

Transaction Privilege Tax (TPT): Arizona imposes a TPT, which is often referred to as a sales tax, on the gross receipts of retail sales. This includes online sales made to Arizona residents. If your online business has a physical presence or ‘nexus’ in Arizona, you’re generally required to collect TPT from Arizona customers and remit it to the state.

Corporate Income Tax: If your online business is incorporated, it will be subject to Arizona’s corporate income tax. As of 2023, the rate is 6.97%​¹​.

Federal Taxes: On the federal level, your online business will also be subject to income tax. The specifics of this will depend on the structure of your business (sole proprietorship, partnership, corporation, etc.).

Do I need to collect sales tax on online sales to out-of-state customers?

The requirement to collect sales tax from out-of-state customers depends on whether your business has a sales tax nexus in the customer’s state. The concept of ‘nexus’ has been expanded in recent years due to the Supreme Court’s decision in South Dakota v. Wayfair, Inc.

In general, if your business has a significant presence or economic activity in another state (such as sales over a certain threshold or a physical presence), you may be required to collect and remit sales tax to that state. This can vary by state, so it’s important to check the specific laws in the states where your customers are located.

What tax records do I need to keep for my online business?

For tax purposes, you should keep detailed records of your online business’s income and expenses. This includes sales receipts, invoices, purchase orders, expense receipts, and bank and credit card statements.

You should also keep records of any sales tax or TPT you collect and remit. These records should include the date and amount of each sale, the amount of tax collected, and documentation of tax remittances to the state.

The IRS generally recommends keeping tax records for at least three years from the date a tax return is filed, but some records may need to be kept longer. It’s a good idea to consult with a tax professional to understand your specific record-keeping requirements.

What if I sell to customers outside of Arizona?

If you’re selling products or services to customers outside of Arizona, you generally do not need to collect Arizona sales tax. However, you may be required to collect sales tax for the state where your customer is located, depending on that state’s tax laws and your business’s connection to that state (known as “nexus”).

Are there any special tax considerations for foreign owners of an Arizona LLC?

Foreign owners of an Arizona LLC are subject to U.S. tax reporting requirements. They must file a U.S. tax return and report their share of the LLC’s income, deductions, and credits. If the LLC has income effectively connected with a U.S. trade or business, the foreign owner may also owe U.S. income tax.