Max has a great idea for a business.
Now, he just needs to learn how to form a business in Arizona.
Choosing a Business Entity
First, he’ll need to choose what type of business he will operate. The structure he uses may affect his taxes, licenses and registrations, formation documents needed, and annual reports that may need to be filed.
In Arizona, business operators can choose from the following business entities:
The business owner has complete control over the business. However, the business typically ends when the owner passes away.
As for liability, the owner is personally liable. Unlike other business types, there’s no limited liability.
Sole proprietors pay taxes, of course. However, they avoid the double taxation issues that other business owners may face.
It’s fairly easy to start a sole proprietorship. Arizona imposes no state filing requirements, which simplifies the whole start up process.
As implied by its name, a partnership consists of partners. At least two people or entities are needed to form a partnership.
Like sole proprietors, partners are personally liable for issues related to the partnership.
Partners will pay taxes. However, they are not doubly taxed.
It’s a little more difficult to start a partnership than a sole proprietorship. Typically, partners enter into a partnership agreement. (This is a great time to address business succession issues!)
Limited Liability Companies
This business type combines some of the benefits of a partnership with benefits of a corporation. As implied by the name, members enjoy some limited personal liability. However, they may become liable if they don’t keep adequate records, conduct annual meetings, and send regular updates to the Arizona Corporation Commission.
The members of a limited liability company (LLC) are not doubly taxed.
Starting an LLC is a little more complex that the other two business entities we’ve looked at. For example, an LLC typically is formed using Articles of Organization and an Operating Agreement. It’s recommended that members of an LLC also execute a Buy-Sell Agreement. Keep in mind that your Articles of Organization need to be filed with the Arizona Corporation Commission.
A Professional Limited Liability Company (PLLC) is a certain type of LLC but with some significant differences. The members of a PLLC must be licensed or certified in their field (like lawyers or doctors). PLLCs only operate in the field their members are licensed in. So, a PLLC formed by real estate agents would not also be conducting business as a nail salon. These are just two of the differences between a PLLC and an LLC.
This business entity is treated as being separate and distinct from its owners, the stockholders. In a corporation, management is handled by the board of directors. People often refer to “S corporations” or “C corporations.” These names refer to federal taxes, not the type of business entity. When forming a corporation under Arizona law, you have two choices: for profit corporations and nonprofit corporations.
The shareholders and directors of a corporation receive individual liability protection.
Corporations are formed using Articles of Incorporation, Bylaws, and Shareholders Agreements. The Articles of Incorporation must be filed with, and approved by, the Arizona Corporation Commission.
When it comes to taxes, corporations are doubly taxed.
He decides to go with the sole proprietorship for now. He is concerned about liability. However, he likes the ease of startup. He probably can convert the company if he later takes on partners or feels an LLC or corporation would better suit his purposes.
What Registrations and Licenses Are Needed
Business entities are required to register with the state or get licenses, but it varies from business to business. One thing is sure: the business will need a name.
New business owners will check the Arizona Corporation Commission’s website to see if the name they want is available. If so, they can file a name reservation or register the name as a trade name on the Arizona Secretary of State’s website.
Registrations Needed – Taxes
As a small business operating in the state of Arizona, you’ll need to register for state taxes. Arizona collects a state income tax. Most businesses, then, will collect standard withholding taxes for their employees.
Your business may sell a product or service that makes you subject to the transaction privilege tax. Check with the Arizona Department of Revenue to find out if you need a state transaction privilege tax license.
Some businesses may be taxed for specific services. Sellers of wholesale tobacco products, liquor distributors, and bingo operators are three examples. Each is taxed tax related to their product or services.
Certain business entities – like corporations or partnerships – may be taxed differently than others. For example, partnerships will file Arizona Form 165 every year to see how much income tax to pay.
And, of course, you’ll need to pay federal income taxes. Some business owners pay quarterly taxes to the IRS to make the tax bite a little easier.
Licenses and Permits, Too
Some small business owners must get one or more licenses or permits. This depends on the type of business you’re running and where it is located. Some businesses may be run by professionals who are licensed by state board, while others just need local permits. Generally, though, you may be required to get the following:
- State and city transaction privilege tax licenses,
- Regulatory or professional and special licensing and permits, or
- Local business/occupational licenses and permits.
The Arizona Department of Revenue has a webpage devoted to licensing and taxes: https://www.azdor.gov/Business/LicensingGuide.aspx.
For example, a real estate agent operating an agency in Chandler will be licensed by the Arizona Department of Real Estate. The agency may also pay local taxes and obtain permits from the city or county.
Max is operating a small book store and coffee shop. He is probably not required to get a professional license. However, he will need a business license from the city his store is located in. Max also plans to research other permits, including those related to handling food. It’s important that he check with state, local, and federal agencies to make sure he gets all the licenses and permits he needs.
Preparing and Filing Formation Documents
You’ve chosen the type of business you’ll be operating and learned more about licenses and registrations. Now, it’s time to put together the paperwork needed to open a business in Arizona.
Paperwork varies according to business entity. For example, an LLC submits Articles of Incorporation, while a corporation submits Articles of Incorporation. A sole proprietorship does not have to file any formation documents, although it is a good idea to register the trade name with the Arizona Secretary of State.
The Arizona Corporation Commission provides forms and instructions for creating the following entities:
- Limited Liability Company or Professional LLC,
- For profit corporation or professional corporation,
- Nonprofit corporation.
There’s also information about registering or applying for authority for foreign corporations.
As an example, to file a
To prepare and file documents
- Go to the Arizona Corporation Commission website: http://ecorp.azcc.gov/
- Select Search to see if your company name is available.
- Select File then “Create” to access available forms.
- Select the type of business you are forming.
As an example, if you chose Limited Liability Company, then Paper Articles of Organization, you’ll find forms for the Cover Sheet, Articles of Organization, Statutory Agent Acceptance, Manager Structure Attachment or Member Structure Attachment.
Once you’ve completed the documents you need, they can be filed online at the same website.
Because Max initially chose to operate as a sole proprietorship, he did not need to file formation documents. However, after a few months his attorney suggesting forming the business as a limited liability company. Max submitted the right forms, paid the right fees, and soon enjoyed the benefits of operating as an LLC.
Estate Planning for Your Business
Many, many business owners start operating their business and forget one very important task: estate planning.
Earlier in this article, we asked you to think about what would happen to your family if you did not make it home tonight.
Now, take a minute to ask yourself this question: what would happen to your business if you did not make it home tonight.
Also, what if you decide to retire or are involved in a messy divorce? A business succession plan could be the difference between continuing to provide an income for your family or closing the doors.
If you have partners, a buy-sell agreement offers some distinct benefits:
- Your partners should be able to choose their new partners if the buy-sell states your interest cannot be transferred to a third party without prior approval.
- Company assets can be protected against the claims of an ex-spouse or soon-to-be-ex-spouse.
- Tells company management how to calculate the value of the business if they need to buy out your interest.
- Your heirs can be compensated for your business interest, but the other partners will not be forced to work with them.
When you talk to your estate planning attorney, make sure your business interests are included in your plan.
As a sole proprietor then LLC member, Max knew the importance of careful planning. He spoke with his estate planning attorney about including his business interests in his estate plan. He and his new partners negotiated a buy-sell agreement so that his family would be financially secure without harming the business. Max had peace of mind knowing that his family and his business cared for.
Make Your Plans Today.
The attorneys at the Keystone Law Firm assist clients every day set up customized estate planning. Call us at (480) 418-8448 to set up an appointment. You may also want to check out our free videos at keystonelawfirm.com. Although located in Chandler, we also work with clients in the surrounding communities like Sun Lakes, Gilbert, Mesa, and Tempe.