Arizona is home to over 550,000 small businesses in agriculture, technology, health, manufacturing, and other industries. The warm weather, natural beauty of the outdoors, and bustling tourist scene contribute to a strong small business environment in Arizona. If you operate a business in Arizona, you’ll need to choose a business entity structure for your company.
There are several business structures you can opt from, among them the limited liability company (LLC). The LLC is a hybrid business structure somewhere between a corporation and a partnership. The legal protection and tax flexibility that an LLC offers can be very attractive to small businesses. Starting an LLC in Arizona is pretty easy if you follow the steps we’ve outlined below. In this guide on starting an LLC in Arizona, we’ll give you step by step instructions to launch your Arizona LLC and maintain it in good standing.
Starting an LLC in Arizona: Step-by-Step Instructions
Arizona LLCs must register with the Arizona Corporation Commission. The Commission sets the rules, requirements, and fees to start an LLC in Arizona and to operate an out-of-state LLC in Arizona.
Here are step-by-step instructions for starting an LLC in Arizona:
Step 1: Choose a Name for Your Arizona LLC
The first step is to choose a unique name for your Arizona LLC. Like other states, Arizona requires that your LLC have a different name from other active businesses that have registered with the Arizona Corporation Commission. For example, if a company called “A Great Bakery, LLC” already exists in Arizona, then you probably can’t call your LLC “The Great Bakery, LLC.” Choosing a unique name prevents confusion among customers and members of the public.
Name Availability and Name Reservation
We suggest checking if your business name is available by reviewing Arizona’s business name database. The name of an Arizona LLC has to end with one of the following words or abbreviations: “limited liability company,” “limited company,” “L.L.C.,” “L.C.,” “LLC,” or “LC.” Certain words, like “association,” “corporation,” and “incorporated,” cannot appear in an LLC’s name because it would mislead the public about the type of business entity structure.
Once you find an available name on Arizona’s business entity database, you can reserve the name for up to 120 days by filing a Name Reservation Application (L001.002). This application can be filed by mail, or for fastest processing, reserve a name online. The online reservation costs $45, and the paper reservation costs $10. Reserving the name ensures it will be available until you have time to file your Arizona LLC’s formation documents.
Professional LLCs in Arizona
Certain licensed professionals, such as doctors and lawyers, can form a professional limited liability company (PLLC). The name of your PLLC should end with one of the following words or abbreviations: “professional limited liability company,” “P.L.L.C.,” “P.L.C.,” “PLLC,” or “PLC.” Other than naming conventions, most of the rules for regular LLCs in Arizona also apply to PLLCs.
Arizona LLCs With Trade Names
Sometimes, businesses want the ability to operate under a trade name. For example, your LLC’s name might be “Jane’s Event and Party Supply Store, LLC,” but you might like to use the trade name “Jane’s Parties” in your marketing and business signage. In this case, you’ll need to make sure that the trade name “Jane’s Parties” isn’t in use by any other Arizona business. You’ll also need to register the trade name with a different state agency, the Arizona Secretary of State.
Source: AZ Corporation Commission
Step 2: Choose a Statutory Agent in Arizona
When starting an LLC in Arizona, you have to choose a statutory agent to accept service of process and official mail on your business’s behalf. The statutory agent, which most other states call a registered agent, is an individual or business entity that maintains a physical office in Arizona and serves as your LLC’s main point of contact with the state. If your business is sued, the statutory agent will be the first to notify you.
In Arizona, a statutory agent can be an individual or a company. An individual statutory agent must be an Arizona resident, at least 18 years old, and available during normal business hours. A company that’s authorized to do business in Arizona can also serve as the statutory agent. Either way, make sure your statutory agent has a physical address in Arizona (P.O. boxes are not sufficient).
You or another owner of the business can serve as the registered agent for your Arizona LLC, but then your name and address will appear in the state’s public records. For privacy reasons and convenience, most small business owners opt to use a commercial provider as their statutory agent. We suggest trying IncFile, an online legal service that is licensed to provide registered agent services in all 50 states. When you form your LLC on IncFile, they’ll include one year of free registered agent service with your order.
Step 3: Obtain Arizona Business Licenses
Companies in some industries will need a business license to operate in Arizona. Figuring out license requirements can be challenging because not all businesses need a license and because there’s no central licensing office in Arizona.
The city or county where your company operates might require you to obtain a business license. There’s no statewide business license. You have to contact your city or county office to learn about local licensing requirements.
There are a few professions that are regulated at the state level. These include acupuncturists, chiropractors, barbers, and pharmacists, to name a few. If you’re unsure if your industry needs a state or local license, check out the list of Arizona regulatory agencies.
On a statewide basis, the Arizona Department of Revenue gives licenses to businesses that sell goods or services subject to sales tax. Arizona calls sales tax transaction privilege tax. You’ll be required to collect this tax from your customers and remit the tax to the state on a quarterly, monthly, or annual basis. The frequency depends on the amount of tax you collect.
Step 4: File Your Articles of Organization
Next, you’ll file your Articles of Organization (Form L010.003) with the Arizona Corporation Commission. Along with your articles, you have to submit a Statutory Agent Acceptance (Form M002) and Cover Sheet. You can either submit these forms by mail or file online. The filing fee is $50.
The articles of organization officially establish your business as an LLC that’s authorized to do business in Arizona.
The Arizona articles of organization will include the following information:
- Type of LLC (regular LLC or PLLC)
- Name of the LLC
- Statutory agent’s name and address (P.O. boxes insufficient)
- The LLC’s address in Arizona
- Duration of the LLC if it dissolves on a specific date
- Whether the LLC is member-managed or manager-managed
- Name and signature of the person filling out the form
The Arizona Corporation Commission will examine the articles of organization to make sure all the information is correctly filled out. If everything checks out, they will file the articles, and they will become a matter of public record. Regular processing time is about six to eight business days, but you can pay an extra fee for expedited processing.
Source: AZ Corporation Commission
Foreign LLCs Operating in Arizona
An LLC that already exists and was formed in another state is considered a foreign LLC. If you have a foreign LLC that you’d like to operate in Arizona, you have to fill out an Application for Registration of Foreign LLC (Form L025.002). The filing fee is $150.
Step 5: Draft an LLC Operating Agreement
An LLC operating agreement lays out the rules for how your LLC will be run on a daily basis, and in multi-member LLCs, it also specifies the rights and responsibilities of each member. The state of Arizona doesn’t legally require LLCs to have an operating agreement, but it’s highly recommended that you have one.
Here’s what the operating agreement for your Arizona LLC should contain:
- A description of the LLC’s products or services
- Each member’s names and addresses
- The manager’s name and address if the LLC is manager-managed
- Each member’s financial contributions to the LLC
- Each member’s profit share in the LLC and voting rights
- The procedure for admitting new members to the LLC
- The procedure for electing a manager if applicable
- The LLC’s meeting schedule and voting procedures
- Terms and procedures for dissolving the LLC
After you draft your LLC operating agreement, all members should have the opportunity to review and sign it, after which you can store the agreement with other business records. If you’d like additional help in creating your LLC operating agreement, we recommend IncFile. When you use IncFile to form your LLC, they can also draft a custom operating agreement for you.
Step 6: Comply With Arizona Employer Obligations
In addition to the steps listed above, Arizona LLCs with employees have some additional obligations, including the following:
- Employee reporting: Federal and state law requires employers to report new employees within 20 days of their hire date to the Arizona New Hire Reporting Program.
- Employer withholding: In Arizona, employers have to withhold income taxes from employee wages and submit withheld payments to the state on a regular basis.
- Paying unemployment taxes: Most employers in Arizona have to pay unemployment taxes on a portion of employee wages. New businesses will be assigned a higher unemployment tax rate, which then reduces as the business ages.
- Purchasing workers compensation insurance: If your Arizona LLC has even one employee, you have to purchase workers compensation insurance. This includes members or managers of the LLC who are employees.
A business attorney who specializes in Arizona employment law can help you learn about additional requirements for employers and help you stay in compliance.
Step 7: Pay
Most LLCs are pass-through entities for income tax purposes. This means the LLC itself doesn’t pay an income tax. The owners, or members, of the LLC will pay Arizona state income taxes on their share of the LLC’s profits. Unlike some other states, Arizona does not require LLCs to file an annual report and does not charge a gross receipts tax or annual LLC fee.
The members of an LLC can choose for the LLC to be taxed as a C-corporation instead of a pass-through entity. If you elect corporation tax status for your LLC, the company will be subject to Arizona’s corporate tax rate and corporate tax rules.
Arizona LLCs that have employees, as we mentioned above, also have to pay unemployment taxes and withhold taxes from their employees’ paychecks.
Step 8: Comply With Federal Requirements
LLCs operating in Arizona have to comply with both state and federal law. LLCs are pass-through entities for federal income tax purposes, just like at the state level. Members of the LLC report their share of the LLC’s income on their personal income tax return. The LLC itself doesn’t pay a federal income tax.
If you choose for the LLC to be taxed as a C-corporation at the federal level, the LLC will pay a flat 21% federal corporate tax. A business entity that is taxed as a corporation is eligible to take additional deductions and tax credits.
As you might have guessed, there are additional federal taxes aside from income taxes. For instance, LLC members must pay a 15.3% federal self-employment tax to cover social security and Medicare obligations. Businesses with employees must withhold federal income taxes and payroll taxes from their workers’ wages and pay the employer share of payroll taxes. The federal government also charges an unemployment tax on employers.
Before filing your federal taxes, check whether your LLC needs a federal employer identification number (EIN). An EIN is necessary for LLCs with employees or multiple members, or LLCs that wanted to be treated as a corporation for tax purposes.
Step 9: Maintain Your Arizona LLC
After starting your Arizona LLC, you’ll need to make sure that your company remains in good standing with the state. One thing to focus on here is to keep your personal and business finances separate. This preserves limited liability for owners of the LLC and makes accounting and taxes easy.
Here are some tips for keeping business and personal finances separate:
- Open a business bank account that you use exclusively for business transactions
- Use a business credit card only for business expenses
- Use business loans only to cover business expenses and not for personal reasons
Along with these tips, it’s important to hold regular member meetings and document decisions in writing when a member or manager acts on behalf of the LLC.
Benefits and Drawbacks of Forming an Arizona LLC
When starting a new business, an LLC is one of several business models you can consider. The main advantage of an LLC is that the owners aren’t personally liable for business debts or obligations, which means their personal assets are protected. LLCs also have more tax flexibility, allowing members to choose between pass-through taxation and corporate taxation.
Drawbacks include high self-employment taxes for LLCs. It also is costly to start an LLC compared to a sole proprietorship or general partnership. And businesses that want to raise money from investors will typically need to form a corporation, not an LLC.
Here’s a closer look at the pros and cons of forming an LLC in Arizona:
- Owners of an LLC aren’t personally liable for business debts (as long as adequate separation is maintained between personal and business finances)
- LLCs have fewer recordkeeping requirements than corporations
- An LLC can choose whether to be taxed as a pass-through entity or corporation
- LLCs are more expensive to start than sole proprietorships and partnerships
- LLCs are subject to federal self-employment taxes on all profits
- LLCs can’t issue stock, so they are not well suited for raising money from investors
When evaluating the pros and cons of starting an LLC in Arizona, consider your business’s needs both now and later so that your business structure is appropriate for the long haul. Of course, you can always change your business structure, but choosing wisely at the outset saves time and money down the line.
Starting an LLC in Arizona: The Bottom Line
Starting a new business can be very exciting, but before you can focus on the day-to-day of running your company, you’ll need to choose a business structure. An LLC can be a good choice for small businesses, offering liability protection and tax options. If you follow the nine steps above, it’s also relatively easy to form and maintain an LLC in Arizona. We recommend getting started with IncFile once you’re ready to launch your Arizona LLC. IncFile has affordable pricing for business formation and includes one year of free registered agent service.