How To Start A Business in Arizona

Starting a business is often full of uncertainty and questions, not the least of which is how to limit the personal liability of a business' owners by forming a limited liability entity, like a corporation or limited liability company ("LLC"), in the most tax-advantaged way.

In the United States, limited liability entities are so-called "creatures of state law" meaning that they are created via state law as opposed to federal law and each state has its own requirements. In Arizona, there are many types of limited liability entities that can be used to structure a business; however, two (2) of the most common are the corporation and the LLC, but what's the difference?

Corporation

A corporation is perhaps the first thing that comes to mind when talking about business structures. Corporations can provide limited liability protection for the owners of a corporation which effectively creates a "wall" between any creditors of the business and the personal assets of the owners, subject to exceptions.

The profits of a traditional corporation, often called a c-corporation, are subject to two levels of taxation, once and the entity level and once at the owner or shareholder level. However, the profits of a newer type of corporation, called an s-corporation, are not subject to two levels of taxation; rather, the profits of an s-corporation are taxed once at the owner or shareholder level.

Because publicly traded companies, such as those traded on the New York Stock Exchange or NASDAQ must be corporations, many business owners who aspire to own such companies choose to incorporate corporations.

LLC

Perhaps the most flexible form of limited liability entity is an LLC. An LLC is actually a hybrid of a corporation, which can provide limited liability, and a general partnership, which cannot provide limited liability.

The limited liability protection provided by an LLC is similar to that which is provided by a corporation, however, an LLC also provides greater tax flexibility and requires fewer ongoing formalities than a corporation.

Below is a list of some actions that apply to incorporation of an Arizona corporation or the organization of an Arizona LLC.

  1. Choose Business Name
  2. Choose Statutory Agent
  3. Draft & File Articles
  4. Publish Formation & File Affidavit of Publication
  5. Execute Shareholder or Operating Agreement
  6. Choose Federal & State Taxation
  7. Open Bank Account

1. Choose Business Name

Although an Arizona Corporation or LLC is organized pursuant to Arizona law, an Arizona Corporation's name or LLC's name is governed by both Arizona and federal law.

2. Choose Statutory Agent

Arizona law requires each Corporation or LLC to select and maintain an agent to receive service of process on behalf of such entity. While in some states, this agent may be know as a registered agent, such an agent is generally called a statutory agent in Arizona.

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3. Draft & File Articles

When incorporating a corporation, Arizona law requires the filing of Articles of Incorporation with Arizona's Corporation Commission. When organizing an LLC, however, Articles of Organization must be filed with Arizona's Corporation Commission.

5. Execute Shareholder or Operating Agreement

In order to set forth the rights and responsibilities of the owners of a corporation both one to another and to the corporation, many such owners execute a shareholder agreement. Shareholder agreements often contain provisions about profits losses, and distributions, management, voting, and membership changes. The LLC corollary of a shareholder agreement is called an operating agreement.

6. Choose Federal & State Taxation

Federal Taxation

As mentioned above, a corporation is taxed either as a c-corporation, pursuant to Subchapter C of the Internal Revenue Code or as an s-corporation pursuant to Subchapter S.

An LLC is perhaps the most flexible of any U.S. limited liability entities in terms of federal taxation. An Arizona LLC, can elect federal taxation as either, a(n): 

  1. Disregarded Entity
  2. Partnership
  3. S-Corporation
  4. C-Corporation

The Internal Revenue Service ("IRS") automatically classifies single-member LLCs as "disregarded entities" and attributes all income earned by such LLCs directly to their owners. This means, among other things, that the LLC does not need to file its own tax return and there is only one level of taxation, i.e. pass-through taxation. Single-member LLCs that accept this classification do not need to apply for an Employer Identification Number ("EIN") with the IRS.

The IRS automatically taxes multiple-member LLCs as partnerships pursuant to Subchapter K of the Internal Revenue Code ("IRC"). Subchapter K is quite flexible and provides pass-through taxation, however, it can be quite complex — in particular Section 704.

If an LLC's members do not wish to accept the default classification by the IRS, the members may elect taxation under either Subchapter S or Subchapter C. For more information about LLC taxation under Subchapter S, see the following blog post: Self-Employment Tax: LLC v. S-Corporation.

Multiple-member LLCs, LLCs taxed as S-Corporations, and LLCs taxed as C-Corporations likely need to apply for an Employer Identification Number ("EIN") with the IRS.

State Taxation

Depending upon the particular activities of a corporation or LLC, it may be subject to various state taxes, e.g. Arizona's Transaction Privilege Tax, that require additional steps and/or registrations.

7. Open Bank Account

In order to avoid so-called "piercing the corporate veil," i.e. court imposition of an corporation's or LLC's liabilities upon an corporation's shareholders or the LLC's members, both corporations and LLCs likely need to have their own bank accounts — even for single-owner corporations or single-member LLCs — so as not to commingle the corporation's or LLC's funds and those of the owners.

This brief overview of some important considerations associated with starting a business in Arizona is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

Arizona Business AttorneyDouglas K Cook is an Arizona business attorney with over 40 years of experience as a practicing attorney. Although Douglas K Cook's office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.

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