How to Incorporate in Arizona vs. How to Start an Arizona LLC
A Guide to Choosing the Best Business Entity in Arizona
One of the first steps to starting your own business is knowing what kind of structure is best for your business needs. For any state, the LLC and corporation structures are the most popular and offer the most benefits, but deciding between the two can be challenging. This guide will resolve your questions about both structures and help you decide which route to take. We’ll provide details on how to start an LLC and a corporation, the advantages and disadvantages of the structures, and a final analysis of both.
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LLCs vs. Corporations
There are basic characteristics for all states that are important to consider first when figuring out the right business structure for you:
- Minimal maintenance
LLCs have the appeal of providing entrepreneurs lower overall annual maintenance and paperwork, creating a big selling point for the LLC structure. Corporations require annual meetings, directors meetings, recorded meeting minutes, and a notable amount of paperwork, while LLCs have little to no maintenance of this type. LLCs not only require less resolutions, but can make executive decisions without the need to hold an official meeting.
- Tax structure
Unlike a corporation, which must pay its own taxes, LLCs are known as pass-through entities, meaning their tax structure is designed to have its profits, losses, credits, and expenses pass directly through to the owners, who report them on their personal income tax returns (similar to if the owners had a partnership or sole proprietorship). Corporations have a default tax structure known as the C corporation, but can potentially elect an S corporation tax status if it’s more beneficial. This structure imposes a double-taxation, where the net income is initially taxed, and then taxed a second time as personal income after the profits and losses are distributed to the shareholders. At first glance, double taxation may seem like a downside, but for the right business it can provide advantages, such as reinvesting profits into the business. When you elect an S corporation tax status, your corporation becomes a pass-through entity, and is allowed tax advantages such as dividends not subject to self-employment tax.
Investors and shareholders often prefer doing business with corporations. The structure of a corporation is reputable and familiar. Investors know exactly where their time and money will be going with a corporation. LLCs can still be divided into percentages for members, but there is more trust behind the prominence of investing in stock within a corporation. Consider a corporation if you are serious about attracting investors.
A corporation is the oldest form of business entity, and one of the most prestigious. When your business name contains “Inc” or “Corp” at the end, it conveys a sense of prestige and notoriety. The LLC ending still gives an extra boost of legitimacy, an often times offer better asset protection for a business.
AZ LLCs vs. AZ Corporations
After understanding the general advantages and disadvantages between LLCs and corporations, we’ll cover the specifics of why an Arizona LLC or Arizona corporation is better for your business. Each state has its own set of statutes that govern the way its businesses operate, indicating the importance of understanding these differences on a detailed level. The information in this section will discuss the unique differences among the Arizona LLC and the Arizona corporation.
- Arizona Transaction Privilege Tax
The Transaction Privilege Tax (TPT) for Arizona is a gross receipts tax on the income of retail businesses. Often times, businesses will pass this tax onto its customers, making it similar in appearance to a sales tax. The state TPT rate is 5.6%, and some counties and cities impose their own TPT on businesses, making the actual amount you pay higher.
- Arizona Corporate Income Tax
The corporate income tax is a 4.9% flat tax, rather than a progressive (scaled) tax—which can be more favorable for larger, high-profit businesses.
- Arizona Personal Income Tax
There are five personal income tax brackets in Arizona, and different tax brackets apply to different filing types. Married couples filing a joint income tax return have wider tax brackets. The lowest tax bracket begins at 2.59%, and the highest is 4.54%. For LLCs just starting out, the graduated scale can be the most advantageous, taking into consideration the size and expected income of your business.
- Certificate of Disclosure Form Required with Incorporation
If you’re forming a corporation in Arizona, you are required to submit a Certificate of Disclosure form for all your businesses directors, officers, or major shareholders. This form will disclose any criminal history that has not yet reached the period of time needed to fall off a person’s criminal record.
- Better Asset Protection for Arizona LLCs
A charging order is the “exclusive remedy” that a creditor can administer against the debtor of an LLC, which can lead to money or property an LLC tries to distribute from itself to its owner to instead go to the creditor. However, with a corporation, a creditor can use Arizona law to sell all of a corporation’s stock at an auction, wiping out the interest and value of a corporation. This difference in asset protection must be largely taken into consideration when choosing your business structure.
Arizona LLC or Arizona Corporation? Final Answer.
By nature, the LLC business structure is low maintenance and requires minimum effort, unlike the corporate structure. When examining the Arizona LLC, the initial filing to start an LLC requires more paperwork than just the Articles of Incorporation—you must also include a cover sheet, have your statutory agent fill out the Statutory Agent Acceptance form and publish a notice in the local paper of your newly-formed business (some counties are exempt from this). The initial filing to incorporate will require the same paperwork and publishing requirement, plus a Certificate of Disclosure.
However, this extra bit of paperwork for starting an LLC is trivial compared to Arizona not requiring LLCs the cost and hassle of filing an annual report every year (corporations do require an annual report). Combined with the relatively inexpensive cost to start an LLC and the quick paperwork processing times, maintaining an LLC in Arizona has lesser complexities, and more freedom of management, asset protection, and operational ease, while Arizona corporations have more initial and annual paperwork than a typical corporation. The state statutes governing Arizona businesses have recently adopted a new act for LLCs (the ALLCA), allowing them to be modernized and comparable to other states as well.
To answer whether an LLC or corporation is better for your needs, consider your business size and how important investors are for your business. An LLC will be your best choice if you are operating a small or medium-sized business, and investors are not one of your top priorities. If your business will be growing substantially and investors will be the key for that growth, and you have the means for the amount of paperwork required and understand the difference in the asset protection, your best bet will be to form a corporation.
How to Incorporate in Arizona
To incorporate in Arizona, you must complete the Articles of Incorporation with the Arizona Corporation Commission (ACC). There are three ways you can go about filing your Articles of Incorporation:
- Online (recommended)
- By postal mail
- In person
Unlike most states, where these filings normally take place with the Arizona Corporation Commission, Arizona strictly goes through the Arizona Corporation Commission. A name reservation or an initial filing immediately after formation will not be needed, although the Articles of Incorporation must be accompanied by:
- A cover sheet
- The Statutory Agent Acceptance form (to be completed by the Statutory Agent)
- A Certificate of Disclosure form
- A standard filing fee
How much does it cost to incorporate in Arizona?
The standard filing fee for Arizona is $60 ($95 total if expedited processing is needed).
To complete the Arizona Articles of Incorporation, you must include the following information:
Your Arizona corporation’s name must contain the words “association”, “bank”, “company”, “corporation”, “limited”, or “incorporated”, or an abbreviation of one of those words. It cannot contain the words “limited company” or “limited liability company”, or the abbreviations “L.L.C.”, “L.C.”, “LLC”, or “LC”.
Your corporation’s name must be distinguishable from the names of other business entities already on file with the Arizona Corporations Commission. Names may be checked for availability by searching the Arizona Corporation Commission business name database.
Briefly describe the character of affairs the corporation initially intends to conduct in Arizona.
Specify whether the corporation will or will not have members.
Corporations are required to provide a known place of business address in Arizona, and that address must be a street or physical address.
Include the name and address of each and every director (must have at least one). The directors are the people chosen to jointly oversee the activities of a company, and act on behalf of the shareholders.
Reserved for the name, required physical/street address, and optional mailing address of your Arizona statutory agent. All Arizona corporations are required by Arizona law to have a statutory agent physically located in the state to accept legal papers on behalf of the corporation. This can be an individual Arizona resident, a domestic corporation or LLC, or a foreign corporation or LLC authorized to do business in Arizona. This means that they must have a physical/street address—a P.O. box address won’t work.
The Statutory Agent Acceptance form (or Form M002i) must be submitted along with these Articles of Incorporation.
Include the name, address, and signature of each and every incorporator. An incorporator is an individual, corporation or association responsible for the process.
How to Start an LLC in Arizona
To form an LLC in Arizona, you will need to file the Articles of Organization with the Arizona Corporation Commission. There are three ways you can go about filing your Articles of Organization:
- Online (recommended)
- By postal mail
- In person
Unlike most states, where these filings normally take place with the Arizona Corporation Commission, Arizona strictly goes through the Arizona Corporation Commission. A name reservation or an initial filing immediately after formation will not be needed, although the Articles of Organization must be accompanied by:
- A cover sheet
- The Statutory Agent Acceptance form (to be completed by the Statutory Agent)
- A standard filing fee
Please note: As of September 1, 2019, Arizona LLCs are not required to have a known place of business in Arizona—only a mailing address inside or outside of Arizona.
How much does it cost to form an LLC in Arizona?
There is a standard filing fee of $50 to form an LLC in Arizona.
To complete the Arizona Articles of Organization, you must include the following information:
Choose whether you are starting an LLC or a professional LLC (a PLLC is formed specifically by people who will provide Arizona licensed professional services).
Your Arizona LLC’s name must contain the words “Limited Liability Company” or the abbreviations “LLC”, “L.L.C.”, “L.C.”, or “LC”. A professional LLC’s name must contain the words “professional limited liability company” or the abbreviations “P.L.L.C.,” “P.L.C.,” “PLLC,” or “PLC.” Your LLC’s name must be distinguishable from the names of other business entities already on file with the Arizona Corporations Commission. Names may be checked for availability by searching the Arizona Corporation Commission business name database.
If filing for an Arizona PLLC, describe the professional services that the PLLC will provide.
Reserved for the name, required physical/street address, and optional mailing address of your Arizona statutory agent. All Arizona LLCs are required by Arizona law to have a statutory agent physically located in the state to accept legal papers on behalf of the LLC. This can be an individual Arizona resident, a domestic corporation or LLC, or a foreign corporation or LLC authorized to do business in Arizona. This means that they MUST have a physical/street address—a P.O. box address won’t work.
The Statutory Agent Acceptance form (or Form M002i) must be submitted along with these Articles of Organization.
Corporations and limited liability companies are required to provide a known place of business address in Arizona, and that address must be a street or physical address. The Arizona known place of business address may be the same as the street address of the statutory agent.
Specify the LLC’s life period. Skip this section is the life period is perpetual (forever).
Choose whether your LLC will be manager-managed or member-managed. A member-managed LLC means all members will participate in the decision-making process of the LLC, and a manager-managed LLC relinquishes the authority of the members to the selected manager(s).
By credit card (Visa, MasterCard, or American Express) if paying in person, by check or money order if paying in person or by mail, and by cash if paying in person.
Arizona Annual Report Requirements
In order to keep your LLC or corporation in Arizona in good standing, you do need to complete a couple tasks with the state to keep your business entity up and running.
1. File Your Annual Report
2. File Your Arizona Business Taxes
Below, you’ll find instructions and resources to help you complete your annual maintenance.
What is an Arizona Annual Report?
Corporations in Arizona must submit an annual report each year with the Arizona Corporation Commission. This must be submitted by either your statutory agent or an officer listed on the report and has a $45 filing fee. The report can be submitted online through the Arizona Corporation Commission website or by postal mail, and is due by the anniversary date of the corporation’s formation. You can file up to three months before your due date.
Unlike most other states, Arizona does not require LLCs to file annual reports.
How do I file an annual report in Arizona?
You can file your annual report yourself or have your statutory agent file it on your behalf. The report can be submitted online through the Arizona Corporation Commission website, by postal mail, or in person, and must be accompanied by a cover sheet.
If filing by postal mail or in person, send to:
Arizona Corporation Commission
Corporations Division – Annual Reports
1300 W. Washington St.
Phoenix, Arizona 85007
How much does it cost to file an annual report in Arizona?
The cost to file an annual report is $45.
When are Arizona annual reports due?
Annual reports are due by the anniversary date of the corporation’s formation. You can file up to three months before your due date.
Arizona Business Taxes
Like most states, Arizona’s business taxes have many moving parts. For corporations, the state imposes a corporate income tax. For all businesses, the state imposes a Transaction Privilege Tax (TPT), which is a gross receipts tax on vendors.
The filings can be complicated and you may need the help of a CPA or a tax service to fulfill these requirements. This section will help get you started in understanding your business taxes.
Take a look at our Arizona Business Tax FAQ below:
What is an Arizona Transaction Privilege Tax (TPT)?
The TPT is a gross receipts tax that sellers pay on their income tax from retail sales, and is often referred to as a sales tax, since businesses will pass this tax onto its customers, turning it into something similar to a sales tax. The tax is based on the sales from certain business activities, not individual transactions. TPT is imposed on the seller for the privilege of doing business in the state.
How is the Arizona Transaction Privilege Tax calculated?
To calculate this tax, obtain the Transaction Privilege Tax Return form which will calculate your TPT owed and can be used to report gross income from business operations.
Reporting frequency changes depending on your tax liability. If your tax liability is between $500 and $1,250, you may file a return quarterly. If your tax liability is less than $500, then you may file a return annually. For new businesses, you may file on the frequency for your estimated future income for the next 12 months.
Who has to pay the Arizona Transaction Privilege Tax?
Any businesses selling a product or engaging in a service are subject to the TPT.
In Arizona, do I also have to file an income tax return for my LLC?
If your LLC is taxed as a partnership, you will need to file the Form 1065 informational return.
If your LLC is taxed as a disregarded entity, you will need to report income on your own personal income tax return, as well as Form 1040, to show the distribution of the businesses profits and losses.
What information is required for the TPT tax returns?
The TPT tax return is a two-page document that will require the following information:
• Taxpayer information such as taxpayer ID, license number, etc.
• Estimated TPT payment based on transaction numbers from page 2
• Profits, losses, and other transactional details regarding business earnings
What tax form does an Arizona corporation need to file?
Standard C corporations will need to file the Form 120. If elected to be taxed as an S corporation, you will need to file Form 120S.
What’s the Arizona corporate income tax rate?
The corporate income tax is a flat rate of 4.9%–one of the lowest rates in the US.
How are Arizona corporate income taxes calculated?
Arizona’s corporate income tax is calculated as a flat fee with a minimum tax of $50.
What’s the personal income tax rate in Arizona?
There are five personal income tax brackets in Arizona, and different tax brackets apply to different filing types.
Arizona – Single Tax Brackets
|Tax Bracket||Tax Rate|
When are my business tax returns due?
Standard C corporation income tax returns are due by the 15th day of the 4th month following the end of the taxable year, or April 15 for calendar year filers. For S corporations, taxes are due on the 15th day of the 3rd month following the close of the taxable year, or March 15 for calendar year filers.
For LLCs taxed as disregarded entities, informational tax returns are due by the 15th day of the 4th month following the end of the taxable year, or April 15 for calendar year filers. For LLCs taxed as partnerships, informational taxes are due on the 15th day of the 3rd month following the close of the taxable year, or March 15 for calendar year filers.