Choosing to form an LLC is a huge decision. Arizona has many benefits for business owners who are looking to do so, but it also comes with some risks.
The formation of an Arizona LLC is not a very difficult process, but it does require some work.
For this reason, this blog post will take you through each step of how to set up an LLC in Arizona and provide resources for more information along the way.
What is an Arizona LLC?
A limited liability company represents a business structure that is popular among entrepreneurs.
It combines the limited liability characteristic of a corporation with the tax benefits and pass-through taxation of a partnership or sole proprietorship.
With an Arizona LLC, members have many protections from being held personally liable for lawsuits or debts that arise in connection to their businesses - however, they are required to pay federal income taxes on their share of company profits or losses.
The LLC is designed to protect the personal assets of its owners - including your house, cars, and bank accounts.
For example, if a customer wins a large lawsuit against an Arizona LLC that you own, they may be able to seize funds from your business checking account but not from your personal checking account.
What Are the Benefits of Arizona LLCs?
A limited liability company is a business structure that provides small-business owners with the same protections and tax benefits as other, more complex structures such as corporations or partnerships.
Personal liability protection is one of the biggest benefits for LLC owners. With limited liability protection, LLCs are perfect for both small and large companies.
An Arizona limited liability company is designed to protect the personal assets of its owners - including your house, cars, and bank accounts.
Arizona LLCs also allow LLC members to choose between a manager-managed LLC and member-managed LLC.
The LLC designation offers lots of flexibility for members who want to split profits, share costs like rent and supplies, and offer employees ownership stakes.
LLC operating agreements make it easier than ever before to define ownership percentages and rights & responsibilities among LLC owners.
This agreement also helps establish how much money should be put into or withdrawn from the company bank account at any given time.
Lastly, LLC formation is not as expensive as many people think. In fact, you can get an Arizona LLC for less than $100.
An additional benefit to forming a business in this state is that many people do not realize how easy the LLC formation process is.
The process can usually be completed online within just a few hours without any outside submissions or filings with the Arizona Secretary of State's office.
What Are the Cons of Arizona LLCs?
The downsides to forming an LLC in Arizona are few. However, there is one main downside to consider before forming an LLC in this state.
The taxes LLCs pay vary from state to state. In Arizona, LLCs are treated as pass-through entities for tax purposes.
This means that taxes on profits and losses will be paid by the members of an Arizona LLC personally rather than taxed at a company level.
For this reason, if you expect to generate large sums of profit through your Arizona LLC, then this business structure might not be the most ideal for you.
On the other hand, if you are a small business owner who expects to make only modest profits, then you might be better of as a sole proprietorship after all.
As with any business structure decision, it is important to fully understand how each choice may affect you before making a final decision.
Discussing your options with an Arizona LLC formation specialist can help you better understand which option will work best for you and your company's unique needs.
Steps to Setting Up an LLC in Arizona
Setting up an Arizona LLC requires a legal and comprehensive understanding of Arizona law. That means you will have to make sure you are complying with all legal requirements.
The following steps are essential if you are planning on starting a limited liability company in Arizona.
Step 1: Pick a Business Name
Choosing the perfect Arizona LLC name is important. Arizona state law requires that the name of your LLC must be distinguishable on file with the Arizona Secretary of State (SOS).
This means you can't pick a business name already registered in Arizona or one that will likely cause confusion for an Arizona resident or company owner.
You should always check the SOS website to make sure no businesses are using similar names. Otherwise, you may face some legal issues down the road.
You can perform the business entity search by visiting Arizona Corporation Commission's website.
You also need to make sure your proposed business name doesn't infringe upon any trademarks and service marks because this could lead to complications when trying to obtain necessary licenses and permits from federal agencies like the U.S Patent Office.
Make sure it's not descriptive either because it might limit others from registering unique Arizona business names.
Arizona LLC registration doesn't require publication, so you don't have to worry about getting your name in a newspaper or other media outlet before filing for a certificate of formation.
For the detailed guidelines on Arizona LLC name reservation and requirements, visit Arizona Corporations Division website and read through the requirements.
The Arizona Corporate Commission is the only entity authorized to take care of name reservation applications.
Before submitting formation papers, all LLCs must get a Certificate of Name Reservation, which ensures that the selected name is free for use.
You can request this certificate either by mail or online. The online filing fee is $45, and if you choose to do it via mail, you'll have to pay $10.
Related: How to Set Up an LLC Anonymously
Step 2: Find a Statutory Agent
An Arizona statutory agent (known as a registered agent in other states) is a person or business entity that serves as an agent for limited liability companies.
An LLC statutory agent is similarly required to be registered with the Arizona Corporation Commission and has to be located in AZ, i.e., has to be a resident of the state.
Arizona law requires all business entities, including LLCs, to have a registered or registered agent service.
To select your statutory agent online, you can file online with the Arizona Corporation Commission website and pay a $50 fee once you fill in the Statutory Agent Acceptance form M002.
This form confirms that the statutory agent is ready to accept legal documents that are served on it.
This process can be done by mail too, but you will have to submit an additional document containing your registered agent's information if you choose this option. The filing fee is the same as when filed online.
Step 3: File Arizona LLC Articles of Organization
Articles of Organization represent the organization for your business, and they should be written in the language appropriate to Arizona LLC law.
Although you can file articles yourself if you are comfortable with legal lingo (and don't mind spending extra money on filing fees), most people find it easier to hire a lawyer or their registered agent service to perform this step for them.
The articles will contain basic information about your business: name, physical street address, and purpose, which must comply with all state laws.
There needs to be at least one member listed; this person has authority over formal decisions made by the members (owners) regarding running their new corporation or LLC - unless there's something else stated in those articles of the organization.
Typically, Articles should be accompanied by filing fee payment because it is paid upon filing articles. The fee for filing Arizona Articles of Organization is $50.
Step 4: Draft Your LLC Operating Agreement
Arizona LLC Operating Agreement is a must for you to set up your LLC. It is basically the law that governs how an LLC business will operate, and it covers different aspects of running the LLC, such as:
- Member's contribution;
- Managers (if any);
- Ownership transfer and buyback options;
and other important matters that should be considered to avoid future disputes between members or with third parties.
An LLC Operating Agreement can also determine whether there are penalty fees imposed if someone fails to contribute his/her fair share when needed, so this document has become increasingly popular among entrepreneurs these days not only because it offers them protection but mainly due to its relatively simple language compared with other legal documents.
The best thing about operating agreements is that they are custom-made according to the needs of each LLC.
Unlike Articles of Organization, an operating agreement doesn't have to be filed with the state.
Although the law doesn't require LLCs to have operating agreements, it's highly advisable to have it because the LLC members must ensure that everyone is well aware and in agreement with its terms.
You can draft your own operating agreement by finding free templates online. However, if you're new to LLCs, you may find seeking legal advice from professionals helpful.
Other Important Steps
After completing these steps, your LLC will be registered, and you can begin transacting business.
However, there are still some other important things to take care of before doing so.
Set Up a Business Bank Account
LLCs in Arizona need to have a separate bank account just for their LLC.
This is because personal asset protection shields owners from business debts and liabilities, but this separation isn't complete until the two accounts become entirely separate.
In order to make sure that your personal funds remain separated from those of the LLC, it's important not only to open an LLC-dedicated account at a different institution than where you hold personal or household funds - but also keep in mind how money flows into and out of your new company's accounts.
To set up a business bank account, you will also need an EIN.
Acquire an EIN
An EIN is an employer identification number, also called a federal tax identification number or federal employer identification number. It's the equivalent of your business's social security number.
You will need to acquire one in order to set up an LLC bank account for both your limited liability company and any other companies you wish to create.
Suppose you are only setting up one limited liability company. In that case, this process can be done with just one EIN - but if you plan on creating more businesses down the road, it may be helpful to obtain multiple ones now rather than waiting until later.
It is possible that some banks won't allow new LLCs without an EIN before opening an account (so make sure to check beforehand).
You will need to apply for your employer identification number through the Internal Revenue Service website. This service is free of charge.
Obtain a Business License
Obtaining a business license is extremely important, especially if you're planning on registering a professional limited liability company.
To make sure your limited liability company is in compliance with state laws, you need to be registered and have a business license.
The process for obtaining one varies from city to city, so it's best that you check with local authorities before going through the steps of registering an LLC.
If you're providing professional services through your LLC, a business license is a must. It's also best that you have one even if your limited liability company is not registered to provide professional services in the area.
It shows that you are operating legally and allows for the proper regulation of your limited liability company.
One of such licenses is the transaction privilege tax license, which allows you to transact business in a given city.
The requirements for obtaining this type of license might vary from city to city. You should check with the relevant Arizona commerce authority to find out what they are before going through the steps of applying for one.
Obtaining this license is done through the Department of Revenue either online or by mail.
Other business licenses that you might need include city, county, or state business licenses.
The specific requirements for these types of licenses also vary based on factors like the size of your LLC company and where it is located, among other things.
To check other requirements for business licenses in Arizona, contact the Arizona Department of Commerce and inquire about their license verification service, making it easy for you to check if your business is in compliance.
Arizona LLC Taxes
LLCs in Arizona are taxed as pass-through entities, which means that federal income taxes are not levied against the LLC.
The federal government considers an LLC to be a "pass-through" entity meaning that any profits or losses of the business are passed on directly to its members who report them on their individual federal tax returns.
This reduces paperwork because you don't need separate corporate federal tax filings. It also gives you more flexibility for managing your finances since there is no double taxation like with regular corporations.
However, this does mean that each member must pay self-employment taxes if they receive money from the company in exchange for services rendered.
This essentially functions like normal payroll withholding but under different names, so make sure you understand how it works before deciding whether or not to form an Arizona LLC.
The Arizona Department of Revenue has guidelines as to what types of businesses need to pay sales tax. If you belong to the group of businesses that need to collect sales tax, you will have to register for the seller's permit before collecting sales taxes.
An Arizona LLC choosing to be taxed as a corporation (whether it's S or C corporation) also needs to pay federal taxes, regardless of the business income it makes.
What is Arizona LLC Act?
The Arizona Limited Liability Company Act is the law that governs the formation and operation of Arizona LLCs.
The purpose of this Act was to develop a legal structure that would allow entrepreneurs to form their business entities through a regulated procedure that was different from the previous law that was obsolete and caused a lot of confusion among business owners.
How Much Does an LLC Cost in Arizona?
The minimum required cost is the amount you need for filing Articles of Organization, which is $50.The cost of an Arizona LLC will vary based on the services you need and how much time it will take for your attorney to complete the necessary steps.
Do I Need to Renew My LLC Every Year in Arizona?
Arizona LLC annual report is not required by state law. Although you don't have to renew your LLC, you might need to renew the business licenses and permits on an annual basis.
Can I Form a Foreign LLC in Arizona?
Yes, a foreign LLC is allowed to transact business in Arizona, provided that it files a Foreign Registration Statement. This document is filed with the Arizona Corporation Commission in person or by mail and is accompanied by a $150 filing fee.
Does Arizona Allow LLC Domestication?
Yes, Arizona allows LLC domestication. The chances are you will have to make an amendment to your previous Articles of Organization, and you will also have to file Articles of Domestication with the Arizona Corporation Commission.
Can an Arizona LLC Have an Out-Of-State Address?
Every LLC in Arizona needs to have its principal address in the state.
Does Arizona Need an Operating Agreement for an LLC?
No, Arizona LLCs don't need to file an operating agreement with the state. However, it is recommended to have a written LLC agreement that will govern how your business is run and help avoid future misunderstandings between members of your LLC.
How Do I Add a Member to My LLC in Arizona?
Adding a member to your multi-member LLC in Arizona is a simple process. In order to add a member, your LLC will need to file an Articles of Amendment with the AZ Corporation Commission. The filing fee for this service is $25.
How Fast Can I Register an LLC in Arizona?
The registration process for LLCs in Arizona can take up to 5 weeks. However, you can shorten this period drastically if you opt for expedited processing.
With expedited processing, the registration process will take no more than a week. The fee for expedited processing is $35.
Can I Act as My Own Statutory Agent in Arizona?
Yes, an Arizona statutory agent can be anyone who is 18 years old and lives in Arizona. The statutory agent can resign at any time by filing an application with the AZ Corporation Commission.
When setting up your LLC in Arizona, you should always seek professional help.
While it is possible to set up an LLC by yourself, there are many regulations that you must follow, and mistakes can happen if not done correctly.
Suppose you want to do everything by the books and avoid any potential legal issues down the line. In that case, we recommend seeking out a licensed attorney who specializes in corporate law for assistance with all of your needs.