How to Start an LLC in Arizona? | Step-by-Step Guide

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How to Form an LLC in Arizona

Forming 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.

1. Choose the Type of Your Arizona LLC (Mandatory)

In my experience working with various Arizona LLCs, each structure offers distinct benefits and challenges:

• Single-Member LLC: Ideal for solo entrepreneurs, this structure offers simplicity in management and tax filing. However, it may provide less credibility with banks and investors compared to multi-member LLCs.
• Multi-Member LLC: Suitable for businesses with multiple owners, offering shared responsibility and diverse expertise. The drawback is potential conflicts in decision-making and profit-sharing.
• Series LLC: Useful for those managing multiple, separate business activities under one umbrella. It provides legal separation of assets and liabilities among different series. However, it's more complex to manage and may be confusing for tax and legal purposes.
• Professional LLC (PLLC): Designed for licensed professionals, ensuring liability protection while maintaining ethical standards of the profession. Its limitation is that it's only available to certain licensed professions like doctors and lawyers.

Each type caters to different business needs, so consider your specific situation and consult with a legal advisor to make the best choice for your Arizona LLC.

2. Choose a Name for Your LLC (Mandatory)

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 can perform the business entity search by visiting Arizona Corporation Commission through their website.

You also need to make sure your proposed business name doesn't infringe upon any trademarks and service marks to avoid legal issues and complications when trying to obtain necessary licenses.

Make sure it's not descriptive either because it might limit others from registering unique Arizona business names.

For detailed guidelines on Arizona LLC name reservation and requirements, visit the Arizona Corporations Commission website and read through the requirements.

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.

If you want to change your LLC name in Arizona, our simple guide will help you with the process.

Related Articles:

• How Long Does It Take To Form an LLC in Arizona
• How to Cancel an LLC in Arizona
• How to Set Up an LLC Anonymously

3. Select a Registered Agent (Mandatory)

From my experience in setting up LLCs in Arizona, choosing an LLC statutory agent (known in other states as a registered agent) is a crucial step.

This individual or entity acts as the official point of contact for your LLC and must be registered with the Arizona Corporation Commission. Importantly, they must be based in Arizona - a requirement I've found ensures prompt and reliable handling of legal documents.

Arizona law requires all business entities, including LLCs, to have a registered agent or registered agent service in Arizona.

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, even through a statutory agent.

4. File LLC Articles of Organization

Drawing from over a decade of experience in LLC formation, I advise my clients on the importance of the Articles of Organization that represent the organization for your business. They should be written in the language appropriate to Arizona LLC law.

You can draft and file the Articles of Organization yourself, or hire a lawyer to perform this step on your company's behalf.

The Articles of Organization will contain basic information about your business. The document must include the name, physical address, purpose, members and type of business [1].

The Articles of Organization must include one member to be 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.

The fee for filing Arizona Articles of Organization is \$50.

Steps to Take After Forming an LLC in Arizona

5. Create an LLC Operating Agreement (Optional, but Recommended)

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.

It covers different aspects of running the LLC including:

• Member's contribution
• Managers (if any)
• Ownership transfer and buyback options

An LLC Operating Agreement, popular among entrepreneurs for its straightforward language, can specify penalty fees for failing to contribute fair shares, offering valuable protection.

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 them 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.

6. Apply for an Employer Identification Number (EIN) (Optional, but Recommended)

Obtaining an EIN is another expense associated with forming an LLC in Arizona.

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 LLC and any other companies you wish to create.

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.

7. Open an LLC Bank Account (Optional, but Recommended)

LLCs in Arizona need to have a separate business 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.

To set up a business bank account, you will also need an EIN.

8. Obtain Business Licenses and Permits

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 shows that you are operating legally and allows for the proper regulation of your limited liability company.

One such license is the transaction privilege tax license, which allows you to transact business in a given city.

"The privilege tax license requirements can differ across cities; it's crucial to consult the relevant Arizona commerce authority for specifics before embarking on the application process."

- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions

Other licenses that you might need to 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.

9. Choosing Your Tax Structure

LLCs in Arizona are typically treated as pass-through entities for tax purposes, meaning profits or losses are passed directly to members who then report them on their personal federal tax returns.

This structure avoids the double taxation common in corporations, where both the company and the shareholders are taxed.

It simplifies paperwork by eliminating the need for separate corporate tax filings. However, members must pay self-employment taxes on any income received for services to the LLC.

Drawing from my experience, the pass-through nature of an LLC is advantageous for small to medium-sized businesses due to its simplicity and tax efficiency.

However, larger businesses or those seeking to retain earnings within the company may prefer being taxed as a corporation (S or C Corp) for potential tax benefits.

Changing your tax structure is possible, but it's important to be aware of the IRS deadlines. Generally, you must file an election form (like Form 8832 for C Corp or Form 2553 for S Corp) within 75 days of the start of the tax year when you want the change to take effect.

In terms of sales tax, if your Arizona LLC falls into a category that requires collecting sales tax, you must register for a seller's permit before starting to collect these taxes. The Arizona Department of Revenue provides guidelines on businesses that need to collect sales tax.

Benefits and Drawbacks of an LLC in Arizona

Benefits:

• Pass-Through Taxation: Arizona LLCs enjoy pass-through taxation, meaning profits are taxed only once at the member level, not at the corporate level. This avoids the double taxation seen in corporations.
• No Annual Report Requirement: In Arizona, LLCs are not required to file an annual report, which reduces administrative burdens significantly. This is particularly beneficial given the recent economic data showing that 25,424 new Arizona establishments were launched between March 2021 and March 2022, highlighting a vibrant startup scene [2].
• Asset Protection: LLCs in Arizona provide personal liability protection, safeguarding members' personal assets from business debts and lawsuits.
• Flexibility in Management and Ownership: Arizona LLCs offer flexibility in structuring management and ownership, accommodating different types of businesses and investor needs.

Drawbacks:

• Self-Employment Taxes: Members of Arizona LLCs must pay self-employment taxes on their income from the LLC, which can be higher than corporate tax rates.
• Limited Growth Potential: Since an LLC cannot issue stock, it may face limitations in raising capital compared to corporations.
• Statutory Agent Requirement: LLCs must appoint a statutory agent within Arizona, adding an extra step in the formation process.

DIY vs. Professional LLC Formation

DIY LLC Formation

Pros:

• Cost-Effective: DIY formation is generally less expensive since you are not paying for professional services.
• Learning Experience: Handling the process yourself can provide valuable insights into the legal and operational aspects of your LLC.

Cons:

• Time-Consuming: DIY requires significant time investment to research and understand state-specific rules and processes.
• Risk of Errors: Without legal expertise, there's a higher risk of making mistakes in paperwork or missing crucial legal requirements.

Professional LLC Formation

Pros:

• Expertise and Accuracy: Professionals bring legal knowledge, ensuring accurate and compliant filing.
• Time Savings: Delegating the process frees up time to focus on other aspects of your business.
• Customization and Guidance: Experts can tailor the LLC to your specific needs and offer ongoing advice for compliance and operation.

Cons:

• Higher Cost: Professional services come with fees, which can be a significant investment.
• Less Personal Involvement: You may miss out on learning some aspects of the LLC formation process.

FAQs

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Reference:

1. https://www.investopedia.com/terms/a/articles-of-organization.asp
2. https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-AZ.pdf