How to Start a Business in Arizona: Legal Requirements
Once you’ve decided that you want to open a business, you’ll want to make sure that you’ve ticked all the legal boxes necessary to turn your business idea into an actionable plan.
Here’s a step-by-step guide on how to start a business in Arizona, from legally registering your business, to maximizing profit from your first sale.
Step 1: Organise business funding
You’ll have the clearest picture of your finances once you finalise your business plan. Your business plan should include the following items relating to finance:
- Initial start-up costs including property and equipment
- Marketing and advertising
- Finding employees
- Product development
- Logistics
- Income projections
Using this information, you’ll be able to decide which funding option is best for you. You might be able to finance your business yourself or with the help of friends and family. This is known as bootstrapping.
If you need some support, you could choose to apply for a small business loan through the bank, a credit union or another lending institution.
Similarly, you can check if you are eligible for any government business grants. These often depend on the area you’d like to open your business and the type of services you provide.
Step 2: Decide on a business entity
The first, essential element in forming a business is determining which legal structure best aligns with your business plan.
Your entity type impacts things like taxes, insurance, and how your business is organized legally. Some common structures for businesses in Arizona are:
Sole Proprietorships
The most common business structure in AZ [1], Sole Proprietorships are companies owned by people who go into business independently and trade under their own name. Income is charged as self-employment tax, and there is no state filing required.
Limited Liability Company (LLC)
LLCs offer the greatest protection for business owners. Unlike sole proprietorships, there is a separation between the individual and the business – i.e., the personal assets of business owners are protected if something goes wrong with the company, or if it runs into debt.
Another useful thing to know when forming an LLC is that they operate more like a partnership in how they provide management flexibility and the benefit of pass-through taxation.
All LLCs must be registered with the Arizona Corporation Commission. Profits are reported on the owners’ personal income tax forms, so the business is not subject to federal income tax.
General Partnerships
Partnerships are when two or more people enter business together. They require partnership agreements that protect the business owners from one another legally if there is a dispute. Income is taxed via personal tax and not through the partnership itself. Responsibility is typically equal among business owners: they both must contribute time and money, and both parties face equal risk if the company were to be sued.
Corporations
Corporations are individual entities that can be held fully liable, generate profit, and pay tax separately from their owners. The U.S. Small Business Administration deems corporations the safest type of structure in terms of protecting the personal assets of owners, as they are completely separate legal entities [2].
Corporations are governed by bylaws and are answerable to shareholders. State taxes must be paid by stockholders, and shareholder-employees must pay through personal taxes.
Step 3: Choose a legal business name
There are currently more than 550,000 small businesses in Arizona [3], so creating a unique business name might be hard!
Sole proprietorships and general partnerships have rules that make naming slightly more straightforward. Businesses with these structures must operate under the surname of the owner. If you want to name your business something different that doesn’t contain your name, the business owner(s) must file a fictitious name, or DBA (doing business as), with the state [4].
The Arizona Corporation Commission have some rules surrounding business names:
- All business names must also be distinguishable from other entity or trade names on file with the Arizona Corporation Commission and the Arizona Secretary of State.
- All LLCs must include the abbreviation ‘LLC’ in their business name.
- LLCs cannot include the words "association", "corporation", "incorporated" in their name.
- All for-profit corporations must include one of the following applicable words in this business name: "association", "company", "corporation", "limited", or "incorporated"
- Corporations cannot include ‘LLC’ in their name [5].
Step 4: Acquire Business Tax ID
In Arizona, businesses must file for both federal and state tax ID. This applies to all businesses, whether they are traditional, home-based, or online.
Federal Tax ID / Employer Identification Number (EIN)
An EIN is an employer identification number and is separate from your social security number. They are issued to business entities and individual owners, depending on your business entity type.
Sole proprietorships that do not have any employees do not require EINs and can use their personal AZ Tax ID number instead when completing taxes.
Businesses require EINs when filing employee tax returns, and for opening business bank accounts. EINs are free and can be applied for online on the Internal Revenue Services (IRS) website.
Arizona State Tax ID Number
Partnerships, LLCs, and corporations must be registered with the Arizona Department of Revenue. Unless you are a sole proprietor with no employees, you must have an EIN in order to get an Arizona state tax ID number.
Using the Department of Revenue Arizona Joint Tax Application, which is available online, you can apply for several licenses and tax registrations. This includes transaction privilege tax and state unemployment tax.
Submit your form, signature card, and filing fee by mailing it or by submitting it in person. You'll be granted your state tax ID number and licenses once the application is processed [6].
Step 5: Set up business bank accounts
Set up dedicated banking and credit accounts for better protection over your personal assets, and for tax purposes. This will separate your personal finances from your business, which in turn makes money management a lot easier.
Accounting and bookkeeping, managing business expenses, and business credit are all a lot easier to handle when you have an account dedicated to your business. In Arizona, you can only open a business bank account once you have your EIN.
Step 6: Obtain licenses and permits
The type of licenses and permits you need will depend on what type of business you own and the services you provide. It’ll also depend on your business location and structure.
Find out the licensing your business needs by performing a business license search or by utilizing the following resources:
- Local: Contact your county clerk, town clerk or a local business advisor
- State: Check the Arizona Department of Revenue's State Licensing page on their website
- Federal: Refer to the US Small Business Administration (SBA) guide
Step 7: Protect your business with insurance
The most common types of business insurance you should consider are General Liability Insurance, Workers’ Compensation Insurance, and Professional Liability Insurance.
In Arizona, businesses with one or more employees are required by law to have Workers' Compensation Insurance.
LLC experts TRUiC recommend that all small businesses purchase a general liability policy. Businesses selling professional advice or services, like consulting and accounting firms, should consider a professional liability policy, too [7]. Cyber Liability Insurance and Business Auto Insurance could also be extremely beneficial to protect your business assets.
Step 8: Invest in a leading POS system
When starting your own business, you’ll need a reliable sales and business management system to support your growth. Point of sale (POS) systems work as the backbone of retail and hospitality businesses. Designed to work as a complete business management system, you can control all vital aspects of your company from one cloud-based system.
Receive detailed analysis on the areas that matter to your business:
- Sales reports filtered by product, time, trend, or employee.
- Inventory reviews including profit margin, profitability, trend detection
- Multi-award-winning inventory management that syncs online sales and in-person sales for the most up-to-date stock levels.
- Automated orders that purchase stock once it falls below a certain level.
- Customer management systems that save customer contact details and shopping preferences for more targeted marketing.
- Integrations with over 100 apps including marketing, accounting, bookkeeping, and loyalty program apps.
- Employee management for more efficient scheduling and payroll.
If you’d like to learn more about our industry-leading software, request a free callback with one of our experts.