Arizona offers many advantages for business owners. A low tax rate, light regulations, year-round sunny weather, and a growing population make the state ideal for those looking to locate a business there.

If looking to form a limited liability corporation (LLC), business owners often turn to Arizona. With low filing fees and the tax and liability protections afforded by LLCs, it’s a smart decision to form the business in the Copper State.

Advantages to Starting an LLC in Arizona

An LLC is one of the most common business types across the United States. The LLC structure has the best components of corporations and sole proprietorships. In addition, an LLC gives owners broad latitude with how their company is organized and taxed.

An LLC allows for owners, called members, to operate their business in multiple ways. If you are the only owner, then the LLC is a single-member LLC. If there are multiple owners, then it’s a multi-member LLC.

Operations offer some flexibility, too.

The business can be run as a member-managed business, meaning one or more of the owners is responsible for the day-to-day business operations. Or it can be run as a manager-managed entity, meaning the owner-members hire someone to run the company on their behalf.

Taxes

Taxes are a major reason why companies choose to organize as an LLC. With an LLC, the business is considered a pass-through entity. That status means that LLC owners report their share of business profits or losses directly on their personal tax returns, typically on a Schedule C form. For single-member LLCs, the owner reports all income or loss on their personal taxes. For a multi-member LLC, each owner passes through their share. Owners must also submit a Schedule K-1, which details the share of the business income with their tax return.

The business, while a separate legal entity, is not taxed directly. This approach also eliminates the risk of double-taxation that can occur in other business structures where the corporation is taxed first and then dividends paid are also taxed on individuals’ returns.

While there is no complex tax return to fill out for the LLC, the entity must file Form 1065 with the IRS.

With an LLC, owners also have tax flexibility regarding how they want to be taxed. They can choose the default, which is the pass-through taxation, or choose to have the LLC taxed as either an S-corporation or C-corporation, two other business entity types.

S-corporations are pass-through entities, like sole proprietorships. However, some businesses choose to elect S-corp taxation due to the employee tax rules.

As the owner of the LLC who works for the LLC being taxed as an S-corporation, you are considered an employee. That means only wages paid to the owner/employee are earned income and eligible to have FICA taxes for Social Security and Medicare removed.

Other business net earnings that pass through to owners are treated as dividend income. That means they are not considered passive income or subject to the SECA tax if the owner plays a material role in the business.

There are some restrictions on which LLCs can choose the S-corp status. For example, the company must have fewer than 100 employees.

With a C-corporation tax status, the LLC business can take advantage of other major tax benefits, but they are subject to double taxation.

However, individuals can calculate the rates of personal and corporate taxes to determine how much to pay themselves in salaries, how much to keep in the corporate offers, and how much to pay in dividends. Corporate tax rates may be lower, allowing business owners to shift assets legally while lowering their overall tax burden.

With a C-corporation tax structure, corporations can also deduct major expenses, including:

  • Employee benefits, such as health, dental, and life insurance
  • Profit sharing or stock options paid to employees
  • Employee educational expenses
  • Moving expenses
  • Vehicle expenses
  • Retirement plan contributions

These tax rules are complex but in certain situations can save you considerable money.

Liability Advantages to Forming an Arizona LLC

Tax considerations are one of the two major reasons most business owners form an Arizona LLC. Liability considerations are the other.

As a separate legal entity, the LLC itself can be sued and be responsible for business debts or judgments, such as during a bankruptcy.

When forming an LLC in Arizona, you are not personally liable, in most cases, for any judgments or debts. That means that creditors cannot come after the owners’ personal assets, such as the family home, cars, or bank accounts.

If the business fails, for example, it is the business that files for bankruptcy, not the owners themselves. That’s a major contrast from a sole proprietorship, where the business and the owner are one and the same from a legal standpoint.

While in most cases the individual owner cannot be held liable, that protection does not hold in cases of fraud, negligence, or where the owner has personally guaranteed debts.

Why Launch an LLC in Arizona?

There are many great reasons to start your business in Arizona. Here is a look at some of the top benefits.

Low Taxes on Income and Businesses

In addition to the tax benefits of forming an LLC, the state of Arizona is a very tax-friendly venue.

The individual income tax rate is one of the country’s lowest at 2.5 percent.

On the business side, the state has a 4.9 percent corporate income rate. The state sales tax rate is 5.6 percent and the maximum local sales tax rate is 5.3 percent. The average local sales tax rate is just 2.77 percent

There’s also no franchise tax in Arizona, which is a bonus given that many franchise owners select an LLC as their business structure.

Tax Credits

Arizona offers additional tax relief for businesses. There are many different programs, depending on the type of business. Here are a few of the programs available:

  • Accelerated depreciation to reduce personal property taxes for businesses
  • Tax credits for angel investorsfor capital investments in small businesses
  • Up to $9,000 in tax credits over three years for each net new job in the state
  • Tax exemptions for purchases of computer data center equipment
  • Reductions up to 80 percent in real estate and personal property taxes for businesses located in foreign trade zones or sub-zones
  • Sales tax exemptions for various types of machinery and equipment
  • Income tax credits for increased research and development work

Enterprise Zones

Arizona encourages businesses to relocate to Arizona or grow their business in some of the state’s most distressed areas. The incentives range greatly and are provided by the local government in each enterprise zone.

The incentives may include financial and economic perks, improved infrastructure, more public services, reduced regulatory burdens, and rehabilitation of structural components.

Innovation Incentives

Arizona is home to many different programs that encourage research, development, and innovation.

For example, there are two programs focused on the semiconductor industry. The Arizona Advanced Manufacturing Facilities grant program provides discounted access to facilities at Arizona State University for semiconductor startups. The state also is a facilitator of the National Semiconductor Economic Roadmap initiative to grow the industry in the United States.

Other programs include:

  • The Venture Ready Accelerator program connects entrepreneurs with experienced CEOs for rigorous coaching sessions over the course of a year.
  • The Arizona Innovation Challenge is one of the country’s largest business plan competitions. Up to 10 companies are selected for each round.
  • A 12-week program, the Virtual Accelerator, is designed for early-stage companies and includes online courses and mentoring for founders to learn, seek funding, and prepare for applications to other programs.
  • PropTech is a unique program that allows businesses to test, launch and scale new business models and ideas within Arizona. Participants in the PropTech Sandbox can test ideas and products within Arizona without obtaining the licensure or authorizations that would otherwise be required.

Starting an LLC in Arizona

What does it cost to start an LLC in Arizona? The startup costs are very low.

Like with any LLC registration in the United States, the LLC needs to be registered in the state where it operates. Businesses need to choose a statutory agent, also known as a registered agent, when forming as an LLC. The statutory agent can accept formal documents on the company’s behalf and will have a physical address to do so in the state.

Filing fees in Arizona are low, only $50. If you are an LLC in another state that does business in Arizona, the so-called “foreign LLC” fee is only $150.

Unlike in many other states, the expenses for doing business in Arizona are also low. Various certificates and statements provided by the Arizona Corporation Commission range from $5 to $50 apiece.

Arizona provides great benefits for any business looking to make it big. With an LLC business structure, Arizona businesses can take advantage of all the great tax and incentive programs in the state.