Kristina K. Esq. – Business Law Attorney
There are a number of different types of corporate structures available under Arizona state law that can be filed with Arizona Corporation Commission. One of the most common is a limited liability company, also known an LLC. It limits the personal liability of the owners like a corporation, but also allows the business to take advance of pass-through income tax like a partnership. It’s a bit of a hybrid, a best of both worlds compromise. While it is not necessary to form an LLC in order to start a business, the advantages are many. In fact, you don’t even need to have a business to start an LLC. You can use an Arizona LLC to run a business or you can use your LLC to purchase assets, such as real estate, vehicles, boats, and aircraft. Below is a comprehensive guide on creating an LLC in Arizona,
CONSIDERATIONS PRIOR TO FORMATION
LLC v. PLLC.
Arizona law recognizes two corporate structures for limited liability companies, one for non-professional practice (LLC) and one for professional practices (PLLC). The difference is that a PLLC means the company is organized to provide “professional services,” or any service that may be lawfully rendered only by a person licensed or otherwise authorized by a licensing authority in this state to render the service, such as law, accounting, real estate agents, or medicine. Most everything else is an LLC.
Choosing a name
The name of your LLC is one of the most important decisions you will make.While it is possible to change the name of your LLC later, it’s best to get it right the first time. An available name may be reserved for 120 days by filing an Application to Reserve Limited Liability Company Name with the Arizona Corporation Commission for $10. Be sure to check the Arizona Business Entity Search Page to make sure your chosen name hasn’t already been taken.
The name must contain any of the following:
- “limited liability company”
When in doubt, use “LLC.” The name of your LLC may contain the name of a member or manager. If your business name contains any of the following words, prior written approval must be obtained from the Arizona Department of Financial Institutions before registration is allowed:
- Credit Union;
- Savings Association;
- Building Association;
- Savings and Loan Association;
- Building and Loan Association;
- Savings Bank;
- Trust Company.
The name must not contain the words
- or an abbreviation of those words.
You also cannot include any words that may confuse the public that your business is a government agency.
Because most businesses must have some kind of an online presence in order to be successful, it is a smart idea to check to make sure your prospective business name is available as a URL and move quickly to purchase it before other competitive companies do the same.
FORMATION AND DOCUMENT CREATION
An Arizona LLC is created by filing Articles of Organization with the Arizona Corporation Commission for a $50 filing fee, and there is an additional $35 to expedite the process. The articles must include: the LLC’s name and address; the LLC’s duration, the names and addresses of the LLC’s mangers or members; the name, business address, and signature of the LLC’s statutory agent (see below). The period of duration of a limited liability company shall be perpetual unless the Articles of Organization place a limitation on the company’s existence or until dissolution or termination.
An organizer of an LLC in Arizona is the individual responsible for signing the Articles of Organization. It is possible for the organizer to be a member or a manager or an LLC, however, they do not have to be. By signing the Articles of Organization, the organizer does not assume any interest in the LLC.The articles may be completed and filed online. Alternatively, you can obtain a copy of the form on the Arizona Corporation Commission website and file it by postal mail. It takes about two to three weeks to process the document. If the filing requirements are not met or the required fees are not paid, the state will send notice that additional information is needed to comply with the requirements. You will have thirty days from that notice to meet the requirement.
When it comes to phone numbers, it’s a good idea to get a routing number rather than provide your mobile phone. It can be a toll-free 1-800 number or a local number where you can create pre-recorded messages and voicemails are sent directly to your email. Especially if you have a virtual office, this option helps to keep your mobile number from becoming public record and subject to unwanted telemarketers.
Three other documents must also be sent along with your Articles of Organization: cover sheet; statutory agent acceptance; and membership attachment. Upon approval, a letter will be sent to the statutory agent regarding publication requirements.
Statutory agent appointment.
Every Arizona LLC must have a “statutory agent.” A statutory agent is an individual or business entity that agrees to accept legal papers, also known as “service of process,” on behalf of the LLC, akin to a liaison between your company and the state of Arizona. The statutory agent can bean individual who is a permanent, full-time Arizona resident, a domestic corporation or LLC, or a foreign corporation or LLC authorized to do business in Arizona.
The statutory agent may be, and most often is, an individual within the LLC, including the managing member. It could also be a friend or family member. The statutory agent must have a physical street address in Arizona (no P.O. Box) and must accept the appointment in writing. This is important because in compliance with the publication requirement (see below) many members or their family or friends would not want to have their home address publicized in the newspaper.
Some LLCs have found it beneficial to enlist the help of a professional registered agent service at a small annual cost. This is especially important because LLCs might risk fines or automatic dissolutions if they miss a deadline for a state filling. As a result, the members lose their shield against personal liability and asset protection. Professional registered agents are trained to notify LLCs of upcoming deadlines and submitting the proper documentation on their behalf.
When filing, you will need to state whether your LLC will be member-managed or manager-managed. Arizona does not have a provision specifying where members/managers must reside, nor is there any age requirement. Their names and addresses are required to be listed in the Articles of Organization.
Member-managed, or decentralized management, is generally best when there are a small number of members who all have an input in the vision of the company as well as the more mundane or routine tasks and they live or work closely together to foster frequent meetings and ease of signing documents. This option is popular when an LLC is family-owned and operated. Manager-managed, or centralized management, is better suited if there are a large number of members and those members generally do not participate in the day-to-day management of the LLC. The Members however do vote the Manager into their position and also are required to vote on certain items, like adding or removing an LLC Member.
Addition of and removal of a member
There may come a time when it’s in the best interest of the LLC to add a member or to remove a member involuntarily. When you add a member or remove a member, it must first be done in writing, and it usually involves updated the operating agreement (see below) and filing an amendment with the Arizona Corporation commission. Changes to an LLC’s members or managers does not require publishing.
If the LLC is member-managed, simply put together a new agreement and have all members sign as an addendum to the operating agreement. If the LLC is manager-managed, the manager typically signs the new agreement with lists the new or removed member. The additional or removed member should still sign a separate document showing this or her acceptance of the change. This is especially true for removed members. A resignation or other agreement showing their acceptance, what they are receiving for their removal, and the business reason why is always a wise way of avoiding legal issues later on.
Be mindful that changes in members could impact the way the LLC is taxed and you may need to notify the IRS. For example, if your LLC is taxed as disregarded entity (sole proprietorship) and the LLC adds a member, then you will need to decide if you want to be taxed as a partnership (and file an informational partner return) or as a corporation.
Prepare an operating agreement.
An LLC operating agreement, a legal document outlining the ownership and operating procedures of an LLC, is not required in Arizona, but is highly advisable because it helps ensure the policies and procedures of the LLC are made clear and concise, it can reduce the risk of future conflict, and it helps preserve limited-liability status for tax purposes. It does not have to be and should not be filed with the state. It is an internal document. It does not have to be notarized, and it becomes binding once all members sign.
Note that some banks require an LLC to submit an operating agreement in order to open up a business bank account. Likewise, if your LLC is involved in real estate transactions, title companies might need a copy. Accountants and attorneys might also need to review a copy in case there are issues with taxing authorities or the law.
Several pieces of information are standard.
- the date of formation, the indemnification of the members, and how ownership is divided
- the purpose of the LLC
- whether the LLC is member-managed or manger-managed
- an explanation of capital contributions, simply states, how much an individual member is depositing into an LLC bank account
- an explanation of how profits and losses will be distributed (note: profits are not considered “salary”)
- how the LLC will be taxed
- voting rights and ownership percentage
- what happens when a member leaves the LLC and any buyout procedures
- what to do in case of dissolution
Even if your LLC is a single-member LLC (meaning, you’re the only member and manager), it is still best practice to have an Operating Agreement. In case of litigation or questions from the IRS, it shows that your LLC is run as a separate entity and that your personal assets remain protected.
Consideration of a “doing business as” (DBA) filing
Some LLCs might want to consider filing for a DBA, which Arizona law considers to be a trade name. It is not legally necessary. You may obtain one by filing with the Arizona Secretary of State and paying a $10 Trade Name Registration Application. Note that Arizona Secretary of State will reject the trade name if it conflicts with an existing name or an Arizona LLC, corporation, limited partnership or trade name.
Notice of LLC formation publication requirement.
Within sixty days after an LLC’s Articles of Organization have been approved, you must publish the Articles in a newspaper of general circulation in the Arizona County where it does business for three consecutive publications. A list of acceptable newspapers in each county is posted on the Arizona Corporation Commission website. The LLC may be subject to dissolution if it fails to publish. An important exception is that businesses whose principal address is in either Maricopa or Pima counties are under no obligation to meet this publishing requirement.
- The notice should include
- Your LLC’s name;
- the name and street address of your statutory agent;
- the address of the LLC’s principal place of business (if different from that of the Statutory Agent);
- whether your LLC is member-managed or manager-managed;
- and the name(s) and address(es) of either your LLC manager or each member of your LLC.
There is no need to file an affidavit of publication with the state.
It can get easy to just sign your name on behalf of the LLC because the LLC is itself a separate legal personality. But getting sloppy can leave you vulnerable to personality liability unwitting. As a result, when a member signs a document on behalf of the company, the signature block should read as follows:
- formal name of business, LLC
- member’s wet-ink signature
- member’s name
- member’s position in the LLC as an authorize representative
A foreign LLC is not a company outside the United States, but rather an LLC originally formed in another state that registers to do business in Arizona. The process of registering a foreign LLC in Arizona is called a “foreign qualification.” The process is very similar to forming an Arizona LLC, but there are a couple noted distinctions.
Listing the exact, true name of the Foreign LLC is required on the application. Applicants will also need to list the name of the LLC when it conducts business in Arizona. The name in Arizona can be the same name used elsewhere or a fictitious name if your name is not available for use in Arizona. The LLC must have a statutory agent, and that agent must have a physical address in Arizona. A post office box is not permitted. Also, each application must include a Certificate of Existence/Good Standing from the home state. The filing fee is $150. As with an Arizona LLC, there is no annual report to file.
Once approved, and in contrast to domestic LLCs, there is no requirement to publish any notice in any paper.
TAXES AND FINANCES
Federal tax requirements. Properly forming an LLC under Arizona law also requires compliance with numerous federal tax laws. LLCs in Arizona are treated as corporations, limited liability partnerships or single-member LLCs and are subject to federal income tax classifications. Most are familiar to all corporate structures, such as obtaining an IRS Employer Identification Number (EIN), somewhat like a social security number for a company. You must have approval of your LLC prior to obtaining your EIN. The laws vary if the LLC has only one member: an EIN is required if the sole member elects to have it taxed as a corporation rather than a sole proprietorship. It is necessary to open a business bank about, to file both federal and state taxes, and to hire employees.
Consult with a trusted accounted as to which tax structure is best for you. Most multi-member LLCs use Form 1065 Partnership Return, and most single-member LLCs use Form 1040 Schedule C. You may recall that is the most common form for individual returns because of the pass-through nature of the taxation. Depending on how your LLC is taxed and what your tax liability is, there is a good chance you may need to file quarterly estimated tax payments. These points may be helpful:
- LLC as LLP: file Form 1065, U.S. Return of
Partnership Income, and to show equal distribution of profits, losses and
credit on a Schedule K-1 with the IRS
- It is important to note that as with sole proprietorships, all Arizona LLC profits are taxed to the owners, even if they are not actually distributed by the LLC
- LLC as C Corp: file Form 8832, Entity
Classification Election, and must opt to be taxed as a corporation and Form
1120, U.S. Corporation Income Tax Return, with the IRS
- Because the corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to the taxable income of non-corporate taxpayers, it is possible a net income tax savings can result from this tax election.
- LLC as S Corp: file Form 1120S, U.S. Corporation Income Tax Return, accompanied by a report from each owner expressing the equal distribution of profits, losses and credit with the IRS
- LLC as Sole Proprietorship: must report all business income and expenses via the sole proprietor’s personal income tax returns, Schedule C (Form 1040), Profit or Loss from Business, with the IRS
Arizona state taxes.
Arizona has a number of taxing authorities, and your LLC could be subject to several of them. In some cases, for example if you will be selling goods and collecting sales tax or if you have employees, you’ll need to register with the Arizona Department of Revenue in order to pay the proper state sales taxes as an Arizona Transaction Privilege Tax (TPT) (in other states, this is referred to as a sales tax license, tax license, vendor license, wholesale license, or resale license). Rates will vary. And if your LLC employees Arizona residents, then it must register for unemployment tax and employee withholding tax, also through the Department of Revenue.
Be careful about local taxes, too. Some counties and cities have their own tax requirements. For example, if you’re main place of business is in Phoenix, then the additional sales tax is 8.6%, which includes 2.3% for the city and 0.7% for the county in addition to the TPT of 5.6%.
There is no required annual report that LLCs must file nor any annual fee that must be paid to Arizona.
Business bank account and credit/debit card.
It is essential that an LLC have its own separate bank account. The main reason why most people engage themselves in some form of corporate structure is to shield themselves and their assets from personal liability. When funds are comingled, however, then it’s difficult for a creditor or a litigant to determine which assets belong to the LLC and which belong to a member. Members can protect themselves by separating LLC and company assets in separate accounts. This also make the payment of state and federal taxes so much easier. When choosing a bank, inquire into the minimum initial deposit, minimum balance requirement, and monthly maintenance fee (if any).
In most cases, in order to open a business bank account, it’s important to have a state-approved Articles of Organization, the approval letter of your LLC from the state, your EIN, a photo identification (like a driver’s license), and an Operating Agreement (generally not needed, but smart to bring anyway).
Also, given the number of mobile phone apps and financial programs, consider getting a credit or debit card for your LLC. It syncs with your bank account automatically, and matches transactions to profits and losses. You’ll be better able to manage and view your expenses while also establishing a history of good credit that can help you raise capital later on.
Insurance is always ones of those investments we make that we hope we will never use. As your LLC grows (and, depending on your business, at inception), it is wise to consider purchasing insurance to help you manage risks and further protect you and the LLC.
Consider, at the least, a general liability insurance policy. This blanket protection protects an LLC from lawsuits, often providing for attorneys and covering the costs of money damages from a settlement or lawsuit. This can be especially important for a small business operating on lean margins and with a modest operating account.
For those operating a PLLC, it’s nearly certain that the regulatory body overseeing your profession requires you to carry some type of malpractice insurance. This protects against business errors, and like general liability insurance, often pays for counsel and damages.
Some LLCs engage in more physical or hands-on work. For these businesses, workers’ compensation insurance is a must. It covers job-related injuries, including death, for the employees of the LLC and their estates.
Not all LLCs need business licenses or permits. Three of the most common types of business licenses are the Transaction Privilege Tax; the Local Business License; and Regulatory (Professional/Special License).
The Transaction Privilege Tax, also described as the sales tax above, taxes sellers for the “privilege” of doing business in Arizona. A local business license may be necessary depending on the county and city where your LLC does business. And if you’re a PLLC, you will certainly need a regulatory license for offering professional services like law, medicine, or accounting or even in industries subject to government regulation like firearms, mining, and drilling.
Hiring the right employees can make or break your LLC in the beginning. As the old adage goes, “hire slow, fire fast.” But as your business expands, take care to make sure that your LLC complies with all relevant employment laws.
Verify that all new employees are legally able to work in the United States. There are several document (or combinations of documents) that can help you avoid violating immigration laws. Report employees as “new hires” to the state, and provide them information about your workers’ compensation insurance policy, if relevant. The minimum wage in Arizona is $11.00 per hour, and ages must be paid two or more days a month, but no more than every sixteen days. It is your responsibility to withhold employee taxes, unless the individuals working for you are independent contractors. In those case, they will be responsible for reporting their own taxes.
DISSOLVING AN LLC
Business and goals change, and there may be a time when it becomes necessary to dissolve your LLC. If you planned things properly in your Operating Agreement, then you already have a blueprint from which to follow. In any event, dissolving under the law is not the same as abandonment, and you must follow the proper procedures in a timely manner. Otherwise, your LLC could face tax consequences, fines, or even legal action, which could be imputed on to you.
The first step is to close all your LLC business accounts and pay all taxes or fines owed. Pay careful attention to any unemployment insurance tax or employee withholding tax. And if your LLC sells goods or services, the Arizona Transaction Privilege Tax. Your LLC cannot be dissolved if there is any outstanding balance.The second step is to file Articles of Dissolution, which tells that state that you’re voluntarily terminating the existence of the LLC and that it no longer exists.
Be careful of involuntary dissolution. When an LLC is not in good standing, the Arizona Corporation Commissionwill first classify the LLC as delinquent and then administratively dissolve or revoke the LLC’s existence if the LLC does not correct the problem within the time period listed on the ACC’s delinquency notice. Ways to stay in good standing include publishing your notice of publication if required; failing to inform the ACC of a change of address of the LLC, its members, or its manager; failing to provide notice of a change related to the statutory agent; failure to appoint a new statutory agent if one resigns; failure to amend the Articles of Organization if the duration of the LLC lapses; and bouncing any checks due to non-sufficient funds.
If your LLC has been dissolved or its authority revoked for any reasons, you have six years from the dissolution date to correct the deficiency. Depending on the deficiency, the remedy may include filing the necessary documents, paying all fees that are due, and including the proper reinstatement fee of $100.00.
OVERVIEW OF COSTS TO FORM AN ARIZONA LLC
- Articles of Organization — $50 filing fee or $85 expedited fee
- Holding a Name for 120 days — $10
- Statutory Agent (professional) – varies, but approximately $125/year
- Operating Agreement – varies if done by attorney ($500 – $2500) or online program ($150)
- Publication costs – varies, but approximately $120 for three publication cycles
- Transaction Privilege Tax – varies by business activity and location
- Taxes (state and federal) – varies
In reading the material provided on this page, you acknowledge that you should not rely on this page for legal or tax advice. State and federal law are subject to change and may or not apply differently to your specific to your situation. Please consult a licensed professional if you have legal or tax questions.