Starting a small business in Arizona can be an exciting, yet overwhelming venture. The “Grand Canyon State” offers entrepreneurs a supportive business climate in one of the nation’s fastest-growing states. But, choosing how to structure your business is just as important as deciding on the type of business you want to open.
Forming an Arizona S corporation (S corp) could benefit your business by providing tax savings. Read on to learn how to set up your Arizona S corp and then keep your business in good standing.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Arizona
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from an Arizona S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form an Arizona S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Arizona
Starting an Arizona LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are six basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Complete Publication Requirement
Step 5: Create an Operating Agreement
Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Arizona.
Be sure to choose a name that complies with Arizona naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for an Arizona LLC:
- Your name must contain the following words or abbreviations: limited liability company, limited company, L.L.C., L.C., LLC, or LC.
- Your name cannot contain the words "association," "corporation," "incorporated," or an abbreviation of those words.
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Your name must be distinguishable from any existing business in your state. You can find more information about what makes a business name distinguishable on Arizona’s state legislature website.
You can also read the Arizona state statute about LLC naming guidelines for more information.
2. Is the name available in Arizona? You can use the eCorp business entity search on the Arizona Corporation Commission website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Arizona Registered Agent
You must elect a statutory agent, also known as a registered agent, for your Arizona LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Arizona Registered Agent Consent to Appointment
Statutory agents in Arizona must consent to their appointment in written or electronic form.
The statement of consent should include:
- The name of your LLC
- The name of the person designated as statutory agent
- An express statement that the person designated consents to serve as the LLC’s registered agent
- The signature of the statutory agent
- The date of execution
For in-depth information on this requirement, as well as a downloadable consent form, view Statutory Agent Acceptance Form M002.
Step 3: File the Arizona LLC Articles of Organization
The Arizona LLC Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With Arizona eCorp
- OR -
OPTION 2: File by Mail, by Fax, or in Person
State Filing Cost: $50, payable to the Arizona Corporation Commission (Nonrefundable)
Arizona Corporation Commission
Corporate Filings Section
1300 W. Washington St.
Phoenix, AZ 85007
Fax: (602) 542-4100
Note: The Articles of Organization must be submitted with a cover sheet.
Step 4: Complete Publication Requirement
Newly formed LLCs in Arizona must publish a Notice of LLC Formation in an approved newspaper for three consecutive weeks. The approved newspaper must be in the same county as the LLC’s principal office and publication must be done within 60 days of formation.
Your Notice of LLC Formation 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 the statutory agent address)
- Whether your LLC is member-managed or manager-managed
- The name(s) and address(es) of either your LLC manager or each member of your LLC
To learn more, be sure to read our complete guide to Arizona LLC publication requirements.
Find an Approved Newspaper With the Arizona Corporation Commission
Fee: Fees vary by county. Costs range from $30-$300. (Nonrefundable)
Note: LLCs with a principal address in Maricopa County or Pima County do NOT have to publish a Notice of LLC Formation.
Step 5: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Arizona LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 6: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Arizona S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Arizona S Corp Compliant
Creating a business is a big undertaking, but, once you establish your company and elect S corp status, you also need to keep your business compliant with state and federal laws. All Arizona S corps must file an Arizona S Corporation Income Tax Return with the state. Some businesses also will need to pay an Arizona transaction privilege tax.
Arizona S Corp Annual Report
Unlike in most states, Arizona LLCs that elect the S corp tax designation don’t have to file an annual report. However, S corps in this state must still pay all applicable taxes.
Arizona S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Arizona S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Arizona Income Taxes - Form 120S
All LLCs taxed as S corps must file Form 120S (Arizona S Corporation Income Tax Return) with the Arizona Department of Revenue. You must file this form each year to keep your business in good standing. If your S corp runs on a calendar year, the due date for this will be March 15.
In addition to filing Form 120S, you’ll need to pay the income tax itself. The current state income tax rate in Arizona is 4.9%. Because state income taxes can range from 0% to 10%, Arizona’s 4.9% rate falls near the middle. If your income tax liability exceeds $1,000, you’ll need to pay on a quarterly basis. You can make your tax payments on Arizona’s AZTaxes website.
Arizona Sales and Use Tax
Arizona calls its sales and use tax a transaction privilege tax (TPT). If the state requires your business to pay the TPT, then your business also must apply for a TPT license through the Arizona Department of Revenue.
Businesses that must pay the TPT and register for a TPT license include:
- Retail Sales
- Hotels/Motels (Transient Lodging)
- Commercial Leasing Companies
- Personal Property Rentals
- Severance (Metal Mining)
- Transportation Companies
- Non-metal Mining
- Job Printing
- Private (Rail) Car
For more information, check out the Arizona Department of Revenue website.
Arizona Local Taxes
Whether your business is in Phoenix, Tucson, or one of the state’s smaller cities, each local municipality may have its own taxes that apply to your business. Check with your local government to make sure your business complies with local laws.
Start an Arizona S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Does Arizona require an annual report for S corps?
Arizona is one of the few states that don’t require you to file an annual report after you form your S corp. This reduces the annual paperwork burden on you and your business. Only corporations have to file an annual report in Arizona.
Is Arizona a good state in which to form an S corp?
While each state offers many different benefits, no single state is better than another in terms of forming an S corp. Arizona has a low tax burden and a supportive business climate, making it a great place for small business owners to form an S corp.