LLC vs S-Corp | What Entrepreneurs Need to Know in Arizona

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LLC vs S-Corp in Arizona

When starting a small business in the Arizona, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Arizona. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Arizona. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Arizona

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Arizona?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Arizona?

Unlike a limited liability company (LLC) or other business structures, Arizona S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Arizona

Creating a business in Arizona requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Arizona Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Arizona does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Arizona.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Arizona

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Arizona is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Arizona. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Arizona are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Arizona are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Arizona to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Arizona with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Arizona State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Arizona, it costs $0, which can be paid to the AZ Corporation Division. Of course, before forming the whole LLC, you must pay the initial fee of $50 to the Arizona Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Arizona have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Arizona LLC: An LLC can have any number of owners, called members, from starting Arizona Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Arizona S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Arizona LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Arizona.

Arizona S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Arizona LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Arizona S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Arizona LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Arizona Operating Agreement.

Arizona S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Arizona LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Arizona: LLC or S-Corp?

Filing an LLC or S-Corporation in Arizona requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Statutory Agent. To establish an LLC in Arizona, you must submit the Articles of Organization to the Arizona Department of Revenue. Your Articles of Organization must include information about your Arizona LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Arizona S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Arizona: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Arizona depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Arizona LLC Cost for detailed information.

Arizona S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Arizona LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Arizona?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Arizona. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520​ in Arizona.

FAQs

What is the difference between an LLC and an S-Corp in Arizona?
An LLC is a limited liability company, whereas an S-Corp is a type of corporation that files an election with the IRS for special tax treatment.
Which type of entity is better for a small business in Arizona?
The type of entity that is better for a small business in Arizona depends on various factors, including the number of owners, liability protection needs, and tax considerations.
Is it more expensive to form an LLC or an S-Corp in Arizona?
The cost of forming an LLC or an S-Corp in Arizona is roughly the same, although LLCs may incur higher recurring fees after the initial formation.
Are there any limitations on the number of shareholders in an S-Corp in Arizona?
Yes, an S-Corp in Arizona can have no more than 100 shareholders, who must be U.S. citizens or residents.
What are the income tax implications for LLCs and S-Corps in Arizona?
LLCs and S-Corps in Arizona are generally taxed as pass-through entities, where profits and losses are reported on the individual tax returns of the owners.
Are there any special requirements for organizing an LLC in Arizona?
Yes, Arizona LLCs must file articles of organization with the state, as well as publish a notice of formation in a local newspaper.
Can an LLC in Arizona have only one member?
Yes, an LLC in Arizona can have a single owner, known as a “member.”
What is the annual filing fee for an LLC in Arizona?
The annual filing fee for an LLC in Arizona is $0, unless the LLC has elected to be taxed as an S-Corp.
Is it necessary to hold annual meetings for an S-Corp in Arizona?
Yes, an S-Corp in Arizona is required to hold annual meetings of shareholders and directors.
Can S-Corps in Arizona issue multiple classes of stock?
No, S-Corps in Arizona are limited to one class of stock.
Are there any restrictions on the types of businesses that can form as LLCs or S-Corps in Arizona?
LLCs and S-Corps in Arizona can be formed by nearly any type of business, except for banks, insurance companies, and certain investment firms.
Must an LLC in Arizona adopt an operating agreement?
Although not explicitly required by Arizona law, it is recommended that LLCs in Arizona adopt an operating agreement to establish clear ownership and management expectations.
Will forming an LLC or an S-Corp protect my personal assets in Arizona?
Yes, both LLCs and S-Corps in Arizona offer some degree of personal liability protection to their owners.
How does an LLC’s ownership differ from an S-Corp’s ownership in Arizona?
LLCs in Arizona have members who own membership interests in the company, while S-Corps have shareholders who own shares of stock.
Can an LLC be taxed as an S-Corp in Arizona?
Yes, an LLC can elect to be taxed as an S-Corp for federal tax purposes by filing Form 2553 with the IRS.
Are LLCs subject to the same annual filing requirements as S-Corps in Arizona?
No, S-Corps in Arizona must file an annual report, but LLCs do not have any ongoing filing requirements (other than any required by federal law or the operating agreement).
Does Arizona offer any special incentives for LLCs or S-Corps?
Arizona has various incentive programs aimed at encouraging businesses to expand and relocate within the state, regardless of their entity type.
What is the minimum number of shareholders required for an S-Corp in Arizona?
An S-Corp in Arizona must have at least one shareholder.
Does Arizona recognize the formation of Series LLCs?
Yes, since 2019, Arizona has allowed the formation of Series LLCs, which permit multiple subsidiaries to be organized under a single LLC.
Can profits and losses be allocated differently among owners in an LLC than in an S-Corp in Arizona?
Yes, LLCs offer greater flexibility when it comes to allocating profits and losses among members, whereas S-Corps must allocate profits and losses equally based on ownership percentage.
Can I form an LLC or S-Corp in Arizona if I already own another company?
Yes, Arizona does not prohibit individuals or entities from holding ownership interests in multiple LLCs or S-Corps.
How do I dissolve my LLC or S-Corp in Arizona?
Both LLCs and S-Corps in Arizona can be dissolved by filing articles of dissolution with the Arizona Corporation Commission.
What impact will my choice of entity have on my ability to raise capital in Arizona?
The choice between an LLC vs. S-Corp may impact the ability of the entity to raise different types and amounts of capital.
Is it possible to convert an LLC to an S-Corp in Arizona?
Yes, an Arizona LLC can elect to be taxed as an S-Corp by filing Form 2553 with the IRS and making sure it meets all the eligibility requirements.
Can a one-person business elect to be an S-Corp in Arizona?
Yes, a single-member LLC or sole proprietorship in Arizona may elect to be taxed as an S-Corp by filing Form 2553 with the IRS and meeting all the eligibility requirements.
Do I need to authorize and issue shares in an S-Corp in Arizona?
Yes, shares must be issued and recorded in the company’s books and records.
How long does it typically take to form an LLC or an S-Corp in Arizona?
The amount of time it takes to form either an LLC or an S-Corp in Arizona can vary, but formation typically takes a few weeks or less.
What is an LLC in Arizona?
An LLC in Arizona is a limited liability company established under Arizona law.
What is an S Corporation in Arizona?
An S Corporation in Arizona is a type of corporation that is taxed like a partnership, and must meet certain requirements to qualify.
What is the fee for starting an LLC in Arizona?
The fee for starting an LLC in Arizona is $50.
What is the fee for filing for S Corporation status in Arizona?
There is no fee for filing for S Corporation status in Arizona, but there may be other fees associated with incorporating as an S Corporation.
Are LLCs subject to the Arizona corporate income tax?
No, LLCs are not subject to the Arizona corporate income tax.
Are S Corporations subject to the Arizona corporate income tax?
No, S Corporations are not subject to the Arizona corporate income tax.
Does Arizona recognize S Corporations from other states?
Yes, Arizona recognizes S Corporations from other states that have been properly formed and registered to do business in Arizona.
Can I convert my LLC to an S Corporation in Arizona?
Yes, you can convert your LLC to an S Corporation in Arizona by filing Form 2553 with the IRS.
How do I choose between an LLC and an S Corporation in Arizona?
The choice between an LLC and an S Corporation in Arizona depends on your individual circumstances and business goals.
What are the benefits of forming an LLC in Arizona?
The benefits of forming an LLC in Arizona include liability protection and flexibility in taxation.
What are the benefits of forming an S Corporation in Arizona?
The benefits of forming an S Corporation in Arizona include liability protection and the potential for tax savings.
Do I need to have a foreign qualification if I am an LLC registered in another state and doing business in Arizona?
Yes, if you are an LLC registered in another state and doing business in Arizona, you need to have a foreign qualification.
Do I need to have a foreign qualification if I am an S Corporation registered in another state and doing business in Arizona?
Yes, if you are an S Corporation registered in another state and doing business in Arizona, you need to have a foreign qualification.
Can an LLC be managed by its members in Arizona?
Yes, an LLC can be managed by its members in Arizona.
Can an S Corporation be managed by its shareholders in Arizona?
Yes, an S Corporation can be managed by its shareholders in Arizona.
Can non-residents be owners of an LLC in Arizona?
Yes, non-residents can be owners of an LLC in Arizona.
Can non-residents be owners of a corporation in Arizona?
Yes, non-residents can be owners of a corporation in Arizona.
Are LLCs required to hold annual shareholder meetings in Arizona?
LLCs are not required to hold annual shareholder meetings in Arizona.
Are S Corporations required to hold annual shareholder meetings in Arizona?
S Corporations are required to hold annual shareholder meetings in Arizona.
Can an LLC elect S Corporation status in Arizona?
Yes, an LLC can elect S Corporation status in Arizona.
Are LLCs required to file a tax return in Arizona?
Yes, LLCs are required to file a tax return in Arizona, but they may not owe any taxes if they are taxed as a pass-through entity.
Are S Corporations required to file a tax return in Arizona?
Yes, S Corporations are required to file a tax return in Arizona.
Will forming an LLC protect me from personal liability in Arizona?
Yes, forming an LLC can protect you from personal liability in Arizona.
Will forming an S Corporation protect me from personal liability in Arizona?
Yes, forming an S Corporation can protect you from personal liability in Arizona.
What is the process for forming an LLC in Arizona?
The process for forming an LLC in Arizona includes submitting paperwork to the Arizona Corporation Commission and paying the appropriate fees.
What is the process for incorporating as an S Corporation in Arizona?
The process for incorporating as an S Corporation in Arizona includes submitting paperwork to the Arizona Corporation Commission and paying the appropriate fees.
Which type of entity is better for a small business in Arizona, an LLC or an S Corporation?
The best entity type for a small business in Arizona depends on the specifics of the business and its owners.
Can an LLC have just one member in Arizona?
Yes, an LLC can have just one member in Arizona.
Can an S Corporation have just one shareholder in Arizona?
Yes, an S Corporation can have just one shareholder in Arizona.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Arizona will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Arizona and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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