How to Start an S-Corporation in Arizona (2024 Guide)

Start an S-Corporation in Arizona

If you want to start an LLC in Arizona, there are things that you should consider. Arizona is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Arizona, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Arizona if qualified for the limitations and requirements.

Recommended: We recommend a professional service that can launch an S-Corp whether you have plans to crowdfund or go public. We recommend using –

LegalZoom Starts at $149 + filing fees

How to Form an S-Corporation in Arizona?

To create S-Corp in Arizona, you must follow the below guidelines that include forming a business name, hiring a Statutory Agent, filing your Articles of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Arizona

After you have decided on the idea to start an S-Corp in Arizona, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Arizona Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Arizona.
  • Limit of restricted words that need a license in Arizona
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Statutory Agent

The next step in starting an S-corp in Arizona is hiring a Statutory Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Statutory Agent in Arizona.

However, if you would like to have an easier process in filing the necessary documents, you can get Arizona Statutory Agent Services.

We reviewed some of the Best Registered Agent Services and provided features as an add-on with their packages for you to check out.

LLC Service

Rating & Pricing

Top Features

Learn More

#1 Recommendation

$299 Per Year

  • Free LLC Formation

  • RA service in all states

  • Legal consultation

$125 Per Year

  • Flat price for RA service

  • LLC formation package

  • Fast service

Step 3: File For Articles of Organization

The Articles of Organization is an important document to start your limited liability company (LLC). Arizona Articles of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Articles of Organization to be filed in AZ Corporation Division, you need to pay a filing fee of $50. In Arizona, the filing fee of forming an LLC is $50.

Recommended: Filing formation papers is easy and hassle-free if you hire a professional service. We recommend using –

LegalZoom ($0 + State Fee)

Step 4: Creating an Operating Agreement

After you have filed your Articles of Organization, the next step is to create an operating agreement in Arizona. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Arizona can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, LegalZoom can get your EIN for you. Their EIN service is quick and hassle-free. For more details about EIN for your business, check on how to apply for an EIN in Arizona.

Recommended: With LegalZoom’s EIN service, obtaining your business’s crucial tax ID becomes a breeze, saving you time and effort by handling the complexities so you can quickly set sail on your entrepreneurial voyage. We recommend –

LegalZoom$79 (Standard Fee)

Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Articles of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Arizona, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Arizona, including:

  1. Filing Fees: When forming a corporation in Arizona, you must file Articles of Incorporation with the Arizona Secretary of State and pay a filing fee of $60 for filing in-person and by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Arizona are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Arizona General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Arizona are subject to the annual franchise tax, which can financially burden some businesses.

In an Arizona S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Arizona franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation?
An S-corporation is a legal entity, much like a traditional corporation, but with certain tax benefits.
Why would I want to start an S-corporation in Arizona?
Arizona offers a favorable tax climate for small businesses and is a popular location for entrepreneurship.
What are the benefits of starting an S-corporation in Arizona?
The state offers many advantages for small businesses including tax benefits and incentives for new start-ups.
Do I need to reside in Arizona to start an S-corporation there?
No, you do not have to live in Arizona to start an S-corporation there.
What are the requirements for starting an S-corporation in Arizona?
You must file articles of incorporation with the Arizona Corporation Commission and have at least one shareholder.
What fees are involved in starting an S-corporation in Arizona?
The filing fee for articles of incorporation is $60, and the annual report filing fee is $45.
Do I need an attorney to start an S-corporation in Arizona?
No, but you may want to consult with one to ensure you meet all legal requirements.
How long does it take to start an S-corporation in Arizona?
The process takes about 6-8 weeks, but can be expedited for an additional fee.
Can I convert my LLC into an S-corporation in Arizona?
Yes, as long as all legal requirements are met.
Can a non-US citizen start an S-corporation in Arizona?
Yes, non-US citizens can start an S-corporation in Arizona as long as they have an ITIN or social security number.
What are the tax consequences of starting an S-corporation in Arizona?
S-corporations are generally not subject to federal income tax, and Arizona offers tax breaks for small businesses.
Can I start an S-corporation with just one shareholder in Arizona?
Yes, Arizona law only requires one shareholder to start an S-corporation.
How are S-corporations taxed in Arizona?
S-corporations are not taxed at the state level, but shareholders must pay income tax on their share of company profits.
Are there any restrictions on who can be a shareholder in an S-corporation in Arizona?
Yes, S-corporations may only have up to 100 shareholders and they must be US citizens or residents.
Can I have a non-profit S-corporation in Arizona?
No, S-corporations must operate for profit.
Can my spouse be a shareholder in my S-corporation in Arizona?
Yes, spouses can both share ownership in an S-corporation.
Do I need to register for state taxes as an Arizona S-corporation?
Yes, you will need to register for state taxes such as sales tax and employee withholding taxes.
Are there any minimum capital requirements for starting an S-corporation in Arizona?
No, Arizona does not have any minimum capital requirements for S-corporations.
How do I elect S-corporation tax status in Arizona?
You must file Form 2553 with the IRS within two months and 15 days of the start of your fiscal year.
Do S-corporations pay self-employment tax in Arizona?
Shareholders are generally not subject to self-employment tax, but must pay themselves a reasonable salary.
Can I operate my Arizona S-corporation without a business license?
No, you must obtain any necessary business licenses and permits from the state and local governments.
Can an S-corporation have multiple businesses in Arizona?
Yes, an Arizona S-corporation can have multiple businesses as long as they are related to the company’s overall purpose.
What ongoing requirements are there for an S-corporation in Arizona?
Arizona S-corporations must file annual reports and may be subject to other state tax requirements.
How does liability protection work for an Arizona S-corporation?
An S-corporation offers its shareholders limited liability, meaning their personal assets are separate from those of the business.
Can an S-corporation be dissolved in Arizona?
Yes, an S-corporation can be dissolved by filing Articles of Dissolution with the Arizona Corporation Commission.
Can I use a registered agent service for my Arizona S-corporation?
Yes, you can use a registered agent service to receive legal documents and notices on behalf of your company.
Can I change my Arizona S-corporation to a C-corporation?
Yes, you can convert your S-corporation to a C-corporation by filing certain forms with the IRS and the Arizona Corporation Commission.
Can my S-corporation deduct expenses on state taxes in Arizona?
Yes, S-corporations can usually deduct legitimate business expenses on their state returns.
What is an S-corporation and how is it different from a regular corporation in Arizona?
An S-corporation is a corporation that has elected to be taxed as a pass-through entity, like a partnership. Unlike a regular corporation, an S-corporation doesn’t pay federal income tax on its profits since the income passes through to the shareholders for tax purposes. The state of Arizona recognizes S-corporations as corporations with fewer tax and regulatory requirements than regular corporations.
How many shareholders can an S-corporation have in Arizona?
An S-corporation can have no more than 100 shareholders in Arizona.
Can a sole proprietorship be converted into an S-corporation in Arizona?
Yes, a sole proprietorship can be converted into an S-corporation in Arizona as long as it meets the eligibility requirements.
What are the steps to form an S-corporation in Arizona?
The general steps to form an S-corporation in Arizona include choosing a name, selecting an agent for service of process, preparing articles of incorporation, registering with the Arizona Corporation Commission, holding an organizational meeting, and issuing stock.
Does an S-corporation require an Arizona business license?
Yes, an S-corporation operating in Arizona requires a business license.
Can an S-corporation file taxes at the same time as its Arizona state tax return?
Yes, an S-corporation in Arizona can file its taxes at the same time as its state tax return, as long as it has elected to be taxed as an S-corporation.
Are S-corporations exempt from Arizona state corporation tax?
No, S-corporations must still pay Arizona state corporation tax, just like regular corporations.
What are the tax rates for S-corporations in Arizona?
The tax rates for S-corporations in Arizona usually range from 4.54% to 5.13% of net income.
Does an S-corporation in Arizona need to register for sales tax?
Yes, an S-corporation in Arizona needs to register for sales tax if it sells taxable products or services.
Does Arizona allow one-member LLCs to become S-corporations?
Yes, Arizona allows one-member LLCs to become S-corporations as long as they meet the eligibility requirements.
Is there a fee for filing articles of incorporation for an S-corporation in Arizona?
Yes, there is a fee for filing articles of incorporation for an S-corporation in Arizona, and the current rate is $60.
Is it mandatory for an S-corporation in Arizona to hold annual shareholder meetings?
No, it is not mandatory for an S-corporation in Arizona to hold annual shareholder meetings.
Can an S-corporation in Arizona have a fiscal tax year?
Yes, an S-corporation in Arizona can have a fiscal tax year as long as it makes an election with the Internal Revenue Service.
Can I operate my S-corporation from outside Arizona?
Yes, you can operate your Arizona-based S-corporation from outside the state after following the out-of-state company requirements by the Arizona Corporation Commission.
Can an S-corporation in Arizona make political contributions?
Yes, an S-corporation in Arizona can make political contributions if it follows the campaign finance laws set by the Arizona Secretary of State.
Is unemployment insurance required for an S-corporation in Arizona?
Yes, unemployment insurance is mandatory for an S-corporation in Arizona if the business has at least one employee.
Can an S-corporation in Arizona have an out-of-state office?
Yes, an S-corporation in Arizona can have an out-of-state office if it properly registers with that state.
Can a business owner be both an employee and shareholder in an S-corporation in Arizona?
Yes, a business owner can be an employee and shareholder in an S-corporation in Arizona simultaneously.
Does a multi-state S-corporation operating in Arizona need to pay Arizona corporate tax?
Yes, a multi-state S-corporation doing business in Arizona will likely have to pay Arizona corporate tax.
Is a foreign corporation allowed to become an S-corporation in Arizona?
No, foreign corporations cannot become S-corporations in Arizona.
What are the benefits of forming an S-corporation in Arizona over an LLC?
Forming an S-corporation in Arizona can provide greater tax savings compared to an LLC, especially for businesses earning profits beyond its founders. Moreover, for S-corporations, the distribution of profits is not subjected to self-employment tax which is the liability involving Social Security and Medicare contributions.
Can shareholders receive a salary from an S-corporation in Arizona?
Yes, shareholders can receive a salary from an S-corporation in Arizona, but the salary must be reasonable for the services performed to avoid audit complications.
Is it possible to convert an S-corporation to a C-corporation in Arizona?
Yes, it’s possible to convert an S-corporation into a C-corporation in Arizona, but strict regulations must be followed such as Anti-Injunction Act rules relating to revocation of the Subchapter S status.
How much must be paid to form an S-corporation in Arizona?
To form an S-corporation in Arizona, you’ll need to pay a filing fee of $40 alongside the $150 Expedited Service Fee filed with an expedited basis.
Is a business owner responsible for filing annual reports for an S-corporation in Arizona?
Yes, the Arizona Corporation Commission mandates company owners of Arizona formed S-corporation to comply by legal protocols, i.e to file an annual report that includes statement info and an amendment account.
What is the minimum initial investment required to form an S-corporation in Arizona?
There is no minimum initial investment the shareholders can restrict or set, but if the shareholders agree to invest below par or below-market price, tax authorities in Arizona may tax that amount.
Can an S-corporation based in Arizona open other satellite branches?
An S-Corporation based in Arizona can undoubtedly expand its operation and open new satellite branches in different areas.
What is the key difference between a General Corporation Purpose(GCP) and S-corporation status?
While a GCP is like a shell corporation buying property and maximizing investments , S-Corporations allow for investors to protect their financial status while starting modest business structures like partnerships.

Also Read

Why You Should Start Arizona S Corp

One of the key advantages of choosing to start an S Corp in Arizona is the tax benefits it provides. S Corporations are considered pass-through entities, meaning that the profits and losses of the business pass through to the individual shareholders to be reported on their personal tax returns. This can result in significant tax savings, as S Corps are not subject to double taxation like C Corporations. Additionally, Arizona has a relatively low corporate income tax rate and no personal income tax, making it an attractive location for business owners looking to maximize their profits.

Forming an S Corporation in Arizona is also relatively simple and straightforward. The state has a business-friendly environment with streamlined processes for incorporating a business. By following the necessary steps and filing the required paperwork, you can have your S Corp up and running in no time. Additionally, Arizona does not have strict residency requirements for shareholders, making it easy for out-of-state investors to participate in your business.

Another compelling reason to start an Arizona S Corporation is the limited liability protection it offers. By forming an S Corp, you separate your personal assets from the business, protecting them from any legal actions or debts incurred by the company. This can provide you with peace of mind knowing that your personal assets are shielded from the risks associated with running a business.

In addition to these benefits, an S Corporation structure also allows for greater flexibility in terms of management and ownership. S Corps can issue different classes of stock, allowing for a diverse ownership structure and giving shareholders the ability to customize their rights and privileges. This flexibility can be particularly advantageous when seeking investment or planning for future growth and expansion.

Overall, starting an Arizona S Corporation can be a wise decision for entrepreneurs looking to establish a solid foundation for their business. With its favorable tax laws, ease of formation, limited liability protection, and flexibility in management and ownership, an S Corp in Arizona can provide the support and structure your business needs to succeed. Consider the many benefits of forming an S Corp in Arizona and take the necessary steps to establish your business in this tax-friendly and business-friendly environment.

Conclusion

Forming an S-Corporation in Arizona can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

Leave a Comment