How to Start a Sole Proprietorship in Arizona
Starting your own Arizona business can be an exhilarating and rewarding journey, and understanding the essential steps to launch a sole proprietorship is crucial for success. In this guide, we will walk you through the key considerations and steps to start your sole proprietorship in Arizona, empowering you to lay a solid foundation for your business venture.
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What is a sole proprietorship?
A sole proprietorship is the simplest and most common form of business ownership. It is an unincorporated business that is owned and operated by a single individual, known as the sole proprietor. In this business structure, the owner has complete control over all aspects of the business and retains all profits and decision-making authority.
Examples of a sole proprietorship
- A freelance copywriter, graphic designer, or virtual assistant
- An artist who sells goods on Etsy
- An ecommerce store owner who sells goods
- A farmer who sells produce at a local market
What qualifies your business as a sole proprietorship?
If you sell goods or services as a solo business owner and have not registered any type of business entity with the state, you’re considered a sole proprietor. You can use your tax returns as proof of a business.
Sole proprietorship vs. LLC
An LLC, or Limited Liability Company, is a popular business structure that combines elements of both a corporation and a partnership. It provides the owners with limited liability protection.
In a sole proprietorship, the business and the owner are considered one and the same, meaning the owner assumes unlimited personal liability for the business’s debts and legal obligations.
A sole proprietorship is much simpler to establish than an LLC. The latter requires paperwork called Articles of Organization and a filing fee, as well as annual reporting and other requirements.
Who is it best for?
A sole proprietorship is ideal for individuals seeking complete control and autonomy over their business. It is well-suited for new entrepreneurs, home-based businesses, self-employed professionals, small-scale operations, and those desiring simplicity and minimal regulations. Sole proprietorships provide a straightforward structure, allowing business owners to focus on core activities without extensive legal or administrative burdens. This makes it a good choice for anyone looking to start a business quickly and with little startup cost.
How to set up a sole proprietorship in Arizona
Unlike other business structures, there is no formal process to register a sole proprietorship in Arizona. The only thing you need to do is start conducting business activity under your legal name, so you could already be a sole proprietor without even knowing it! However, formation is just one piece of owning a business – you may want to take other actions to ensure you are operating legally and with the best chance of success.
Is there any formal paperwork filed to establish this type of business?
No. Unlike other business structures like an LLC or corporation, there is no state-required paperwork to establish a sole proprietorship.
Business planning
While you can be a sole proprietor with even a small amount of business activity, if you are going to truly engage in a new business, it is important to have a business plan. This can be as simple as deciding your name, the type of business, and what you will offer, but can also include marketing ideas and a growth plan.
For a sole proprietorship, it is important to consider how you will obtain business funding as well. Things like grants and investors are often less likely to work with a sole prop, and some banks will not allow for business bank accounts for these businesses. You will likely need to provide your own startup costs, so think through what you are willing to invest in early.
Naming your business
The default name of any sole proprietorship is the legal name of its owner, and there are no steps to take for this to be true. But not everyone wants to use their own name as their business name – in which case, you can use the process of registering a DBA or trade name. This allows you to keep the business in your legal name while operating under another public-facing name.
To register your DBA in Arizona, you need to first be sure the name is not taken by another business. You can do this by searching the business name registry on the Arizona Secretary of State’s website. Once you have chosen an eligible name, you can apply for the trade name and pay the $10 fee.
How to Check if a Business Name is Taken
Licenses and permits
Arizona does not require a general business license to operate in the state, but you will need to apply for a TPT License. This is similar to a seller’s permit and allows small businesses to collect and pay transaction privilege taxes and use taxes, as well as to handle employer withholdings and unemployment insurance requirements.
Your business may also require professional licensure, depending on your industry. Additionally, each local government sets its own laws around business licenses, permits, and zoning clearances, so it is important to contact a local county clerk to understand what you may need.
Tax preparation
For a sole proprietorship with no employees, tax preparation will only include the owner’s personal income tax returns. During tax season, the Schedule C (or Form 1040) will reflect business profits and losses and tax them at the owner’s normal tax rate. This will also take into account self-employment taxes to cover the owner’s Medicare and Social Security taxes. The IRS tracks these taxes using the owner’s personal Social Security Number as a tax ID.
However, if the company has any employees, there are some additional requirements before a new hire can start work. The TPT license covers Arizona state taxes, but the Internal Revenue Service has different requirements at the federal tax level. Each business will need to obtain an EIN, or employer identification number, to be used for business tax purposes. These are free and can be obtained online through the IRS website.
Arizona taxes
From a taxation perspective, a sole proprietorship is considered a pass-through business entity. This means that the business’s profits and losses are reported on the owner’s personal tax return, and the business itself does not pay separate income taxes. This simplicity in taxation eliminates the need for filing separate business tax returns, making the administrative burden lighter compared to other business structures.
Pros
- Easy and inexpensive to set up and operate.
- Complete control and decision-making authority rests with the owner.
- Simple taxation process, with business profits and losses reported on the owner’s personal tax return.
- Flexibility to adapt quickly to market changes and make decisions without extensive consultation.
- Minimal legal formalities and regulations to comply with.
- Direct and personal connection with customers and clients.
- Ability to maintain privacy, as sole proprietorships typically have fewer reporting and disclosure requirements.
- Opportunities for immediate profit retention and the ability to reinvest funds as desired.
- Ability to easily dissolve or transfer ownership, providing flexibility for future plans.
Cons
- Unlimited personal liability for business debts and obligations.
- Limited access to capital and difficulty obtaining financing.
- Sole responsibility for managing and operating the business.
- Disruption to business continuity in the event of owner illness, incapacity, or death.
- Limited access to diverse skills and resources.
- Limited growth potential due to resource constraints.
- Difficulty in separating personal and business finances accurately.
If any of this may be a concern for you, it can be useful to seek out expert legal advice early on.
FAQs
Can spouses start a sole proprietorship in Arizona?
Yes, a business can be considered a qualified joint venture in Arizona. This means that two people can operate a sole proprietorship if they are married and file taxes jointly. Were they to split up, one person would keep the business.
Do sole proprietorships in Arizona require a license?
Arizona does not have a general business license, but sole proprietors will typically need to have a TPT license through the Arizona Department of Revenue. This allows them to collect and pay certain state taxes. Local governments and professional regulations may also require more licensing.
What can I name my Arizona sole proprietorship?
A sole proprietorship is automatically considered to have the same name as its owner. However, in Arizona, you can register to use a trade name. This name must be unique in the state and meet other naming guidelines, like being accurate and avoiding the name of government entities.
Does an Arizona business operating as a sole proprietorship need an EIN?
An EIN is an employer identification number that’s issued by the IRS. If you plan to hire employees or open a business bank account, you’ll need an EIN.
What are the benefits of operating a sole proprietorship?
A sole proprietorship is the easiest type of business to start because there’s no paperwork to file with the state, no filing fees, and no yearly reports to file.
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