How to Start a Sole Proprietorship in Arizona
Setting up a sole proprietorship is a simple way to start your business in Arizona. As a sole proprietor, you are fully responsible for your business and what happens daily. This easy and popular business setup gives flexibility to small business owners looking to start quickly. This article will guide you through starting a sole proprietorship in Arizona, from picking your business name to getting licenses and registering for taxes.
What is a sole proprietorship?
A sole proprietorship is a simple form of business entity. It’s owned and run by a single person responsible for the business and its debts. They are simple to set up and, because of this, are popular with entrepreneurs. Unlike other business structures like LLCs or corporations, there’s no legal divide between the business and the owner.
While a sole proprietorship offers simplicity and flexibility, it has some downsides. The main disadvantage is the lack of asset protection. As a sole proprietor, your belongings, like your car or house, are at risk if your business gets into debt or has any legal duties.
A step-by-step guide to starting your Arizona sole proprietorship
Choose a business name
As a single-owner business in Arizona, you have the choice to use your legal name or a business name—sometimes called a “trade name” or “DBA” (meaning “doing business as”).
If you wish to file a DBA, you must:
- Choose a business name: Think of a name for your business. Make your name memorable and descriptive; you want potential customers to know what your business does immediately.
- Check availability: Before settling on your name and completing your DBA paperwork, check if it is available in Arizona. Visit the Arizona Corporation Commission and search for existing business names.
Your DBA name needs to be unique and not already taken by another business in Arizona. Quick online searches can help you see if other businesses have similar names. Plus, checking the US Patent and Trademark Office’s trademark database ensures you won’t accidentally use another company’s protected name.
- Check online availability: Check if the corresponding domain name and social media handles are available. These will be useful marketing tools for your business.
- Register the business name: Once you’ve confirmed the availability of your chosen name, you may register it as a trade name. Register your trade name on the Arizona Secretary of State’s website. Once on the website, you must fill in the “Online Trade Name & Trademark Filing” link on the Arizona Business One Stop Portal. Printing and filing the form in person or by mail is not possible.
Obtain an (Employer Identification Number) EIN
As a sole proprietor with no employees, getting an EIN might not be necessary. Your Social Security Number (SSN) can be your tax ID.
However, we do recommend getting one as there are many benefits:
- Business banking opportunities: An EIN allows you to open a business bank account separate from your finances, making tracking your business income and expenses easier.
- Establishing business credit: An EIN enables you to establish a separate credit profile for your business, which would be useful if you apply for business loans or credit cards.
- Eases the hiring process: If you plan to hire employees in the future, having an EIN is necessary for reporting wages and fulfilling other tax obligations.
- Enhances business privacy: Using an EIN instead of your Social Security Number (SSN) on business-related documents can help protect your personal information.
- Prepares for business growth: If you plan to expand your business or change its structure, having an EIN will make the transition smoother.
You can apply through the Internal Revenue Service (IRS) website for an EIN. The process is free, and you will receive your EIN immediately upon completing the online application.
You can apply for your EIN here.
Obtain Arizona business licenses, permits, and zoning clearances
Depending on the nature of your business, you may need to obtain various licenses, permits, and zoning clearances to operate legally in Arizona.
- Arizona does not require a general business license for sole proprietors. There may be specific licensing requirements based on your industry or location. Use Arizona’s Business One Stop portal. This can help to search for licensing regulations in your location and industry.
- Although Arizona has no general business license, many large cities have their licensing requirements. We recommend contacting the local government to understand local rules fully. You can find a full list of county offices here and city offices here.
Register for taxes
Sole proprietors use Schedule C to report their business income and expenses on their income tax returns. You must pay self-employment taxes, including Social Security and Medicare taxes.
As a self-employed sole proprietor, you owe self-employment tax contributions for Social Security and Medicare, which you can calculate and report using Schedule SE.
Additional state and local taxes
- State taxes: Arizona does not have a state income tax for individuals, but you may still be subject to other state taxes, such as Transaction Privilege Tax (TPT) or Sales Tax, depending on the nature of your business. Visit the Arizona Department of Revenue for more information on business taxes.
- Local taxes: Some cities and counties in Arizona may have additional local taxes or fees that you need to be aware of. Check with your local government offices to determine if there are any specific tax obligations for your business.
After securing your EIN, signing up for federal taxes, and getting the necessary licenses, you’ve crossed off all the big tasks required to launch your sole proprietorship.
Next, we’ll share some additional steps to help keep your small business aligned with rules and organized.
Open business bank accounts
Keeping your personal assets safe and creating segregation with your business finances is vital. Opening a dedicated business bank account will help you move towards this:
Setting up a business bank account comes with a host of benefits, like:
- Simplified bookkeeping and record-keeping: When your personal and business finances don’t mix, keeping track of what you earn and spend is much simpler.
- Facilitates accurate tax reporting: If you have a bank account just for your business, spotting and reporting business transactions on your tax filings becomes much easier.
- Demonstrates professionalism: A business-only bank account gives your business a professional look and feel, boosting your credibility with customers, suppliers, and banks.
Get liability insurance
Being a sole proprietor means that you alone are responsible for any business debts, which makes insurance a key piece of your business strategy. This can help guard you against unexpected claims or incidents. Here’s what we suggest you consider:
- General business liability insurance: This policy takes care of claims related to damage to property, physical injury, or personal harm that might be connected to your business.
- Professional liability insurance: This type of insurance is vital if your business provides services. It helps protect you from alleged supposed negligence, errors, or oversights in your services.
Maintain business records
Keeping records is important for tax filing and managing your sole proprietorship’s financial affairs. You should make an effort to precisely track the following:
- Assets and liabilities
- Billing documents
Using bookkeeping software and spreadsheets or setting up a systematic method can help handle documents. Being as organized as possible will prove helpful when it’s time to file taxes, and it promotes the overall financial health of your business.
Sole proprietorship vs. LLC
While a sole proprietorship might seem appealing due to its simplicity and few legal needs, it’s vital to consider possible downsides and look into other types of business structures, like a Limited Liability Company (LLC).
Here are some things to think about when choosing between a sole proprietorship and an LLC:
- Protection from debt: One big plus of starting an LLC is its protection from debt. As a sole proprietor, you are responsible for any money owed or legal claims against your business, which could put your own assets at risk. On the other hand, an LLC gives a clear divide between your personal and business assets, keeping your personal belongings safe from business debts.
- Looking professional: An LLC could make you look more professional in customers’ eyes. Starting an LLC shows more dedication to your business.
- Potential to grow: If you plan to make your business bigger or attract outside funding, an LLC gives you more room to grow than a sole proprietorship.
- Flexibility with taxes: One plus of a sole proprietorship is how simple it is when it comes to taxes. You usually report money made and money spent by your business on your personal tax return with a Schedule C. An LLC also offers flexibility with taxes, as it can be treated like a sole proprietorship, a general partnership, or a corporation for tax reasons.
It’s important to remember that starting an LLC involves more steps and legal needs, like filing Articles of Organization and paying filing fees.
Useful resources to help start your sole proprietorship in Arizona
- Arizona Secretary of State’s website
- Arizona Corporation Commission Business Search
- Arizona Secretary of State Entity Search
- United States Patent and Trademark Office’s Trademark Electronic Search System
- Arizona Department of Business and Professional Regulation (DBPR)
- Arizona Business One Stop
- Arizona Department of Revenue
- Transaction Privilege Tax (TPT)
- IRS Employer Identification Number (EIN) Online Application
- Schedule C
- Schedule SE
Do I need to register my sole proprietorship with the state of Arizona?
No, registering a sole proprietorship in Arizona is not required. You may register a trade name with the Arizona Secretary of State’s Office for additional legal protection and to establish your business’s identity.
What taxes do I need to pay as a sole proprietor in Arizona?
As a sole proprietor in Arizona, you must report and pay federal taxes on your business income using Schedule C on your personal income tax return. Depending on your business activities, you may be subject to state taxes, such as Transaction Privilege Tax, and local taxes or fees.
Can I hire employees as a sole proprietor in Arizona?
Yes, you can hire employees as a sole proprietor in Arizona. If you have employees, you must obtain an EIN from the IRS and fulfill your tax and reporting obligations as an employer.
Do I need liability insurance for my sole proprietorship?
While not legally required, having liability insurance for your sole proprietorship is recommended. General business liability insurance can protect you from potential legal claims or damages from your business activities.
Can I convert my sole proprietorship to an LLC in the future?
Yes, converting your sole proprietorship to an LLC is possible if you change your business structure. The process may involve filing various forms and complying with state and local requirements.
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