How to start a sole proprietorship in Arizona

There are times when you have a business idea but don’t have the necessary finances to launch an LLC or a corporation. In such a scenario, you can start a sole proprietorship in Arizona. If you are wondering how to start a sole proprietorship in Arizona then this is the guide created just for that purpose. You will gain information pertaining to various aspects of forming and operating a sole proprietorship including creating a business plan, business name, and obtaining the necessary licenses and permits among others.

Sole Proprietorship in Arizona

Arizona is a growing and fast paced economy as is evident from the state’s real gross domestic product (GDP), which was $414.27 billion in 2023. You will be surprised to know that a large contribution to the GDP is from small businesses including sole proprietorships. There are over 650 thousand small businesses in this state evolving and growing in several key industries. One of the top industries that is home to sole proprietorships in Arizona is food and agricultural exports, and the growth of this has exceeded $1.4 billion. The state also provides several advantages if you are planning to start a new business. You can benefit from a strong infrastructure, robust transportation and logistics network, a highly skilled workforce, low cost of living, and technology hubs like Phoenix.

What is a sole proprietorship in Arizona?

If you are wondering how to start a sole proprietorship in Arizona then let us first try and understand the type of entity structure it has. In fact, a sole proprietorship is known to have the simplest structure as there is a single owner. Hence, it is also known as a sole trader. As opposed to corporations and LLC, this type of company requires minimal documentation. This entity is not considered to be a legal entity and hence you are not required to file any formation documents with the state. This makes it easier to start a sole proprietorship in Arizona. A sole tradership business has different taxation rules and you will not be required to file any federal or corporate taxes.

Important features of sole proprietorship in Arizona

A sole proprietorship in Arizona is a preferred entity structure for start-ups and even home-based businesses. There are several features that make this type of an entity so popular amongst first time business owners. Let’s take a look at some of the top features including the various benefits you may derive.

The foremost feature of a sole proprietorship is that it is a one-man or single-owner organization. This means that decision making lies in the hands of the owner.
If you search sole proprietorship in Arizona for laws, you will realize that this entity is considered as a natural person and not as a legal entity. The bottom-line is that the business and the owner are the same unlike in corporations.
A sole proprietorship in Arizona does not have to be registered or incorporated. This makes it the ideal choice for operating a small or medium scale business.
This type of entity has simple formation requirements. Similarly, closing a sole proprietorship is also very simple. There are hardly any legal processes involved and no requirement of any certificate of cancellation, termination or dissolution.
As a business owner of a sole trader, you will not be required to share your profits unlike in other forms of entities.
Sole proprietorship taxes are filed under the owner’s income tax return

Steps to Start Sole Proprietorship in Arizona

If you are wondering how you can start a sole proprietorship in Arizona then the important thing here is to understand the various steps you may need to take to make your business operational. There are some basic areas to focus on initially, like naming your company, getting business licenses for operations, ensuring you have a proper bank account etc. Let’s look at some of these important or core areas that will help you to start a sole proprietorship in Arizona with ease.

1. Prepare a business plan

Having a great business idea is the starting point but moving from here towards actually establishing and conducting a business is the real challenge. This is where a good business plan will come into play. It is also known as a strategic plan and encompasses several facets of running a company. This is the first goal in the how to start a sole proprietorship in Arizona checklist.

There are several reasons why a business plan is required or rather necessary. One important reason being the ability to see the path forward. A strategic plan will also take into account the market conditions, industry analysis, financial objectives, budgeting, competition, and most importantly, your prospective customers. This document will help you to operate your sole proprietorship in Arizona. Some of the most common aspects of a business plan are:

Executive Summary
Company Description
Core Concept of your business
Initial goals
Long-term objectives
Product and Services
Target audience
Competition and Market analysis
Marketing Plan and Sales Tactics
Operating plan
Financial Plan and Projection

2. Choose an Arizona business name

You can start a sole proprietorship in Arizona only after you have named your company. This stands true for any form of business. The importance of a company name lies in the fact that it will not only communicate with your customer but also enable your business to stand out amidst competition. It is considered as the cornerstone of any brand and hence is integral to your marketing strategy. The business name is often also used for several other purposes like obtaining licenses and permits, registering an office, and applying for a bank account among others. Here are some tips to consider before you can choose and file an Arizona trade name.

Follow the naming guidelines as provided in the Arizona Revised Statutes
It is important to ensure your company name is not similar to that of your competitor
Avoid business names that are hard to spell or pronounce
Your chosen name should have a high recall value amongst prospective customers
The name should be relevant to the product or services being offered
After choosing a name, check for its availability as a domain name for your website
If you want to keep short names then online business name generators can be quite helpful

3. File a Trade name and incorporation

If you have taken a decision to operate a sole proprietorship in Arizona then a business name is of utmost importance. You can either use your legal name as the business name or file an Arizona trade name also known as DBA (Doing Business As) name. The DBA or trade name will allow you to conduct your business under any name other than your legal name.

A trade name is also known as a fictitious business name or an assumed name. Although the registration of a trade name is not a legal requirement in the state of Arizona; it is considered to be a good business practice. In order to register a trade name, you need to search sole proprietorship in Arizona business names as listed with the Corporation Commission. This is also known as the business name availability search and can also be conducted with the office of the Secretary of State. Let’s look at an example to understand this.

Example: Your name is Emily Dune. You want to start a sole proprietorship in Arizona as an IT Consultant. You can use your own name like ‘Emily Dune IT Consulting.’ Alternatively, you can choose to use a trade name like “Dune IT consulting”. Henceforth, Dune IT consulting will be known as the trade name or DBA. You will have to search sole proprietorship in Arizona for name availability prior to registration of the said name.

If your chosen sole proprietorship name is available then you can register it with the state. In order to file Arizona trade name, you will need to fill and submit the Trade Name Registration Application pursuant to AZ Rev Stat § 44-1460 (2023). The application has to be submitted with the office of the Secretary of State along with a filing fee of $10. Alternatively, IncParadise can also help you with the process of filing your Arizona DBA name so that the processing takes place smoothly.

Do you want to start a sole proprietorship in Arizona?

4. Get EIN

Arizona is considered to be a community property state and hence even a couple (husband and wife) are allowed to operate a sole proprietorship company. Hence, if you form a sole proprietorship in Arizona, there will be no formal or state filings whatsoever but you may need to apply for an Employer Identification Number (EIN). This is also known as the Tax ID number or the Federal Tax Identification Number (TIN). This number is used for identifying a business entity.

Generally speaking, when you search sole proprietorship in Arizona regarding taxation, then it will highlight the need for a social security number (SSN). This is more so as according to the IRS, only specific sole proprietorship entities will need to apply for an EIN. You will need to obtain an EIN if any of the following is applicable for your sole proprietorship –

If you have hired at least one employee
If you are planning to operate as a corporation
If you are planning to operate as a partnership
If your company is required to file a federal Employment tax return
If your company is required to file excise tax return
If your company is required to file Alcohol, Tobacco, and Firearms tax return
You apply for a Keogh plan
You are involved with entities like estates or trusts or plan administrators

5. Obtain necessary licenses and permits

If you are wondering how to start a sole proprietorship in Arizona and make it operational then it’s important to focus on business licenses. Any new or existing entity in the state including sole proprietorships will need to apply for and obtain relevant operational licenses in this state. It is important to note that if you start a home-based business then your company may be exempt from specific permit requirements. This rule may vary from one county or city to another. Business licensing in the state of Arizona can be categorized as under:

Arizona transaction privilege tax (TPT)
Professional or Occupational License
City or County licenses and permits
Regulated licenses
Zoning permits

If you start a sole proprietorship in Arizona then you may require single or multiple licenses based on business activity and location of your company. You may even require local permits like those for fire exits and parking. If you are operating your company from your residence then some counties may require you to apply for a home occupation application permit like Cochise County, AZ.

Obtaining the right license and permits can be an extremely challenging task. We at IncParadise have made this task easier by offering our Business License Research Report service. This is a detailed research report that contains a list of filing instructions, supporting document requirements, and fees for all business licenses and permits.

6. Open a bank account for your Arizona business

Whether you start a small business like a sole proprietorship or form a large corporation, there will be profits and losses. This is one of the primary reasons why your company would need to manage its finances properly. There are times when accepting business payments in personal savings accounts can lead to chaos especially in the tax season. The IRS and finance experts hence recommend that every company should have a business bank account. This will enable you to keep your personal gains separate from business gains. You can open this type of banking account before or after you form a sole proprietorship in Arizona.

You can now open an online business bank account with the click of a button. Cheqly, a neo-bank for startups provides an onboarding interface that makes opening a bank account easier and faster. It is a US based bank account with no minimum balance and basic FDIC insurance.

7. Report and pay taxes

Once you have formed any business entity in the state of Arizona including a sole proprietorship, you will need to maintain compliance with the state. These are also known as annual maintenance requirements. Although sole proprietorships are not required to file an annual report, you will still have to file taxes. If you search sole proprietorship in Arizona for taxes then the primary would be a personal income tax return.

You may also be required to file Arizona’s Small Business Income Tax (SBI). This is a fairly new form of tax that allows individual taxpayers like sole proprietorship owners to report their small business income through a separate return. There is a flat 3.0% tax rate. If your business activity focuses on selling certain products or services then you will be required to also file Arizona’s transaction privilege tax (TPT).

Ready to Start a Sole Proprietorship Business in Arizona

If you have decided to start a sole proprietorship in Arizona then it’s a good decision. This type of entity is easy to form and uncomplicated in terms of operations. You will not be required to submit any formation documents with the state. However, you will need to maintain annual compliances and your company will need to obtain relevant business licenses and permits. This will help you to enjoy a good standing with the state.

IncParadise is one of the top registered agents in the state of Arizona and can provide relevant information and assistance towards forming a sole proprietorship in this state. We also offer a wide variety of additional services like filing a DBA, and getting an EIN, among others..