As an entrepreneur, one of the biggest decisions you’ll make is what entity type to form. A lot of aspiring business professionals are drawn to the Limited Liability Company (LLC for short).
And it’s not surprising why: an LLC gives personal asset protection and a flexible taxation structure without compromising flexibility and easy business upkeep. Long story short, it’s easy to operate an LLC (okay, relatively; all business is a bit complicated).
However, if you’ve looked at the Arizona Corporation Commission’s business resources, you’ll quickly notice that not all LLCs are created equal. Arizona distinguishes between standard LLCs and PLLCs.
Not sure what that means? Don’t worry; we’ve got you covered. In this guide, we’ll cover everything you need to know about Arizona PLLCs, including how they differ from LLCs, who can form one, and more importantly, how to get started.
Arizona LLC vs. Arizona PLLC: What’s the difference?
On the surface, LLCs and PLLCs seem really similar. And quite frankly, they have more similarities than differences. Most importantly, both LLCs and PLLCs have what’s commonly referred to as “limited liability” or “personal asset protection.”
We won’t give a long-winded explanation, but essentially, personal asset protection ensures that your private funds, your house, your car, and other assets can’t be claimed if your business is sued or defaults on a debt. In other business types (a sole proprietorship, general partnership, etc.), that can happen—and the consequences can be disastrous.
In general, almost anyone can form an LLC. However, many states, Arizona included, don’t allow certain professions to form a standard LLC; they have to form a Professional Limited Liability Company instead (a Professional Corporation is also an option, but we won’t go into that here).
Here’s why: a PLLC combines elements of a standard LLC and a business like a partnership. Creditors cannot come after the personal assets of a PLLC’s members. However, the PLLC still allows for members to be sued for malpractice.
So if you’re an engineer and one of your designs causes an injury that gets you sued, you can be held accountable. But if another member is responsible for the malpractice, you’re not penalized.
Arizona is a bit unique; only realtors are required to form as a PLLC (unless they opt for direct payment of their commissions; then they can form an LLC). That said, other professions can form a PLLC if they choose.
The state is also pretty picky about who can be a member (i.e., full owner) of a PLLC. Only those who have an Arizona or other state’s license in the business’s profession can hold an ownership stake in the business. There’s one unique exception: spouses of licensed members can also be members, but they hold no voting rights in the business. Aside from that, Arizona is a “no license, no membership” kind of state.
Does your business fall under the state’s restrictions for PLLCs? If not, check out our guide for forming an Arizona LLC. But if you’re required to form one or you simply option for the PLLC over an LLC, then this guide can help.
How to Set Up an Arizona PLLC
Setting up an Arizona PLLC might seem complicated on the surface, but if you know what to do, it’s a fairly straightforward process. In the rest of this guide, we’ll cover everything you need to know for setting up your PLLC. By the time we’re through, you’ll have your business up and running.
If you’re busy and just want to hand off the PLLC formation, Incfile and Northwest are two good PLLC formation services that take care of it for you. Sadly, our favorite LLC service Zen Business does not (yet) offer professional LLC formation.
1. Ensure your professionals have the necessary licenses
Remember how we said that nearly every member of a PLLC needs to have a license? You’ll want to take care of that step before handling anything else. Thankfully, the Arizona Commerce Authority offers a very helpful resource page for small businesses that covers almost everything there is to know about Arizona licenses, from local to federal licenses. From there, you can find the right regulatory board for your industry and get started on any remaining applications.
2. Choose a name for your PLLC
Technically speaking, you can take care of this step while you’re handling licenses. And if you’re like us, you’ll want to give it plenty of thought. Thankfully, Arizona doesn’t have a ton of rules on what your name has to be. For starters, your name cannot be the same as the name that’s already in use in the state. You can use a Business Entity Search to check availability.
Arizona also requires your business name to include one of the following designations:
- Professional Limited Liability Company
In addition, your name should include some sort of indication of whether your business is owned by one or multiple members. For more information on naming requirements in Arizona, check out the state’s Naming Standards resource or our AZ LLC naming guide.
As long as you meet those three requirements, just about any name is fair game. Your own creativity is the only limit. That said, we recommend that you pick a name that’s memorable, easy to say and spell, and gives your customers an idea of what services your business provides. Last but not least, pick a name that you and your members like—at the end of the day, it’s your business!
If you’ve thought of the perfect name but you’re not quite ready to use it, you can reserve it by filing an Entity Name Reservation Application. There’s a $45 fee for this filing ($35 if filing by mail). Once complete, the form will ensure that your name is protected for 120 days.
3. Appoint a registered agent
Every registered business, regardless of type, is required to appoint a registered agent in Arizona (commonly referred to as a Statutory Agent in Arizona; it’s just a difference in terminology). Essentially, a registered agent acts as the point of contact between the state and your business. Any official communications—whether that’s a reminder to file your annual report or service of legal process against your business—will be delivered to your registered agent, not your business.
You can serve as your own registered agent, but we recommend that you appoint someone else. It simplifies your life and keeps your personal address off the public record (an agent’s address is listed as public information). We have a few recommended services, too. For more information on registered agents and what the role includes, look here.
You are required to list your registered agent on your Articles of Organization, so don’t skip this step!
4. File your Articles of Organization
Once you’ve taken care of licenses and appointing your registered agent, it’s time to officially form your business! You can do so by filing the Articles of Organization. In Arizona, PLLCs and LLCs use the same form. That said, PLLCs will need to complete an additional section detailing the types of services the business provides.
In general, this document informs the state about your business, including what profession you’re involved in, who the members are, how the business will be managed, contact information, the name and address of your registered agent, and more.
The filing fee varies depending on how you choose to file. It’s $50 for mail-in documents, but if you file online, then your document is regarded as “expedited,” taking the fee up to $85. Once the state processes and approves your Articles, your business will be an official entity in the state of Arizona!
What’s next: Maintaining your Arizona PLLC
Your PLLC is now an official entity within the state. Exciting stuff, right? Take a deep breath, congratulate yourself on your hard work…and then get back to it, because there’s more to be done.
Honestly, forming the business is the relatively easy part. There are plenty of ongoing requirements you’ll need to take care of. Failing to do so could cost you your good standing in West Virginia (or just make life more difficult than it needs to be).
Let’s jump into what you should do after filing your Articles of Organization.
1. Draft an operating agreement
Unlike a corporation, which must file bylaws with the state, an LLC or a PLLC is not required to file an agreement with the state. However, that doesn’t mean you don’t need to write one. All PLLCs should draft an LLC operating agreement.
The document itself doesn’t need to be complicated; long story short, it should dictate how your business operates. But writing one at the outset will help down the road. For example, an agreement can detail how new members join the business, how they buy out, how profits are distributed, the rights and responsibilities of each member, and more. By setting these policies out in the beginning, you can set yourself up for success.
An operating agreement is also essential if you intend to get a business bank account; most banks request a copy of your agreement when you open an account.
2. Get general business licenses
Don’t confuse this step with the professional licenses we’ve listed above! As a PLLC, industry-specific licenses are part of the game. You can’t technically exist without those. However, it’s not uncommon for states to also require a general business license.
Arizona doesn’t have a statewide general business license that applies to every single entity in the state. Instead, Arizona cities and counties handle business licenses. So before you get too involved in business, you’ll need your local licenses. Then you should be set to go. But just to make sure that you’ve covered all of your bases, we recommend double-checking Arizona Commerce Authority’s Business Licensing page. It’s possible that there’s a unique license type that applies to your business that we haven’t touched on here.
3. File for an Employer Identification Number (EIN)
If you plan on having employees—even if it’s just one or two—then you’ll need to obtain an Employer Identification Number from the IRS. Technically, you can hire someone to file this form for you, but we recommend doing it yourself. It’s free to do on your own, and (unlike a lot of IRS tax forms) pretty easy to file.
Please note that you need to complete the filing in one sitting, so be sure to have your Taxpayer Information Number (the SSN for most people) on hand. Once you complete the filing online, you’ll receive your number almost immediately.
4. Look into business insurance
You’re a licensed professional. You’ve taken the exam, or you’ve worked hard to obtain the certifications needed for your trade. But don’t assume that your license alone will protect you from all the things that can go wrong while running your business.
Ideally, nothing too drastic will happen, but just in case, it’s a good idea to obtain liability coverage for your business. Arizona does not require you to have a general business policy, but we recommend it.
However, Arizona does require all businesses with one or more employees to obtain workers’ compensation insurance. This policy protects both you and your employees if and when there’s an accident on the job. You can learn more about these requirements at the Industrial Commission of Arizona.
Last but not least, you should get a business auto policy for any company-owned vehicles (if applicable).
5. Complete annual filings
Every year, your PLLC will have two primary annual filings: taxes and annual reports. Almost every state requires both types, but the exact timing and procedures for them varies from one state to the next. Let’s talk about taxes and annual reports in Arizona.
One of the biggest advantages to a PLLC is that you can choose your taxation structure. You get to elect to be taxed as a corporation (the business itself pays the taxes) or as a pass-through entity (the tax burden passes through to the members, who pay the tax as individuals).
Arizona’s income taxes are pretty straightforward; the corporate income tax is a flat rate of 4.9%. The individual tax rates vary, though. Depending on your income levels, you’ll pay somewhere between 2.59% and 4.5%. Those taxes are lower than the national average.
Technically, Arizona doesn’t have a sales tax. Instead, there’s a Transaction Privilege Tax, which requires a TPT license. Thankfully, the tax functions exactly the same as a sales tax. The rate currently sits at 5.6%, but Arizona allows cities and counties to tack on local rates, too.
We could dig into all the miscellaneous tax types that could apply to your business, but we don’t want to make this guide tedious! For a fuller look at taxes in Arizona, check out the state’s guide, Business Basics: A Guide to Taxes for Arizona Businesses. The Arizona Department of Revenue is also another helpful source for business tax types.
Surprise! Arizona actually doesn’t require annual reports for PLLCs. As long as you meet your annual income tax reporting requirements, you should be set to go.
6. Set up a business bank account
One of the biggest advantages to a PLLC is the fact that your personal assets are protected (with the exception of malpractice). However, those assets are only protected if you keep your personal funds and your business funds completely separate. Mixing them is a major legal no-no.
To keep them separate, you’ll need to get a business bank account. As an added bonus, you’ll be able to get checks and debit cards for your business, which makes it easier to buy supplies for your business. Plus, a lot of people are more comfortable writing checks to a business than they are writing a check to “John Smith.” It gives you another level of credibility with your clients.
By permitting professionals to form PLLCs, Arizona provides you with unique opportunities: liability protection, opportunities to work with fellow owners, flexible taxation, the reputability of a registered business, and more. Setting up a PLLC isn’t a walk in the park, but by following the steps in this guide, it doesn’t have to be difficult. We hope this guide has helped you do just that, and we wish you the best as you start a PLLC in AZ.