Arizona is home to over 472,000 sole proprietorships, making up 70.3% of all businesses in the state, according to the IRS. With low startup costs and minimal paperwork, sole proprietorships are popular for Arizona entrepreneurs looking to start a business quickly and easily.
In this article, I’ll explain what a sole proprietorship is, its advantages and disadvantages, along with a guide on how to get started.
Related: How to start a business in Arizona
What is a sole proprietorship?
A sole proprietorship is the simplest business structure wherein the business and the owner are considered the same legal entity. This means the business has no existence apart from the owner, and there is no legal distinction between the owner and their business. Thus, the owner is entitled to all profits and has unlimited responsibility for all losses and debts.
A unique aspect of a sole proprietorship in Arizona is that a husband and wife can operate as a single entity, thanks to the state’s community property laws. This feature could be particularly beneficial for family-run businesses.
Sole Proprietorship Advantages
Simplicity and ease of formation: Setting up a sole proprietorship in Arizona requires no formal setup process or fees, making it one of the easiest business structures to form.
Control: As a sole proprietor, you have complete control over all decisions, operations, and profits. You answer to no one but yourself.
Tax simplicity: Sole proprietors report their business income and expenses on their personal tax returns, simplifying the tax process.
Sole Proprietorship Disadvantages
Unlimited personal liability: The major downside of a sole proprietorship is that the owner is personally liable for all business debts and obligations.
Difficulty raising capital: Sole proprietors may struggle to raise funds as investors may be more hesitant to invest in a business where they cannot own equity.
Less business continuity: The business ends if you retire, die, or become disabled. It’s hard to transfer ownership of a sole proprietorship.
While sole proprietorships offer simplicity and control, they come with significant drawbacks, primarily the unlimited personal liability. Owners are personally responsible for all the business’s debts and liabilities, which could potentially risk personal assets.
If liability protection is a priority for you, then forming a Limited Liability Company (LLC) might be a better choice. In an Arizona LLC, your personal assets are generally protected from business debts and claims. This means that if your company incurs debt or is sued, your personal assets, such as your home or savings, are not at risk.
Steps to Start a Sole Proprietorship in Arizona
Step 1: Come Up With a Business Name
In Arizona, sole proprietors have the option to operate their business either under their legal name or under a fictitious business name (DBA). For example, Jane Doe could run her catering business simply as “Jane Doe,” or she could file a DBA certificate to operate as “Taste of Tucson Catering.”
You can choose any name as long as it is not already in use by another business in the state. You can check the availability of a business names on the Arizona Corporation Commission’s name database.
Step 2: File the Trade Name Form (optional)
In Arizona, a business that wants to operate under a name different from the legal name of the owner or entity often uses a DBA, also known as a Trade Name. This name differs from the legal name of the business. The registration of this name, while not mandatory in Arizona, is a common practice as it provides several benefits.
The DBA registration offers transparency about the individuals operating a business, making it easier to track down the owners if necessary. It also helps prove the existence of a business, facilitates the opening of a business bank account, and helps in registering a merchant account to accept credit cards, among other benefits.
Although businesses in Arizona can choose to use a name without registering it, registering a Trade Name is a widely accepted business practice. This action also prevents other businesses from registering the same name, ensuring uniqueness and making it harder for others to use the same name.
To register a DBA in Arizona, you’ll need to submit a form. The form requires details such as the desired Trade Name, the date the name was first used, the type of business entity, the nature of the business, and the owner’s contact information. Note that the physical form must be notarized before signing and processing.
Once completed, you can submit the Trade Name form online or mail it to:
Arizona Secretary of State
Attn: Trade Name/Trademark Division
1700 W. Washington Street, FL. 7
Phoenix, AZ 85007-2808
The standard filing fee is $10, with normal processing taking 2-3 weeks. Expedited processing, which takes 24-48 hours, is available for an additional $25.
Step 3: Get an EIN
An Employer Identification Number (EIN) is only mandatory for sole proprietors if they have employees. However, it can be useful for opening a business bank account or if you decide to hire employees in the future.
Related: How to register an EIN
Step 4: Research Business License Requirements
Here is a summary of the key information on business licensing requirements in Arizona:
Business licenses: While there is no general state business license, many cities in Arizona require businesses to obtain a local license to operate. Licensing rules vary by location and industry.
Transaction Privilege Tax (TPT) license: The main state registration businesses need is the TPT license, also known as a sales tax permit, from the Arizona Department of Revenue. The TPT is a tax on gross sales.
Learn how to register for the Transaction Privilege Tax
Professional and occupational licenses: Occupations like construction, transportation, massage therapy, child care, home inspection, and pest control require an occupational license from the state. The Arizona One Stop portal provides more information on licensing fees and requirements for specific professions.
Related: What licenses are required in Arizona?
Starting a sole proprietorship in Arizona can be a great way to get your business off the ground quickly and easily. With minimal paperwork, low costs, and no formal registration required, launching a sole prop lets you avoid much of the complexity of other business structures. While sole proprietorships do come with unlimited personal liability, for many entrepreneurs, the simplicity and control are worth the trade-off.
Arizona’s business-friendly environment makes it a great place to launch a lean startup as a sole proprietorship. Follow the steps covered in this guide, leverage state resources like the Arizona One Stop portal, and you’ll be on your way to starting your successful sole prop!