According to the IRS, Arizona is home to over 472,000 sole proprietorships, which make up 70.3% of all businesses in the state. With low startup costs and minimal paperwork, sole proprietorships are popular for Arizona entrepreneurs looking to start a business quickly and easily.
This article will explain a sole proprietorship, its advantages and disadvantages, and the steps to starting one.
Related: Arizona Small Business Startup Checklist
What is a sole proprietorship?
A sole proprietorship is the simplest business structure in which the business and its 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: 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 have 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. Your personal assets are generally protected from business debts and claims in an Arizona LLC. 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 used by another state business. You can check the availability of Arizona 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 owner’s or entity’s legal name often uses a DBA, also known as a Trade Name. This name differs from the legal name of the business. While not mandatory in Arizona, registering this name 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 when 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; normal processing takes 2-3 weeks. Expedited processing takes 24-48 hours and is available for an additional $25.
Step 3: 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.
Employer Identification Number: An EIN is only mandatory for sole proprietors if they have employees. However, it can be useful for opening a business bank account or hiring employees in the future.
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 Arizona 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.