Now’s a great time to start a business in Arizona. As California’s real estate prices and taxes continue to soar, its neighbor to the southeast, with its fast-growing cities and friendly tax climate, presents an attractive alternative location for budding entrepreneurs to launch the business of their dreams.
Between July 2017 and July 2018, no city in the U.S. welcomed more new residents than Phoenix, and despite its remarkable growth, Phoenix remains the most affordable large city where residents are able to live comfortably, according to Inc.com.
With a large, expanding base of young consumers and a reasonable cost of living, the Phoenix metropolitan area offers the perfect environment to start a new company. Sweetening the pot is Arizona’s average property tax rate of 0.845 percent, the 8th lowest in the country. Convinced yet? In this guide, we’ll walk you step-by-step through the process of starting a business in the Copper State.
Starting a Business in Arizona? Check out our ranking of the Best Cities to Live in Arizona.
Arizona small business statistics at-a-glance
- In the 12 months between July 2017 and 2018, Phoenix added 25,288 residents, over 4000 more people than San Antonio, America’s second-fastest-growing city.
- Arizona ranks 8th in property tax in the country and ranks in the upper half of states in corporate tax and individual income tax.
- 553,779 small businesses operate in Arizona, comprising 99.4 percent of all Arizona businesses.
- One million Arizonans are employed by small businesses, accounting for 44.5 percent of the state’s total workforce.
- The number of small business proprietors increased by 2.6 percent in 2016 over the previous year.
- 39,570 net jobs were created by small businesses in 2015, with firms employing 20 workers or less experiencing the greatest gains, adding 22,287 net jobs.
- Accommodation and food services are the top industries for small business employment in the state, followed by health care and social assistance and construction.
Sources: U.S. Census Bureau, Small Business Administration, Tax Foundation
Starting a business in Arizona in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Arizona market for your business idea.
- Is there a demand for your product/service in Arizona?
- Who is your target market?
- Do existing businesses in Arizona offer a similar product/service?
- What makes your business unique compared to the competition?
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Arizona.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors. Plenty of both types of investors are operating in Arizona.
Arizona Angel Investors and VCs
- Desert Angels – A Tucson-based non-profit organization comprising over 85 angel investors that have funded over $50 million dollars in 115 companies in the region.
- Arizona Commerce Authority: Angel Investment – A program established by the state legislature focused on expanding early-stage investments for Arizona small businesses.
- Thunderbird Angel Network – A group of accredited angel investors looking to seed early-stage Phoenix-area startups with the potential for rapid growth. The Thunderbird Angel Network holds quarterly dinner meetings where members listen to pitches.
Additional Investor Resources
- Angel.co: Arizona Angel Investors – A vast listing of nearly 5000 investors interested in investing in Arizona businesses. Individual listings include brief information on an investor’s professional background, as well as their areas of interest, and the total number of investments they’ve made.
- Cayenne Consulting: Arizona Venture Capital Directory – A directory of venture capital funds, angel investors, and private equity firms operating in Arizona, along with their size and areas of focus.
- PHX East Valley Angel Investor Initiative – A group dedicated to recruiting angel investors and raising awareness of the importance of funding East Valley area tech startups. This site is geared more towards investors than entrepreneurs, but they hold invaluable workshops for everyone interested in learning about contemporary trends in the local tech start-up and investment scene.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
6. Register your business
If you haven’t already done so, now it’s time to choose a name for your business and search the Arizona business name database to check its availability.
After determining that your chosen name is unique, you can file a trade name online with the Arizona Secretary of State, which is good for 5 years from the date of receipt. The fee is $10 and processing typically takes 2-3 weeks. For those running a sole proprietorship, this step is not required in Arizona, although it is generally recommended.
Those forming a corporation or LLC must file with the Arizona Corporation Commission. If you are forming an LLC, you will complete and submit Articles of Organization, while forming a corporation requires Articles of Incorporation. After your paperwork is approved by the A.C.C., you will receive an approval letter with additional instructions.
As in every state, appointing a registered agent to receive government paperwork and process notices on behalf of your business is required in forming a corporation or an LLC in Arizona. You can be your own registered agent, although hiring an experienced individual or business is recommended for those completing the process for the first time.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
For sole proprietorships, an EIN is optional, although it is required for corporations and LLC’s. You can apply online for your EIN through the IRS website, or fill out and mail this form.
Each state has its own laws and taxes regarding businesses. Head to the Arizona Department of Revenue website for information on state taxes that possibly apply to your business.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Major business banks operating in Arizona
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
A generic “business license” is not required or issued by the state of Arizona, however, there are several types of licenses and permits that may apply to you depending on your type of business and the area that you are based in. Visit the Arizona Commerce Authority’s Business Licensing page for more information.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
The Phoenix metropolitan area is the largest population center in the state, and most entrepreneurs will choose to operate in the area. However, it isn’t the only option: the large city of Tucson presents a great alternative. As home to the University of Arizona, Tucson has a young, well-educated population that provides a large talent pool from which to staff a business. Flagstaff, another university town, presents an additional alternative to Phoenix for entrepreneurs.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
Arizona small business resources