How to Start a Business in Arizona

How to start a business in Arizona

If you decide Arizona is the right state for your new venture, take the following steps. Many of these elements are the same as they would be for starting a business anywhere else. 

1. Define your business idea.

If you’re considering starting a business, you likely think you have a great small business idea. To expand your idea, get a general feel for other similar businesses in the area. Investigate what industry leaders in Arizona are doing, and look for ways you can bring something new or improved to the market. 

During this stage, you should also consider your target customers. Determine the type of people you want your business to attract, and define how you plan to address their pain points.

2. Choose a business structure.

Your Arizona company will need a legal structure, which will affect some core elements of your business. This includes how you file taxes and the personal responsibility you could face during a business lawsuit. 

There are four main legal structures: 

• Sole proprietorship
• Partnership
• Corporation
• Limited liability company (LLC)

To find the best structure for your business, assess its setup, needs and long-term goals.

3. Get a business license.

The process for registering your business depends on the type of legal structure you choose. For example, if your business is registered as an LLC in Arizona, you must submit documents for Articles of Organization to the Arizona Corporation Commission.

Though not all Arizona companies need a business license, you’ll likely need one if you offer a taxable product or service. You might also need a license if your business is regulated by a federal, state or government office. For example, businesses in fields such as construction, medical home care, liquor sales and home inspection require licenses.

4. Hire employees.

If you’re planning to bring on a team for your business — whether it includes one or 100 people — you’ll need to start the hiring process. Your team’s founding members will set the tone for future employees and uphold your company culture with customers. Choose your employees carefully, and invest time and resources into appropriate training.

Bringing a team on board introduces additional requirements for your business, such as running payroll, reporting new employees to the Arizona New Hire Reporting Center and registering for a federal employee identification number.

Opportunities and advantages of starting a business in Arizona

Arizona’s low tax rates, business credits and limited regulations — along with sunny weather and a low cost of living — have made it attractive to businesses. 

Below are some additional benefits of starting a business in Arizona.

1. Arizona enjoys healthy economic growth.

Arizona’s economy is growing on par with the nation, reaching 2.5 percent in 2022. While that’s not a staggering growth rate, its reliability provides a level of certainty for Arizona’s entrepreneurs — a benefit other states don’t necessarily enjoy. In fact, for the last decade, Arizona’s economic growth rate has often been above the 2 percent mark — no small feat for a state enduring an economic recovery.

“Real estate seems to be stable, and more people are moving to the state than leaving,” said Scott Curry, president of PURE Grips in Arizona. “More businesses are moving to Arizona because of the favorable business environment and the relatively low cost of living.”

The ease of establishing a business in Arizona appealed to Lisa Barrington, founder and principal of Barrington Coaching, an Arizona-based strategic consulting and coaching firm.

“Setting up an LLC in Arizona is easy, fast, and low-cost — I have more than one,” Barrington noted. “It’s $50 if you do it yourself.”

Barrington also cited Arizona’s high opportunity levels as consumers move to the state and businesses relocate from other states, such as California. “There is a great deal of opportunity for small business owners in Arizona between the influx of consumers and the influx of businesses with which they might work with or benefit from,” she said. 

In fact, a three-year study conducted between 2018 and 2021 by Spectrum Location Solutions found that Arizona is the fifth-most attractive state for businesses leaving California. According to the study, 352 companies relocated their headquarters to other states during this period. Arizona was a major beneficiary of that divestment.

2. Arizona has manageable taxes for businesses. 

Perhaps part of the reason so many relocating businesses are happy to move to the Grand Canyon State is its low and moderate taxes. The state sales tax is middle-of-the-road at 5.6 percent, but the flat corporate income tax of 6.968 percent and the five-bracket personal income tax ranging from 2.55 percent to 2.98 percent make the overall tax burden manageable. 

Like in most other states, additional property and sales taxes are levied from municipality to municipality and county to county, so the total tax burden depends on your exact location.

“The tax rate is fairly low in Arizona, which makes it appealing to small businesses,” said Tom Wheelwright, an Arizona CPA and author of Tax-Free Wealth. “The Arizona Department of Revenue isn’t bad to deal with, and cities often have tax incentives for opening a business in an enterprise zone.”

“Arizona taxes are extremely fair,” added Joel McLaughlin, founder of Dataflurry.com. “You do need a business license if you are selling physical goods … to an Arizona resident.”

Arizona has a transaction privilege tax. It’s similar to a state sales tax, and the appropriate license is obtained from the Arizona Department of Revenue. Businesses also must register for the Arizona unemployment tax and employee withholding tax if they hire employees.

Resources to help business owners stay current on their Arizona tax obligations include an overview of taxable services and a guide to sales tax exemptions and exclusions from the Arizona Department of Revenue.

3. Arizona’s growing labor market is a plus for businesses.

Arizona’s labor market is a huge plus for the small business community. “Labor selection in Arizona is always great,” said McLaughlin. “There is tons of talent to choose from.”

The state’s population, labor force and employment rates continue to grow. Arizona’s unemployment rate is at 4.1 percent, higher than the national average of 3.5 percent. Although the unemployment rate has been above the national average for more than a decade, it’s far below Arizona’s peak of 10.4 percent in 2010 and is moving in the right direction.

In fact, the state generated substantial increases in employment in 2022, adding more than 100,000 jobs over the course of the year. This translated to 3.8 percent growth, outpacing the national rate of 1.1 percent. Most job gains were in manufacturing, technology, distribution and business services.

Moreover, the higher unemployment rate has led to a competitive job market where employers can still find highly educated, qualified employees with the skills businesses need.

“The state is full of highly competent and educated workers that have the skill set to be an asset to companies and their growth,” said William Moreland, president of Moreland Training and Associates.

Meanwhile, the cost of living in Phoenix is affordable compared to other major metropolitan areas, keeping labor expenses manageable. According to recent Census data, Phoenix was among the cities with the most population growth in 2021. Mesa, Gilbert, Tucson and Scottsdale also attracted newcomers to the state. In fact, Phoenix is the fifth-largest U.S. city, with a population of more than 1.6 million people.

Challenges of starting a business in Arizona

While there is optimism for aspiring Arizona business owners, there are some potential challenges to consider, including access to capital and lower personal income among residents. Still, neither of these factors has dampened entrepreneurs’ enthusiasm about the Grand Canyon State.

1. Arizona businesses face challenges accessing capital. 

Businesses in Arizona face difficulties accessing startup and growth capital (a problem that plagues much of the nation), despite its range of incubators and venture capitalist firms. 

Arizona entrepreneurs and professionals say that while innovative ideas can find support, it’s not easy to distinguish oneself from the crowd. “The growth capital is hard to come by in Arizona,” Curry said. “Companies need to look outside of Arizona for the growth capital to take them to the next step in their journey.” 

In an environment where borrowing options are limited and microlending isn’t well established, startups often must meet exceptionally high standards to gain lenders’ favor. “Unfortunately, Arizona isn’t known for producing high-growth, highly scalable businesses to date,” Curry said. “Hopefully, that is going to change in the foreseeable future. For now, Arizona startups need to execute and gain traction to be seen as viable in the market.”

2. Arizona residents have lower personal income. 

While the cost of living is moderate in Arizona, personal income is lower than the national average, meaning the average Arizonan has less disposable income to spend on small businesses’ goods and services. That’s a big concern for many in-state small businesses that rely on residents’ disposable income for most of their proceeds.

According to the Bureau of Economic Analysis, Arizona’s per capita personal income was $55,487 — 86.5 percent of the national average — in 2021. Even considering the cost of living, that’s a negative indicator. Although per capita personal income in Arizona rose 6 percent in 2020, before adjustment for inflation, that was still below the national pace of 7.3 percent. 

“People love to shop at small retailers in Arizona, but they’re not spending very much,” said Brad Plothow, chief growth officer at Intergalactic. For example, when it comes to restaurants, Arizona consumers dine out but don’t overindulge. “As with retail, Arizona consumers love to patronize local independent eateries, but they don’t spend much,” Plothow explained. “Arizona ranks fourth nationally for foot traffic to local restaurants but 35th for average ticket. Even a marginal increase in spending would bump Arizona restaurants into the top 10 nationally for restaurant sales.”

Best industries for starting a business in Arizona

While many businesses can find success in the Grand Canyon State, the following industries are particularly favorable:

• Real estate is booming in Arizona. There are several booming niches in Arizona’s real estate market, including residential, investment properties, property management and vacation homes. In the second quarter of 2022, Arizona’s real estate industry reached $67.4 billion in GDP. Between 2021 and 2022, property values in the Phoenix metro area increased by 31 percent. Market predictions show that housing prices will continue to grow in 2023 (though perhaps slowly), piquing investor interest. Whether you want to manage vacation homes or lease out an apartment complex, there are several options for starting a real estate business in Arizona.
• Manufacturing is an Arizona growth opportunity. The manufacturing industry covers a wide range of business ideas, from creating automotive parts to HVAC equipment, furniture, and electronics. Arizona has become a hub for this industry, with abundant opportunities for growth and space for manufacturing facilities. Between 2015 and 2021, Arizona’s manufacturing industry had a GDP growth rate of more than 30 percent, over two times that of the U.S.
• Healthcare is a favorable industry in Arizona. As more people move to Arizona, the demand for healthcare services increases. Arizona healthcare industry possibilities include medical transcription, diabetic care, rehabilitation and medical records management. Arizona’s healthcare industry has been steadily growing, with additional opportunities rising in bioscience, research and technology.

Resources for small businesses in Arizona

If you’re a small business owner in Arizona looking for resources to help you move forward, here are a few organizations you might want to learn more about.

1. Arizona SCORE

SCORE’s volunteer business professionals and expert mentors counsel and guide entrepreneurs looking to start or expand their businesses. The services are free and volunteer-driven. Here are some of the main chapters in Arizona. (Visit the SCORE website for a complete list of locations.) 

• Greater Phoenix SCORE
• Northern Arizona SCORE
• Southern Arizona SCORE

2. U.S. Small Business Administration (SBA) Arizona District Office

The SBA Arizona District Office offers financing and small business grants as well as consultations and counseling services. Small business owners have opportunities to apply for federal government contracts through the SBA and avenues to obtain assistance after natural disasters.

3. Arizona Small Business Development Centers

Arizona hosts several development centers for small businesses. Each is dedicated to supporting the development and retention of small businesses, helping entrepreneurs do everything they need to do, whether that’s write business plans or navigate the tax code. You can find your region’s Small Business Development Center via the Arizona SBDC Network.

4. Arizona Small Business Association (ASBA)

ASBA bills itself as the voice of small businesses in Arizona. It provides a host of resources for businesses with at most 500 employees, including education and mentoring opportunities, professional connections, and support through strategic partnerships. It also advocates for legislation and regulations that support a pro-business environment.

5. Arizona Commerce Authority Small Business Services

A program from one of Arizona’s economic development organizations, SBS provides information on business licensing and statewide resources for every stage of business development. It also creates policies and programs that address the needs of small businesses. It especially focuses on providing support and opportunities for Arizona’s small, minority- or women-owned and disadvantaged business enterprises.

Arizona offers excellent opportunities for small businesses

Whether you want to open a home health corporation or a real estate LLC, there are many opportunities for starting a small business in Arizona. If you create a thorough plan, research the state, and take the appropriate steps, you can enter one of Arizona’s many expanding industries. Before long, you might be a thriving business owner in the Grand Canyon State.

Shayna Waltower and Adam Uzialko contributed to this article. Source interviews were conducted for a previous version of this article.