LLC vs S-Corp in Arizona

Arizona has a flat 2.5% personal income tax (effective tax year 2023 and after) and a 4.9% corporate income tax rate. Arizona has no franchise tax. The Arizona Corporation Commission (AZCC) handles the entity filing. The IRS handles the tax classification via Form 8832 and Form 2553. An Arizona LLC can elect to be taxed as an S corporation. Arizona LLC basics. - Articles of Organization filed with the Arizona Corporation Commission. The standard filing fee is $50 (expedited filing carries an additional fee). - No annual report is required for an Arizona LLC. Arizona is one of the few states with no LLC annual report or annual fee. - Publication requirement. Under ARS 29-3201, a new LLC formed outside of Maricopa County or Pima County must publish a notice of formation in an approved newspaper in the county of the known place of business for 3 consecutive publications within 60 days of the AZCC approval. LLCs with a known place of business in Maricopa or Pima County are exempt because the AZCC publishes those notices on its database. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with IRS Form 2553. Arizona S corp basics. - Arizona recognizes the federal S election. An S corporation files Arizona Form 120S, the Arizona S Corporation Income Tax Return. Income generally passes through to the shareholders and is reported on their individual Arizona returns at the 2.5% flat rate. - Arizona's 4.9% corporate income tax applies primarily to C corporations. An S corp is generally not subject to that 4.9% rate, except for items specifically subject to corporate-level tax. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Arizona also imposes state unemployment insurance (SUI) tax through the Arizona Department of Economic Security once the business crosses the wage threshold. Why an Arizona trades shop might elect S corp. The main driver is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Arizona's 2.5% flat state rate applies to the owner's pass-through income either way, so the state-tax side is roughly neutral between LLC and S corp. The federal payroll-tax math is where the decision is made. Rule of thumb. Start as an Arizona LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Arizona construction clients can run the breakeven for your numbers and confirm the Arizona filings, publication steps (if applicable), and AZ ROC license-holder requirements for the entity you choose.