Every traditional corporation is subject to corporate income tax and must collect sales tax on goods sold, but some businesses in some states must also pay a franchise tax or privilege tax. Arizona has a corporate income tax (4.9 percent) but does not have a franchise tax.
Not every small business is a “C” corporation. If you’re a sole proprietorship or a limited liability company, you won’t be subject to state corporate tax on income. Sole proprietors and LLC owners who generate revenue for their own personal needs are taxed like any other salaried or wage-earning person through their personal income tax on the state and federal level.
There are alternative options for companies that want to incorporate but don’t want to pay the 4.9 percent state corporate income tax rate. Companies that file for “S” corporation status with the IRS don’t have to pay traditional federal or state income tax in most cases. Instead, revenue and profits are paid directly to the owners of the corporation who then pay personal federal and Arizona state income tax on the proceeds.
There may be exceptions to the rule for your situation, so speak with a local business or personal tax professional in Arizona for more information.
Yes, any business that’s operating in another state or city that imposes a franchise tax will have to pay it there. Although they’re sometimes referred to as “franchise taxes,” these privilege taxes don’t just apply to franchises.
In some cases, these taxes are just a flat fee, so even companies that operate at a loss in some states or cities will be charged a franchise tax. In other places the franchise tax rate might be based on gross receipts or share value.
What qualifies as doing business in a state or city depends on their local laws. Some states only charge businesses with actual physical locations in the state or city the franchise tax. However, the rules are inconsistent across the country, and may be more nebulous where you operate.
Franchise taxes may not be levied solely against corporations. Even LLCs could potentially be subject to local franchise taxes and business operations fees.
Delaware has a uniquely business-friendly set of tax laws that attract many business owners to incorporate there, even if they don’t plan on operating in Delaware. Unlike most states, Delaware doesn’t impose any corporate income tax on its businesses. People who own shares in Delaware-based companies also don’t have to pay taxes on their shares.
The state also has a robust corporate law court system that is renowned for the consistency of its decisions. Legal disputes in Delaware’s “Court of Chancery” are often preferable to business litigation in states with less predictable judges.
Delaware has essentially made incorporating the nation’s businesses into a business, which is why they’re also extraordinarily fast at doing it. They often process incorporation requests the same day they’re filed.
Owners of businesses incorporating in Delaware also aren’t required to live there. Plus, the state doesn’t require the disclosure of the names of a business’s officers or directors.
Delaware also has a rule that allows a corporation to have the same director, officer and shareholder, which means a small business owner doesn’t need a complex corporate structure in place to get incorporated.
All of these benefits make Delaware incorporation the preferred solution for venture capitalists and angel investors. If a company is seeking venture capital funding, they may be more inclined to incorporate in Delaware.
Arizona businesses that incorporate in Delaware still have to pay Arizona state income tax, so there’s no real tax savings. Delaware also has a franchise tax based on each incorporated company’s share values, even if you don’t actually do business in Delaware.
Arizona businesses incorporated in Delaware also must meet any necessary licensing and operational requirements in Arizona, not in Delaware. Arizona business owners that incorporate in Delaware will need to use an in-state “Delaware registered agent” for legal filing for their business, and if they ever do get involved in a dispute in Delaware they might need to travel there for court.
If an Arizona business owner were to consider incorporating in Delaware it would likely be for the tax and shareholder benefits, but it might not do much to reduce their local state corporate income tax burden.
Most business owners would like to know if there’s anything else they can do or steps they can take to reduce their personal and business income tax burden. At H&H Accounting Services we’re committed to providing reliable, knowledgeable advice on all things business and personal tax related. We can also provide invaluable business accounting, bookkeeping and business consulting assistance.
Give us a call at (480) 561-5805 for a free one-hour consultation.
