Key Takeaways

  • An S corporation in Arizona is first formed as a regular corporation with the Arizona Corporation Commission (ACC) and later elects S-Corp tax status by filing IRS Form 2553.
  • Arizona S-Corps provide limited liability protection and pass-through taxation, meaning profits are taxed at the shareholder level rather than the corporate level.
  • To qualify, the corporation must have no more than 100 shareholders, only one class of stock, and all shareholders must be U.S. citizens or residents.
  • Arizona does not impose a franchise or privilege tax, making it a cost-effective state for S-Corps.
  • S-Corps must file annual reports with the ACC, maintain corporate records and meeting minutes, and comply with IRS requirements for distributions and payroll.

Arizona S Corporation

An Arizona S Corporation has certain requirements, as an S Corporation operates differently than a C Corporation. Specifically, an S Corporation is one that is separate and distinct from the corporation’s owners, also referred to as the stockholders. The purpose of creating an Arizona S Corporation would be to limit liability and pass-through taxation of the business profits.

How to Form an S Corporation in Arizona

To form an S corporation in Arizona, business owners must first create a standard corporation with the Arizona Corporation Commission. This includes filing Articles of Incorporation, appointing a statutory agent, and paying the required filing fee. Once the corporation is legally established, shareholders can elect S-Corporation tax status by filing IRS Form 2553, Election by a Small Business Corporation, within 2 months and 15 days after the beginning of the tax year in which the election is to take effect.

If the election is filed late, it will apply to the next tax year unless the IRS grants relief for late elections. Each shareholder, including spouses with community-property interests, must consent in writing to the S-Corp election.

Arizona S-Corps must maintain compliance by:

  • Filing an annual report with the ACC and paying a $45 fee.
  • Holding annual shareholder and board meetings and maintaining minutes.
  • Keeping a registered agent and updated corporate records on file with the state.

Structure and Governance

When you form a corporation in Arizona, it automatically operates as a C Corp. It isn’t until after the corporation is formed that the business’s shareholders can elect special tax status with the Internal Revenue Service (IRS) to become an S Corporation. The corporation can choose to operate as an S Corporation either immediately after forming or years down the line.  

Once you file the required documentation with the IRS to operate as an S Corporation for tax purposes, a majority of states will also view the corporation as an S Corp. If you choose to begin operating as a C Corp, you can file an application request on the IRS website, but the business must use the S Corp’s fiscal year end (December 31). Additionally, the corporation cannot later switch back to the S Corporation status for a minimum of 5 years.

Shareholders of Arizona S Corporations have limited liability to the debts and obligation incurred by the business, along with limited liability regarding legal actions brought against the company. Therefore, no one can go after shareholders personal assets, whether it is a home, car, bank account, or other tangible/intangible assets. S Corporation shareholders are only liable for the amount of capital they invested into the corporation.

Exceptions to the limited liability rule do exist, including when a corporation has recklessly harmed people or engaged in fraudulent activities.

S Corporations can obtain capital much quicker and more easily than some other types of business structures since corporations can issue and sell stock, along with a variety of other financial products.

Eligibility Requirements for S Corporation Status

To qualify as an S corporation in Arizona, a business must meet IRS eligibility criteria under Subchapter S of the Internal Revenue Code. These include:

  • Having no more than 100 shareholders (a married couple and their estates count as one shareholder).
  • Issuing only one class of stock.
  • Ensuring that all shareholders are U.S. citizens or resident aliens.
  • Operating as a domestic corporation with a December 31 fiscal year-end, unless otherwise approved by the IRS.

S-Corps must also file Form 2553 signed by all shareholders to adopt S-Corp status. Entities such as LLCs can also elect to be taxed as S-Corps by filing the same form if they meet these criteria.

S and C Corporation Tax Differences

• A C Corporation is taxed as a distinct entity. Therefore, the business is required to report both profits and losses on its corporate tax return.

• C Corporations pay corporate taxes on profits, while shareholders aren’t taxed on the corporation’s profits.

• C Corporation shareholders must report and pay income tax on the money they earn from the corporation.

• If a C Corporation wishes to pass the additional profits of the company to its shareholders, then the business would do this through dividends. These dividends would be reported as income on the shareholder's personal tax returns. Therefore, there is double taxation as the corporation is taxed on the profits and the shareholders are taxed on the additional profits that pass-through to them through dividends. An S Corp, however, does not operate in this way.

• An S Corp doesn’t pay income taxes. Rather, the profits of the business pass-through entirely to the shareholders (owners) of the business, and those owners will pay income taxes on their share of the profits.

• Unlike C Corporation shareholders, S Corporation shareholders can balance other types of income by including their own share of the businesses losses on their personal tax returns. However, they can’t reduce their taxes by accounting for corporate losses that are greater than their ‘stock basis,’ which is the amount of money they invested into the business in the first place.

• Only up to 25 percent of an S Corporation’s gross income can come from passive income.

Advantages of an Arizona S Corporation

Forming an S corporation in Arizona offers several benefits for small-business owners:

  • Pass-Through Taxation – Income and losses flow directly to shareholders’ personal returns, avoiding double taxation.
  • Personal Liability Protection – Shareholders’ personal assets are protected from corporate debts.
  • Increased Credibility – The corporate designation improves business reputation with lenders and clients.
  • Investment Opportunities – Shares can be sold or transferred without triggering tax penalties, offering flexibility for growth.
  • Potential Tax Savings – Owners can characterize a portion of earnings as distributions instead of salary to reduce self-employment tax liability.
  • No Franchise Tax – Arizona does not levy a franchise or privilege tax on S-Corporations.

Treatment of S Corporations

While most states view and treat S Corps identical to the way in which the federal government views them, some states have different laws. In fact, some states don’t recognize such business structures. If this is the case, the S Corporation can still exist in that state. The only issue would be that it is treated as an S Corp only by the federal government whereas the state would recognize it as a C Corp.

Some states tax both the S Corp’s profits and the shareholder’s shares of the corporation’s profits. If this is the case, the business is essentially double-taxed in the way a C Corp is. Some states tax S Corps on portions of the income even though they do in fact recognize this type of business structure. Arkansas, New Jersey, New York, Ohio, and Wisconsin require that the S Corp file at the state level in addition to the IRS federal tax filing.

Disadvantages of an Arizona S Corporation

Despite their tax advantages, Arizona S corporations have limitations to consider:

  • Ongoing Administrative Costs – Annual reports, corporate minutes, and record-keeping requirements increase expenses.
  • Limited Shareholder Count – Only 100 shareholders are allowed, restricting large-scale investment opportunities.
  • Ownership Restrictions – Foreign investors and certain corporate entities cannot own S-Corp stock.
  • Rigid Income Allocation – Profits and losses must be distributed in proportion to ownership percentage.
  • IRS Scrutiny – S-Corps often face additional tax audits and classification checks on reasonable compensation claims.

Business owners should evaluate these drawbacks with a qualified tax professional before filing for S status.

Frequently Asked Questions

  1. How do I start an S corporation in Arizona?
    File Articles of Incorporation with the Arizona Corporation Commission, appoint a statutory agent, and submit IRS Form 2553 within 2 months and 15 days of formation.
  2. Does Arizona charge a franchise tax for S corporations?
    No, Arizona does not have a franchise or privilege tax on corporations, reducing annual costs.
  3. Can an LLC elect S-corporation status in Arizona?
    Yes, LLCs that meet IRS requirements can elect S-Corp tax status by filing Form 2553 and meeting ownership restrictions.
  4. What are the main benefits of an S corporation in Arizona?
    Pass-through taxation, limited liability protection, no franchise tax, and potential self-employment tax savings.
  5. What are the common disadvantages of an S corporation?
    Administrative complexity, shareholder limits, income allocation rules, and increased IRS oversight.

If you need help learning more about operating an S Corporation in Arizona, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.