Arizona has worked to establish an inviting business climate, and entrepreneurs have taken note. Not only did Arizona post the fourth-best gross domestic product growth rate in the U.S. in 2018, it's one of the fastest-growing states in the nation, with an unemployment rate that recently fell to 4.7%. Its low tax rates, business credits, and limited regulations, along with sunny weather and a low cost of living, have made it a draw for businesses. Small business owners across the state are encouraged by these healthy indicators, ready to seize new opportunities and pursue economic growth.
The primary drawbacks of business in Arizona are difficulties accessing startup and growth capital (a problem that plagues much of the nation) and the state's generally low personal income per capita. 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. Still, neither of these factors have dampened entrepreneurs' optimistic outlooks in the Grand Canyon State.
Opportunities and advantages of starting a business in Arizona
Healthy economic growth
Arizona's economy is growing on par with the nation, reaching 2.5% in 2019. While that's not a staggering growth rate, the reliability of the rate provides a level of certainty for Arizona's entrepreneurs, a benefit that other states don't necessarily enjoy. In fact, for the last decade, Arizona’s economic growth rate has often been above the 2% 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 SKC Strategies and executive vice president of business development for Pure Grips. "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," she said. "It's $50 if you do it yourself.
"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," added Barrington. "Arizona had the second-highest job growth in the U.S. from midyear 2018 to midyear 2019. There has been an influx of jobs and people due to the high cost of running a business and living in some neighboring states, particularly in California."
In fact, a seven-year study by Spectrum Location Solutions found that Arizona is the third-most attractive state for businesses leaving California. According to the study, relocation by California companies diverted more than $68 billion in capital across more than 1,500 relocations to other states – Arizona was a large beneficiary of that divestment.
Manageable taxes
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%, but the flat corporate income tax of 6.968% and the five-bracket personal income tax ranging from 2.59% to 4.5% make the overall tax burden generally manageable. Similarly to most other states, additional property and sales taxes are levied from municipality to municipality and county to county, so total tax burden can vary by where in the state a business is located.
"The tax rate is fairly low in Arizona, which makes it appealing to small business," said Tom Wheelwright, an Arizona CPA and author of Tax-Free Wealth (RDA Press, 2013). "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 and SEO specialist at Dataflurry. "You do need a business license if you are selling physical goods ... to an Arizona resident."
In Arizona, this is known as a transaction privilege tax. It's similar to a state sales tax, and the appropriate license for it is obtained from the Arizona Department of Revenue. Businesses also need to register for the Arizona unemployment tax and employee withholding tax if hiring 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.
Growing labor market
Arizona's labor market is a huge plus for the small business community right now.
"Labor selection in Arizona is always great," said McLaughlin. "There is tons of talent to choose from."
The population and labor force continue to grow, as does employment. Arizona unemployment rates are at 4.7%, which is higher than the national average of 3.5%. 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% in 2010 and moving in the right direction.
In fact, the state generated strong increases in employment in 2019, adding 72,100 jobs over the year. This translated to 2.5% growth, easily outpacing the national rate of 1.5%. Most of these job gains were in four industries: education, health services, construction, and trade, transportation and utilities.
Moreover, the higher unemployment rate has led to a competitive job market where employers can still find highly skilled, educated and qualified employees who meet the needs of their organizations.
"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, owner of leadership development company Moreland International.
Meanwhile, the cost of living in Phoenix is affordable compared to other major metropolitan areas, which keeps labor expenses at a manageable level. According to recent Census data, more people are moving to Maricopa County and the city of Phoenix than anywhere else in the nation. In fact, with a population just under 1.63 million people, Phoenix is the fifth-largest U.S. city.
Challenges of starting a business in Arizona
Access to capital
As in many states across the U.S., it can be difficult to find startup capital in Arizona, despite its range of incubators and venture capitalist firms. Arizona entrepreneurs and professionals who spoke to Business News Daily said that although 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 need to meet exceptionally high standards to gain the favor of lenders.
"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."
Low income per capita
Arizona's cost of living is moderate, but its per capita personal income is significantly lower than the national average. That's a big concern for many in-state small businesses that rely on residents' disposable income for a majority of their proceeds.
According to the Bureau of Economic Analysis, Arizona's per capita personal income was $46,167 – 81.4% of the national average – in 2018. Even considering the cost of living, that's a negative indicator. Although per capita personal income in Arizona rose 4.3% in 2018, before adjustment for inflation, that was still below the national pace of 4.9%. Individuals' lack of discretionary funds is having a negative impact on Arizona's small businesses.
"People love to shop at small retailers in Arizona, but they're not spending very much," said Brad Plothow, vice president of corporate marketing and communications at Womply. "Our 2019 State of Local Retail report analyzed transactions at 52,000 small local retailers nationwide to discover sales patterns and seasonality. Turns out Arizona mom-and-pop retailers rank second nationally for foot traffic, but 49th for transaction size."
Womply also analyzed transactions at 42,000 small local restaurants nationwide and found that although there are plenty of potential customers, this often fails to translate to actual sales.
"As with retail, Arizona consumers love to patronize local independent eateries, but they don't spend much," said Plothow. "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."
Looking ahead, if there is a decline in the overall U.S. economy or decrease in global growth as many are predicting, it could lead to slower gains – or even declines – in Arizona's economic landscape.
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.
Arizona SCORE
SCORE's volunteer business professionals and expert mentors give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are free and volunteer-driven. Here are some of the main chapters in Arizona (you can see the complete list here):
U.S. Small Business Administration Arizona District Office
The SBA offers financing and grants as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues to obtain assistance after natural disasters.
Arizona Small Business Development Centers
Arizona hosts a number of development centers for small business. Each is dedicated to supporting the development and retention of small businesses, helping entrepreneurs do everything from crafting business plans to navigating the tax code. You can find your region's Small Business Development Center at the Arizona SBDC Network.
Arizona Small Business Association
ASBA bills itself as the voice of small businesses in Arizona. It provides a host of resources for businesses with fewer than 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.
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 and creates policies and programs that address the needs of small businesses. It places a special focus on providing support and opportunities for Arizona's small, minority- or women-owned, and disadvantaged business enterprises.
Are you an entrepreneurial organization or resource for small business owners that is not listed here? Let us know.
Adam Uzialko contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.