How to Start a Business in Arkansas

Arkansas, also known as the Natural State, is a great place to start a business. With over 264,245 small businesses employing 497,605 people according to the US Small Business Administration and 37,756 new businesses formed in 2022 alone, there are plenty of opportunities for entrepreneurs and first time business owners alike. Additionally, Arkansas has some of the lowest business formation costs in the nation – LLCs only cost $45 to form, which is the second lowest in the US. Big cities like Little Rock, Fayetteville and Fort Smith are proving to be hotbeds of entrepreneurship and commerce. With all these opportunities, starting a business in Arkansas has never been easier. In this article, we’ll discuss the key steps of starting a business in Arkansas, from researching your startup needs and ideas to understanding the legal steps of registering a business.

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1. Research and Plan your Business

The process towards starting a business in Arkansas demands a well-thought-of initial business plan and thorough research of the business idea. Before actually launching a start-up, conducting due diligence becomes necessary. Comprehensive market research, including analysis of your competitors, becomes essential in determining the potential factors for your business to succeed. Your research should provide a clear understanding of your target customers, your competitors, and how your product or service offers a unique solution.

When you have done your preliminary research, you can use this information to develop an in-depth business plan. Crafting a business plan is an essential part of launching and growing your new business. Despite the general view of having a comprehensive understanding of your business as a reason to forego the business plan, statistics show otherwise. In fact, according to a study by the Harvard Business Review, businesses who created a formal business plan were 16% more likely to succeed than their contemporaries who didn’t have a business plan. Therefore, putting in the effort to create a professional business plan will increase the likelihood of a successful start-up.

Recommended:Learn How to Craft a Winning Business Plan

2. Choose a Business Structure

Now, it’s time to move on to the next crucial step: selecting a legal structure for your business. It is important to carefully evaluate the level of personal liability risk you are comfortable with, determine the desired tax status, and identify your source of capital. These considerations will help you choose from the four most common types of business structures.

• Limited Liability Company (LLC)
• Corporation
• Sole Proprietorship
• Partnership

Limited Liability Company (LLC)

Limited Liability Companies (LLCs) are the most commonly adopted formal business structures for small businesses. An LLC is a distinct entity from its owners (also known as members), providing them with personal liability protection. This means that the members can rest easy knowing that their personal assets are safe if the business is sued or has outstanding business debts.

LLCs have numerous benefits, including a preferred pass-through taxation standard. However, they also have the choice to adopt C-Corporation or S-Corporation taxation standards. This flexibility is highly beneficial and is one of the main reasons why so many small business owners opt for LLCs.

Additional Information:What is an LLC and How Does it Work?

Corporation

Corporations are another option for business owners who want to establish a separate legal entity. The shareholders own a corporation through a percentage of shares issued as stocks. While setting up a Corporation has benefits and disadvantages, it offers extra liability protection. However, one thing to remember is that Corporations often have higher tax rates as they must pay corporate taxes before the profits are distributed to shareholders. Overall, establishing a Corporation means taking on additional responsibilities and important decisions that can be challenging but enhance your business ventures.

Additional Information:What is a C-Corporation?

Sole Proprietorship

If you’re looking for the most straightforward business setup for a single-owner enterprise in Arkansas, consider a Sole proprietorship. Sole proprietorships require no formal paperwork or registration is outside of the required business licenses and permits. But it’s important to note that while it’s inexpensive to start, sole proprietorships don’t offer liability protection. In case of legal problems or accumulated business debts, creditors can go after the owner’s assets to cover the losses. It’s a good idea to weigh the pros and cons of this business structure before making a final decision.

Additional Information:What is a Sole Proprietorship and is it a good fit for your business?

Partnership

When two or more people co-own a business, the simplest structure is a general partnership. It’s like LLCs in that they benefit from pass-through taxation – this means they don’t pay taxes directly. Instead, they pass profits or losses on to their owners, who then pay taxes on them.

General partnerships are also an informal legal structure, just like sole proprietorships. This means the business isn’t seen as separate from its owners in the eyes of the law. However, this has a significant downside. Members of the partnership have unlimited personal liability for their actions, leaving them open to risks associated with the business.

Additional Information:Partnerships Defined

3. Choose your Business Name

Now that you’re well-informed about legal structures, it’s time to shift our focus to the next step: choosing a great name for your Arkansas business. While you may be tempted to go with the first thing that comes to mind, thinking that your product or service is what matters most, remember that the name is what initially grabs attention. In fact, the choice of name can significantly impact the success of your business, as it plays a crucial role in your marketing efforts once your business is established. Therefore, it’s worth taking the time to select a good name.

If you find yourself lacking creativity and struggling to come up with suitable names, consider the three essential ingredients of a great business name: creating an identity, being memorable and easy to recall, and being easy to search and find. For a comprehensive guide on creating a remarkable business name, be sure to check out our resource: How to Come up with a Business Name

4. Register your Business

Following the choice of business structure and name, you must now turn your attention to getting your business in Arkansas officially registered. The procedure for this varies based on the business structure, so let’s go over each briefly.

• Register an Arkansas LLC
• Register an Arkansas Corporation
• Register an Arkansas Sole Proprietorship
• Register an Arkansas Partnership

Register an Arkansas LLC

Arkansas LLCs are formed by filing a document known as Certificate of Organization (Form LL-01) with the Arkansas Secretary of State, which has a filing fee of 45. Before doing so, you must determine if the name you have chosen is not already in use. You can do this by completing a Arkansas business name availability search. Once verified, you can file the Certificate of Organization (Form LL-01). The filing must include the LLC’s legal name, the owner(s) contact information, address, and a designated Arkansas registered agent. While not legally required, you will also want to create an operating agreement to establish the basic rules of how your LLC will function, list ownership percentages, and detail voting rights.

Register an Arkansas Corporation

To form a Corporation in Arkansas, you must file a document called Articles of Incorporation with the Arkansas Secretary of State, which has a filing fee of 45. Additionally, you will need to appoint a registered agent who will be able to collect service of process documents. Designing the bylaws and internal rules for operations is a key way that you can make sure your organization is set up for success.

Register an Arkansas Sole Proprietorship

At the state level, no formal filings are necessary to start a Arkansas sole proprietorship. Sole proprietorship owners are required to include their name in the business name. If you wish to carry out your business under a name that does not include your last name, you will have to register an Arkansas DBA, formally known as an Assumed Name, with the county.

Register an Arkansas Partnership

Similar to sole proprietorships, general partnerships do not require the filing of any official documents to be set up. Also, they must apply for an Assumed Name if they plan on doing business under a name that does not include the partners’ names. It is also recommended that the partners create a partnership agreement as it settles many arguments before they arise and outlines a few technicalities such as power distribution and the decision-making process.

5. Get an EIN

Once you have taken the steps to legally form or establish your business, you want to get an EIN. An EIN (an acronym for Employer ID Number) is an IRS identification number for tax filing and employment purposes. You can think of an EIN as the business equivalent of a social security number. Any business formed as a Corporation, Partnership, or LLC is required to obtain an EIN. Even if your business is not required to get an EIN, it’s highly recommended that you apply for one. EINs are required for many business filings and can be used in place of providing your SSN, which can help protect against identity theft.

6. Register for Arkansas Sales and Use Tax

If your Arkansas business has a nexus and engage in taxable sales or purchases are typically required to register for a permit with the Arkansas Department of Finance and Administration. This permit enables them to report and pay taxes, also known as a gross receipts tax.

How to Know if you have a Tax Nexus in Arkansas?

According to the Arkansas Department of Treasury, a business can establish sales tax nexus in Arkansas by having a physical presence in the state. Below are some examples of business activities that would qualify as having an Arkansas sales tax nexus.

• Having an office or space in Arkansas for conducting business.
• Employing independent sales reps, employees, or agents who engage in business activities in Arkansas, such as soliciting sales, collecting payments, delivering property, or accepting orders for taxable items.
• Your business provides services like assembling, installing, servicing, or repairing products within Arkansas.
• Offering services such as property maintenance or repairs.
• Providing technical assistance or services to customers, such as engineering support, design services, quality control, product inspections, or similar offerings.
• Owning, renting, or leasing real or tangible personal property in Arkansas, including using a computer server or software to solicit orders for taxable items.
• Utilizing company-owned or leased trucks to deliver goods to customers within Arkansas.
• Maintaining inventory in Arkansas using a third-party fulfillment service, like Fulfilled by Amazon (“FBA”).

Additionally, businesses without a physical presence in Arkansas, known as remote sellers, can establish nexus by exceeding a certain annual sales threshold in the state. This is commonly known as economic nexus.

For more detailed information visit the Arkansas DFA Sales and Use Tax page or contact a qualified Arkansas tax professional.

7. Apply for Arkansas Business Licenses and Permits

To ensure legal compliance with federal, state, and local laws, it is important for your business to obtain one or more business licenses and/or permits. The specific licenses and permits required will vary depending on various factors, such as the nature of your business, the products and services you offer, the data you collect, and your location. It is crucial to understand and adhere to these requirements to operate your business smoothly and within the bounds of the law.

Federal Licenses and Permits

Your business may need a license or permit to operate legally if your business is involved in an activity that is regulated at the federal level, such as:

• Agriculture
• Alcoholic beverages
• Aviation
• Firearms, ammunition, and explosives
• Fish and wildlife
• Commercial fisheries
• Maritime transportation
• Mining and drilling
• Nuclear energy
• Radio and television broadcasting
• Transportation and logistics

For more detailed information on federal business licenses and permits visit the Small Business Administration: Federal Licenses and Permits page.

State and Local Licenses and Permits

A general business license is not required in Arkansas, however most businesses will require a local business license.For more detailed information visit the Arkansas Small Business and Technology Development Center Business License page.

8. Open a Business Bank Account

It’s essential to separate your business transactions and personal transactions to protect your personal assets. Mixing your personal and business banking activity is known as “co-mingling funds” and can cause your business severe problems. Not only does this make bookkeeping and accounting much harder, but it can also result in losing your limited liability status if you’re an LLC or Corporation. If you mix your personal and business funds, you can put yourself at serious legal risk if your business is sued by piercing the corporate veil.

By opening a dedicated business bank account and use it strictly for business activity, you can avoid these risks. To learn more about opening a business bank account, visit our detailed how-to guide. Our guide “How to Open a Business Bank Account” goes over how to choose a bank account provider and the documents you’ll need to open your account.

9. Set Up Credit Card Processing

For most businesses, it’s vital to accept credit card and debit card payments. Credit and debit cards now represent around 60% of all transactions over $10. As a result, accepting card payments is basically a requirement to stay competitive in the modern business environment.

For more information, see our guide, How to Accept Credit Card Payments

10. Establish an Accounting System

Setting up an accounting system allows a business to track business expenditures and create reports to gain insight into your business’ performance. By establishing an accounting system, you can quickly and easily create budgets, manage cash flow and generate the required financial reports to know how your business is doing.

For a more in-depth breakdown, visit our Small Business Accounting 101 guide. Covered in the guide are the steps to do small business accounting, including how to choose between cash basis and accrual basis accounting methods.

11. Get Business Insurance

One of the most overlooked aspects of starting a new business in Arkansas is obtaining business insurance. Having the proper business insurance coverage helps to mitigate your risk so that you’re covered in the event of an accident, natural disaster, or lawsuit.

In our Small Business Insurance Guide, we go over the six types of business insurance so that you can make sure you’re covered.

12. Hire Employees and Set Up Payroll

If you want help running your business, you’ll want to consider hiring employees and setting up a payroll. Employers are responsible for reporting new hires and verifying their employment status.

There are two items that employers must complete to be federally compliant when hiring new employees. You must verify that any employee is eligible for employment in the US and obtain a signed IRS Form W-4 to ensure you are withholding the correct amount for federal taxes. For more detailed information, visit the IRS page for Businesses with Employees.

Since Arkansas has a state level income tax, you’ll need to withhold taxes from your employees and remit them to the state. In addition to this you’ll also need to register for unemployment insurance. Luckily in Arkansas both of these registrations are done with the Arkansas Department of Finance and Administration. For more specific information about your requirements as an employer in Arkansas visit the Arkansas Small Business and Technology Development Center: Your Responsibilities as an Employer page for more info.