Setting up a small business in Arkansas generally involves lower initial costs compared to many other states, making it an attractive option for entrepreneurs. Commercial real estate and leasing rates are relatively affordable, especially outside major urban centers like Little Rock. Labor costs are also comparatively low due to the state's lower minimum wage and cost of living. Arkansas offers a business-friendly regulatory environment with fewer licensing fees and regulations, which helps reduce setup costs. Additionally, the state provides various incentives and support programs for small businesses, including tax credits and grants.
While the market size may be smaller compared to more populous states, Arkansas's lower costs and supportive economic climate provide a favorable environment for new business ventures. Here's a primer on how to start a business in Arkansas.
Costs associated with forming a business varies by business entity type and by state the business was formed in. We aim to cover here the basic costs specific to the state for starting a business. We also touch upon other costs in order to stay compliant and continue to doing business in the state, such as paying various state taxes or complying with local minimum wage laws when hiring in-state.
We cover in broad strokes the following costs:
There are several types of business structures you can choose from when forming your business. Which is best for your business depends on a variety of factors, like ownership in the business, taxation, and more.
No State Filing: There are two types of structures which can be automatically formed without any filing with the state. Sole proprietorship and general partnership falls into this category, and they are a popular form of self-employment.
Formed or Incorporated: Three most common business entities that require some formation or incorporation with the state are corporation, limited liability partnership (LLP), and limited liability company (LLC). Each structure has its own one-time formation or set-up cost.
Arkansas offers the basic entity types that businesses can choose from in any state when filing for a domestic entity setup: Corporation (for profit and nonprofit), LP, LLP, and LLC. There are additional variations for each of these entity types as well as other structures, like LLLPs, Cooperatives, and series LLCs.
Professionals may form professional corporations in Arkansas. The corporate name must contain either the names of one or more of the shareholders, the names of one or more deceased former shareholders, or deceased members of a predecessor organization, or any combination of those names. Additionally, the name must end with the word “Chartered,” or “Limited,” or the abbreviation “Ltd.” Or the words “Professional Association,” or the abbreviation “P.A.” State statute also provides for medical or dental LLCs. These entities must have a certificate of registration from the state medical board. The name of a PLLC must have the words “Professional Limited Liability Company,” “Professional Limited Company,” or the abbreviations “P.L.L.C.,” “P.L.C.,” “PLLC,” or “PLC” and cannot contain the name of the person who is not a member except that of a deceased member. The word “Limited” may be abbreviated as “Ltd.” and the word “Company” may be abbreviated as “Co.” Arkansas professionals don’t have to form a professional corporation or LLC, often they simply form an LLP.
Domestic and foreign entities can be formed predominantly online at the Corporations Online Filing System operated by Arkansas’s Secretary of State. Follow their Doing Business in Arkansas handbook to form an entity.
Across all US states, the average cost of formation is roughly $100 with some states costing as little as ~$50 to create a corporation and some as high as $500+ to form an LLC.
Here are the formation costs (up to date at the time of this writing) for three most common entity types for businesses filed with the state:
Franchise taxes are state fees that businesses pay in order to have the right to operate in those states. They are paid in addition to state and federal income taxes. Failure to file can cause a business to lose its good standing with the state, making it difficult to operate, get loans, and may cost the business clients if clients require this information.
Here are the franchise tax fees for each business entity structure in this state as of the time of this writing.
Taxes, taxes, and more taxes. Although income taxes may seem far off concern when starting a business, the truth is that not withholding enough for income taxes is a material cost to business owners. Here we briefly cover state income taxes. For a better overview of self-employment taxes, you can read more on Small Business Tax Planning.
Pass-Through Entities: Pass-through entities are boon to small business owners. A pass-through entity is a business structure where income passes directly to the owners or investors, and they report it on their personal tax returns. This allows the business to avoid paying corporate taxes, making it a more tax-efficient option for small businesses. This also makes filing taxes significantly simpler as only one return is needed.
By default, sole proprietorships, LLCs, and partnerships are considered pass-through entities. In the case of LLCs, LLCs are usually referred to as disregarded entities. However, owners can choose to get their LLC be recognized and treated differently for tax purposes with the IRS.
Corporate Income Tax: Most states (44 out of 50) levy a corporate income tax.
C-Corps pay a C-Corp state income tax rate. If the income tax is pass-through, as with S-Corps, use your personal income tax rate.
Limited Liability Companies: For LLCs, the tax rate depends on the how you set up the LLC business structure.
Business owners who sell goods or services within a state are typically required to collect and remit state sales tax. Each state has different rules regarding what is taxable, so it’s crucial to understand the state’s specific requirements. Most businesses aren't at significant risk of non-compliance with sales tax until they reach the state's economic nexus threshold.
Economic nexus refers to the threshold of sales or transactions in a state that, once exceeded, obligates a business to collect sales tax, even if they don't have a physical presence there. Once a business achieves economic nexus, they must register with the state’s tax authority and start collecting sales tax on applicable sales. Failing to comply with these requirements can result in penalties and back taxes. Economic nexus is particular important when it comes to online sales for e-commerce companies.
See more about local city and county sales tax, in addition to the state rate of 6.5%, here.
If you're considering hiring employees for in-person work, then knowing your state's employment laws are important.
One important to factor is knowing the local minimum wage, which varies depending on state and sometimes even by city or county. Note that in addition to the hourly rate, employers should also consider payroll taxes, workers’ compensation insurance, and potential benefits costs.
Here we just provide a review in the table below costs specific to the state, namely the state's specific minimum wage, any applicable exceptions to the minimum wage, and recurring payroll taxes.
*Filing Fee Note: Listed fees are for online filing; paper filings will incur an additional $5 cost.
Explore more Business Services available from the state here.
Annual Reports can be submitted online here. Corporations, LLCs/PLLCs, banks, and insurance companies are required to submit franchise taxes, which act as the annual report, while partnerships are required to just file annual reports.
Business names can be reserved for a fee of $25 online, see this resource and select your entity type.
Certificates of Good Standing can be requested online for a $25 fee.
Business entity searches can be completed here.
The idea of starting a business can be exciting, but the plethora of choices, jargon, and costs associated with the pure act of setting up a business with the state can be an unnecessarily daunting and time-consuming process.
Although this guide can't setup your business entity for you, it provides an overview so you can get a head start. We hope this article has sheds light on the essential costs involved and provides guidance on how to manage them effectively, setting you on a path towards entrepreneurial success.
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