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STARTING AND OPERATING A BUSINESS IN ARKANSAS Copyright © 2005, Michael D. Jenkins
CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION Arkansas has a fairly typical tax and legal structure under which businesses must operate. Like most states, Arkansas imposes an income tax, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, so that businesses operating in Arkansas in LLC form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. Overall, Arkansas has the second-lowest per-capita tax burden of any state in the nation, and very competitive manufacturing wages, among the five lowest states in the nation, at only about 80% of the national average. While many people outside the state may still think of Arkansas as being a primarily rural state, it has seen a rapid growth in manufacturing in recent decades, so that Arkansas now has over 22% of its work force engaged in manufacturing, compared to 15.5% nationally. The entire state is an enterprise zone, in which businesses can earn corporate tax credits for each net new job created, and double credits in areas with high unemployment, and purchases of manufacturing equipment are exempted from sales taxes. A Massachusetts Taxpayers Foundation study of state taxes in 2004 (based on 2002 data) found that Arkansas ranked 48th (or third best, put differently) in property taxes in the nation, in relation to residents' income, at only $16 of tax per $1,000 of income. Alabama had the lowest property taxes, at $13 per $1,000 of income, in comparison, and Delaware was second-lowest, at just under $16 per $1,000 of income, while Maine had the highest property taxes, at $55 per $1,000 of residents' income. At present, the Arkansas economy is relatively vibrant, in terms of the level of unemployment, which was only slightly higher than national levels, at 5.6% in December, 2004, compared to a national unemployment rate of 5.4%, and has improved considerably from a year earlier, when the unemployment rate in Arkansas was 6.3%. In addition, Arkansas has a very low cost of living, compared to national averages, making it an attractive place for businesses to locate and to attract employees. To view the latest federal Bureau of Labor Statistics unemployment rate data for Arkansas or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Arkansas can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. To be taxed as an S corporation under Arkansas law, it is necessary for a corporation to file Form AR1103 to elect S corporation status. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV(b). (b) Sole Proprietorships. In general, sole proprietorships in Arkansas can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate tax form filing is required, generally, for a sole proprietorship, under the Arkansas income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Arkansas income tax and filing requirements for individuals. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, nor obtain workers' compensation coverage for yourself. (c) Partnerships. As a rule, general partnerships in Arkansas can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Arkansas law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a Certificate of Limited Partnership, Form LP-01 for a domestic limited partnership or an application for a certificate of authority, Form LPF-01 for a foreign limited partnership. The appropriate form is to be filed with the office of the secretary of state. There is a $50 filing fee for a domestic limited partnership, and a $300 fee for a foreign limited partnership. For information on limited partnership filing requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Arkansas has enacted a new version of the Uniform Partnership Act, effective since January 1, 2000. Under the new Act, the initial filing of documents by a domestic limited liability partnership (LLP) is subject to a $50 fee, or $300 for a foreign LLP. All other filing fees with the secretary of state for LLPs are set at $15, including annual reports, which are required under the new law. Limited liability partnerships (LLPs) are a form of partnership permitted under the laws of Arkansas, under legislation first enacted in 1997. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Arkansas state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. To form an LLP in Arkansas, you must register as an LLP with the secretary of state and pay the applicable filing fees. Under the new Uniform Partnership Act, Arkansas law now also provides for the formation or registration of limited liability limited partnerships (LLLPs), as well as LLPs (which are general partnerships that elect LLP status). The fees charged for LLLPs are the same as for LLPs. For more information on LLP and LLLP registration and reporting requirements, see the contact information for the offices of the Arkansas Secretary of State, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Arkansas, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLPs. Such states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. You should also note that the LLP law gives less protection to partners in an LLP than state law grants to stockholders of a corporation, or members of an LLC. An LLP shields a partner in an LLP from tort liability from claims brought against another partner in the LLP or employee of the LLP for malpractice or other such wrongdoing, but it does not offer a partner any liability protection from his or her own acts or omissions, or those of an employee or other partner who is acting under his or her direction. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not subject to state income tax in Arkansas. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return with the state. For details on Arkansas partnership tax return filing requirements, see Section IV(c). (d) Corporations. To form a corporation in Arkansas, you must file articles of incorporation with the Arkansas Secretary of State and a pay fee of $50. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Arkansas, by filing an application for a certificate of authority with the Arkansas Secretary of State and paying the applicable filing fee of $300. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Arkansas, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition to paying federal income taxes on its income, a corporation that does business in Arkansas must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Corporations that do business in Arkansas are also subject to a corporate franchise tax. The franchise tax, which is administered by the Arkansas Secretary of State, is based on the value of the outstanding stock of the corporation (or the portion of of the stock value allocable to the state of Arkansas, for multistate corporations). The franchise tax rate is 0.3% of the par value of the stock of the corporation. Stock with no par value stock is deemed to have a par value of $25 per share. A corporation with no authorized stock must pay an annual franchise tax of $300. There is a minimum annual franchise tax of $150. Report the franchise tax to the secretary of state annually on May 1, for the preceding year, beginning May 1, 2005 for the year 2004. Failure to file this annual franchise tax report on a timely basis can result in the suspension or revocation of your corporation's charter. For tax forms and more information on corporate income and franchise taxes in Arkansas, see the contact information for the offices of the Department of Finance and Administration, and the Arkansas Secretary of State, respectively, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Arkansas recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. A separate state election to be treated as an S corporation for Arkansas tax purposes is required, on Form AR1103. Only those corporations electing federal S corporation treatment are eligible to elect Arkansas S corporation status. (f) Limited Liability Companies. Arkansas, like all other states, has now adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Arkansas may also choose to operate in the form of an LLC. In most states, LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLCs under Arkansas tax laws. To form an LLC under the laws of Arkansas, one or more persons must file articles of organization with the Arkansas Secretary of State, which must be accompanied by filing fees of $50. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Arkansas, by filing an application for a certificate of authority with the Arkansas Secretary of State and paying a filing fee of $300. The filing fees are reduced by 10% for persons who file electronically, who pay $40 plus a $5 processing fee for articles of organization, and $258 plus a $12 processing processing fee for filing a certificate of authority electronically. LLCs, like corporations, are also subject to the Arkansas franchise tax, but LLCs pay only a flat annual tax of $150. Note that Arkansas was one of the first few states that allowed an LLC to be owned by only one person, and even provided that such an LLC would be treated like a sole proprietorship for state income tax purposes. IRS Regulations now also permit one-person LLCs to be taxed as sole proprietorships for federal income tax purposes, as well. For more information on filing articles of organization for an LLC, see the contact information for the offices of the Arkansas Secretary of State, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales and use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Arkansas is one of the states that has repealed its bulk sale laws, so you need not be concerned with this requirement in Arkansas. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Arkansas, you should obtain tax releases for sales and use taxes from the Revenue Division of the Arkansas Department of Finance and Administration, and for state unemployment taxes from the Arkansas Employment Security Division. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply within 30 days after the acquisition to the Employment Security Department, requesting that you be treated as a successor employer, if you are acquiring only a portion of the seller's business. When the entire business is acquired, and its operation is continued, the tax rate from the previous owner will automatically be assigned to the new owner. Payment of state unemployment tax must be made quarterly by the end of the month following the end of each calendar quarter. Therefore, state unemployment tax reports are due by January 31 (for the fourth quarter of the previous calendar year), April 30, July 31, and October 31. Once an employer has established an account with the Arkansas Employment Security Department, reporting forms are provided by mail on a quarterly basis. IV. ARKANSAS TAXES AND OTHER GENERAL REQUIREMENTS (a) In General. Arkansas has a fairly typical tax and regulatory structure, but is generally a business-friendly state, with relatively low individual and corporate income tax rates, and a low sales tax rate. (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city hall or county clerk and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Arkansas has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. For information on state licensing and business registration requirements in Arkansas, contact the Arkansas Department of Economic Development and the Arkansas Department of Finance and Administration, both of which offer information and publications on state agencies you will have to contact to get your business licensed and operating in Arkansas. See address information for both agencies in Section VI(a). (c) Income and Franchise Taxes. Arkansas has both an individual income tax and a corporate income tax, as well as a franchise tax on all corporations and LLCs. The Arkansas individual income tax is imposed at a maximum tax rate of 7%. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership, S corporation or LLC. The Arkansas personal income tax return is Form AR1000, which must be filed with the Division of Revenue, Arkansas Department of Finance and Administration, and is due on April 15th of each year for the preceding calendar taxable year. A temporary tax surcharge, equal to 3% of the regular Arkansas income tax liability, was imposed for the 2003 and 2004 tax years, which applied to both the Arkansas individual and corporation income taxes. Legislation adopted in early 2005 has repealed the surcharge, for tax years beginning in 2005 or later. Partnerships, or entities taxable as partnerships, such as LLCs, are not subject to state income taxation in Arkansas, but must file an information return with the Department of Finance and Administration each year, showing each partner's share of taxable income, losses, and credits, on Form AR1050. The partnership information return is due by April 15th of the following year, in the case of a calendar year partnership. Individual taxpayers doing business as sole proprietors, or who are partners in partnerships, or members of LLCs, are required to make payments of estimated Arkansas individual income taxes, on Form AR1000ES, if their net tax liability (not covered by withholding) exceeds or exceeds $1000. Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. To avoid penalty, you must either pay in 90% of the current year's tax, or 100% of the previous year's tax. The Arkansas corporate income tax on corporations, other than S corporations, applies at graduated rates of 1% to 6% on taxable income up to $100,000, and a flat 6.5% tax rate on all income over $100,000 of income. Until mid-1997, the state tax authorities had interpreted the law to require corporations with over $100,000 of taxable income to pay a flat tax rate of 6.5% on all such income, but the Arkansas Supreme Court has ruled that the the 6.5% rate applies only to income in excess of $100,000. Accordingly, corporations that have paid a flat 6.5% tax rate in prior years may now be able to file refund claims to recover the overpaid tax. As noted above, a 3% (of the regular tax liability) tax surcharge also applied in tax years that began in 2003 or 2004. For 2005 and subsequent years, the surcharge has been repealed. The state corporation income tax return is Form AR1100-CT, which must be filed with the Arkansas Department of Finance and Administration by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their tax liability for the year exceeds $1000. Estimated tax payments are due in advance, in four equal installments, on the 15th day of the 4th, 6th, 9th and 12th months of the current taxable year. The total estimated tax that must be paid in is usually equal to 90% of the actual tax liability for the year. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 100% of the prior year's tax liability, if less. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. S corporations are generally not subject to the corporate income tax in Arkansas, as under federal tax law. However, all nonresident shareholders of S corporations receiving a prorated share of income, loss, deduction, or credit must file an Arkansas state income tax return with the Department of Finance and Administration and remit the applicable state income tax due. Failure to do so may result in the state's collecting the tax owed from the S corporation or revoking the S corporation's tax status for state corporate income tax purposes. In Arkansas, a limited liability company (LLC) is taxed in the same manner as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. Or, for state income tax purposes, a one-owner LLC will be taxed as a sole proprietorship by Arkansas. Under IRS regulations, a one-owner LLC is now allowed to elect to be treated as a sole proprietorship for federal income tax purposes. Arkansas follows the federal treatment of an LLC. Note that it is not always entirely clear whether an LLC is a "single-member LLC" LLC or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, Arkansas is not a community property state, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether Arkansas would treat the LLC as a single-member LLC or as a partnership. Both corporations and LLCs are subject to the Arkansas franchise tax, as discussed at Section II(d). (d) Sales and Use Tax. Arkansas imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 5.125% (6%, effective March 1, 2004). Local governments are allowed to adopt local sales taxes, generally at a rate of 1%, or 2% in some cases. Certain border cities that are divided by the state line are also allowed to adopt an additional 1% tax. The sales and use tax was expanded a few years ago to apply to a number of services, such as cleaning and janitorial services, pool services, lawn care and landscaping, auto storage and parking, fur storage, and indoor tanning. Numerous additional services became taxable on July 1, 2004, such as:
There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A parallel tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Arkansas. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Before making any taxable sales, you will need to register for your Gross Receipts Tax (sales tax) permit on an Arkansas Application for Permit, Form ST-1 with the Sales and Use Tax Unit of the Department of Finance and Administration. As a seller at retail or wholesale, you are required to obtain a Gross Receipts Tax seller's permit for each business location, and to pay a $50 permit fee. Businesses that are not domiciled in Arkansas must post a bond or deposit equal to the anticipated sales tax liability for the year. You must collect and pay over the state and local sales and use taxes to the Sales and Use Tax Section of the Arkansas Department of Finance and Administration. In 2003, filing requirements for small businesses were modified, so that any business whose average monthly Gross Receipts Tax did not exceed $100 per month for the last 12-month period ended June 30 may now file sales tax returns and make payments on a quarterly basis, rather than monthly. If the average tax liability per month did not exceed $25, then only an annual return and payment of the tax are required. For further information on Arkansas sales and use tax registration and compliance, see the contact information for the offices of the Arkansas Department of Finance and Administration in Section VI(a). (e) Real and Personal Property Taxes. In Arkansas, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Arkansas also imposes personal property taxes on tangible personal property. Each business is required to conduct a self-assessment each year by March 1 for personal property it owned on January 1. Unlike many states, Arkansas does not exempt business inventories from taxation. While Arkansas generally taxes tangible personal property, it does not impose property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. (f) Other Business Taxes. Arkansas imposes a number of other taxes on businesses, including:
Contact the Miscellaneous Tax Section of the Arkansas Department of Finance and Administration for further information on excise and miscellaneous business taxes. (g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In Arkansas, a business operating under an assumed name, other than a corporation, limited partnership, LLC or LLP, must file a certificate with the county clerk's office in each county where business is conducted, disclosing the name and address of each person participating in the business. Corporations wishing to register a fictitious name must file similar information, but not including the names of all owners, with the secretary of state, and must pay a filing fee of $25. Domestic corporations must also file with the county clerk in the county where the registered office of the corporation is located, if other than Pulaski County. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. In addition, since Arkansas imposes a state income tax on the income of individuals, you will need to also withhold Arkansas income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the state by filing Form AR4ER, Employer Income Tax Withholding Registration Statement. The Withholding Tax Unit of the Arkansas Department of Finance and Administration will then supply you with preprinted forms which you must use to remit withheld income tax, based on withholding tables. For more information on Arkansas income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Finance and Administration, listed in Section VI(a). Request their publication, Income Tax Withholding Tables and Instructions for Employers. (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Arkansas unemployment tax are required to register with the Arkansas Employment Security Division on Form 201. New employers are required to pay tax at a rate of 3.7% in 2005 on the first $10,000 of wages paid to each employee. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Arkansas law, cannot be charged to your employees or withheld from their wages. For more information on your Arkansas unemployment tax obligations as an employer, see the contact information for the offices of the Arkansas Employment Security Division, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Arkansas, virtually all businesses with three or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Employers of two or more employees in the building or building repair industry (or subcontractors with one or more employees) are also required to provide coverage for their employees. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Corporate officers may also elect to be excluded from coverage in some cases. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. Employers are required to post a notice of workers' compensation insurance coverage in the workplace. Obtain a copy of WCC Form P from the Workers' Compensation Commission, which will fulfill this posting requirement. For more detailed information regarding your obligations as an employer under the Arkansas workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Arkansas Workers' Compensation Commission, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Arkansas wage-hour laws, which provide for a state minimum hourly wage that is currently $5.15 an hour, the same as the federal minimum wage. Arkansas law, like the federal labor law, requires an employer to pay time and one-half for overtime hours worked. Overtime is defined as hours worked in excess of 40 hours per week. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees and outside salespersons are exempted from the Arkansas wage-hour rules. Employers are required to display a state minimum wage poster in a conspicuous location in the workplace. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Arkansas. Under the Arkansas child labor laws:
(e) State Occupational Safety and Health Laws. Nearly half of the states have their own OSHA-like agency, charged with administering their own state occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Arkansas is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Arkansas job safety requirements, you may wish to contact the OSHA Consultative Training and Education Division of the Arkansas Department of Labor and request a free and confidential on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information, required posters, and possible on-site safety consultations, see the contact information for the offices of the Safety Division, Arkansas Department of Labor, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Arkansas labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Wage payments to employees who quit, resign, or who are discharged or suspended, must be made within seven days. Otherwise, if the employee has been discharged or refused further employment, wages may continue to accrue until payment is made, for up to 60 days. (2) Right-To-Work Laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Arkansas has enacted a right-to-work law. (3) State anti-discrimination laws. Arkansas does not have a state anti-discrimination agency. Federal equal employment opportunity laws are administered in Arkansas by the federal Equal Employment Opportunity Commission (EEOC) and the U.S. Department of Justice. (4) Reporting new hires. Under new federal welfare reform laws, employers in every state now must report all newly-hired (or rehired) employees to a designated state agency (the Arkansas New Hire Reporting Center, for Arkansas employers) within 20 days after the date of hire. Employers who file electronically or on magnetic media must submit the reports in two monthly transmissions, not more than 16 days apart. For more information, contact the New Hire Reporting Center at the address listed in Section VI(a) or file your new hire reports online at the Internet address listed for that agency in Section VI(c). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike most other states, Arkansas does not yet have a single agency to whom you can go to handle all your licensing and permit requirements for your business under the laws of Arkansas. Accordingly, you will need to contact the various Arkansas agencies that are mentioned in this book and listed below on an individual basis, to obtain needed forms, official posters, information, and other assistance from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. Two key agencies that can provide helpful information on getting your business up and running in Arkansas are:
STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Arkansas, contact the Safety Division of the Arkansas Department of Labor, at the address listed above for that agency. (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Arkansas to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Arkansas. Since new sites are appearing constantly, you might also want to search for other Arkansas government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Arkansas government information, you may want to begin with the following Internet sites:State of Arkansas Home Page: Department of Finance and Administration, Revenue Division: Arkansas Employment Security Division: Arkansas New Hire Reporting Center: Arkansas Secretary of State (corporate, LLC, and partnership filings): Arkansas Department of Economic Development (business startup information):(d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Arkansas, or contact the Arkansas Department of Economic Development at the address or phone number listed above under BUSINESS STARTUP INFORMATION. The Department of Economic Development provides a helpful free booklet, entitled Financing Resource Guide for Small Business. The address of the Little Rock SBA office is:
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Copyright © 2005 Michael D. Jenkins
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