Wednesday, January 12, 2011

Forming an LLC, LLP, or Other Business Entity: What You Need to Know

New and current business owners alike often start with only a few dollars and a vision. Rarely do they think about how structuring their business as a legal entity can affect their own personal liability, income and taxation, management structure, disassociation and dissolution, and more. Though this is understandable, it isn't wise. Establishing your business as an LLC, LLP, PC, or S-Corporation can be extremely advantageous in both the short and long term.

Here are the two primary advantages of the commonly used business entities in Alabama:

(1) Flow-Through Taxation - In contrast to "C-Corporations" which are subject to "double taxation," many business entities allow "flow-through" taxation in which profits and losses flow directly through to the owners. Thus, income is taxed only once - when the individual owners receive it.

(2) Limited Personal Liability - Sole proprietors are liable for their business's obligations. In contrast, the owners or investors of an LLC, LLP, PC, or S-Corporation are generally not personally liable for the obligations of the entity. Instead, only the entity itself is liable for the entity's obligations. As a result, the owners and investors risk only their capital investment in the entity. However, owners and partners are still personally liable for their own wrongful acts.

And, here are brief descriptions of the commonly used business entities in Alabama:

LLC (Limited Liability Company) - Flow-through taxation; limited personal liability; power to design management structure as the owner desires; power to allow or restrict transfer of ownership; only one owner needed to form LLC.

LLP (Limited Liability Partnership) - Like an LLC, an LLP features flow-through taxation, limited personal liability, the power to design management structure, and the power to define transferability rights. Of course, to form a partnership, at least two persons must be present.

PC (Professional Corporation) - Professionals may not form a general corporation for the purpose of practicing their profession. Instead, Alabama law allows certain professionals - architects, attorneys, doctors, engineers, so on - to form a PC and thereby enjoy the advantages of a Corporation. However, several restrictions apply.

S-Corporation - Corporate structure; flow-through taxation; limited personal liability. But note the following requirements and limitations: stock limited to one hundred persons; shareholders must be individuals; only once class of stock is permitted.

Of course, this is only a basic introduction to business entities in Alabama. For more information, feel free to contact me, a new business attorney. My best.

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