A new business owner will need to choose the right type of business management structure when registering their business. This is crucial to operating a successful business because it can have a substantial impact on the future of the company, specifically in terms of liability and tax implications. There are a number of different business management structures that new business owners can select from, such as a C Corporation or a limited liability company.
According to American law, if someone files a lawsuit against a corporation and the suit is successful, the corporation pays out of the corporation’s assets. The individual members’ and owners’ assets are not “touched.”
What this means is that the owners of the corporation are not personally liable for the corporation’s debts, or for damages awarded against the corporation in a lawsuit. However, one of the downsides of a corporation is “double taxation.” Simply put, corporate profits are first taxed to the corporation as they are earned, and are then taxed to shareholders as capital gains income, when the shareholders receive dividends.
A limited liability company (“LLC”) is a specific business form that offers the advantage of a corporation, in that the owners’ individual assets are protected from creditors and legal claims made against the LLC. Similar to partnerships, LLCs are not taxed at the “entity level.” What this means is that unlike corporations, they do not pay taxes as an LLC. The only taxes paid are paid by individual members who have earned profit.
However, there are some notable downsides to organizing as an LLC. An example of this would be how the liability of LLC structures is such that owners can be sued for their own negligence.
Some businesses choose an LLC formation because it provides extensive protections to the assets of those involved. In an LLC, there are no owners, rather members. Additionally, there are fewer costs and less paperwork associated with creating an LLC when compared to creating another type of business.
What Are The Requirements For Forming An LLC In Alabama?
In order to form an LLC, there are a series of steps that must be followed. Although the exact process can vary from state to state, the process generally involves:
- Determining who will be members of the LLC;
- Creating a unique business name;
- Filing the articles of organization, which are usually filed with the state’s Secretary of State; and
- Filing an operating agreement, if required by state law.
Many states require an initial information statement to be filed. This statement must be filed within a short period of time of the filing of the articles of organization, generally within ninety days. The statement must provide the names and addresses of all LLC members and managers. And, the LLC must pay a fee to the Secretary of State, which can vary by jurisdiction.
An additional statement of information must be filed periodically, generally every one or two years. If any of the information included on the initial statement has changed, the new information should be included in subsequent filings.
Some states require LLCs to pay franchise taxes, which are filed with the state’s Franchise Tax Board (FTB). If the LLCs have any employees, they must also pay state and federal employment taxes. LLCs must also pay unemployment insurance taxes, and must collect and pay sales taxes.
The first step in forming an LLC in Alabama is choosing and reserving a name with the Alabama Secretary of State. The cost to reserve a name is $25, and the name must include one of the following:
- Limited Liability Corporation;
- L.L.C.; or
- LLC.
The next step is to choose a registered agent who will be sending out the paperwork and receiving any notifications. The registered agent must live in Alabama in order to receive service. After filling out a Certification of Formation, the original plus 2 copies must be filed with the county probate judge in the county in which the LLC is filed. Finally, there must be at least one member for the LLC, and the LLC must have a “Limited Liability Company Agreement.”
What Other Paperwork Is Required To Form An LLC In Alabama?
In order to form an LLC in Alabama, you will need to file a Certificate of Formation with the county probate judge. You will also need to include a check for $100, which will be made out to the Office of the Alabama Secretary of State as a filing fee. If you wish to have the process expedited, some courts will allow for that at an additional cost of $100. Additionally, you will be required to include a copy of the Name Reservation with your application.
Foreign-based LLCs must fill out an application for registration. The form should include the following information:
- The official name of the company;
- Any other names used for the company;
- A copy of the name reservation;
- Where the company was formed;
- The name and address of the registered agents;
- The office address; and
- The day that the company will start conducting business in Alabama.
What Are The Benefits And Disadvantages To Creating An LLC In Alabama?
One notable advantage that Alabama provides to LLCs is that it does not require an LLC to choose between being member-managed or manager-managed. What this means is that it can be governed by both managers and members. Additionally, an LLC is allowed to establish different classes of membership, so that you can decide what responsibilities or how much power any class of member has in your company.
If the LLC is mostly owned by a single family, the LLC can receive a special tax break. This is done by registering as a “family limited liability entity,” which can be accomplished by attaching an additional form to the LLC’s Alabama Business Privilege Tax return form.
In terms of disadvantages to creating an LLC in Alabama, your LLC must pay a yearly tax called the “Business Privilege Tax.” Additionally, it is possible for a member to be sued and be forced to relinquish their financial interest in the membership as a remedy.
What Else Should I Know About Choosing a Business Structure?
When selecting a business management structure, consider the following factors:
- The number of owners that are forming the business;
- Whether they want to issue stocks and raise money from investors;
- Review both federal and state tax laws in order to evaluate the tax incentives that each business management structure offers;
- How much control the owner wishes to have over company decisions and assets;
- The amount that the owner is willing to spend in order to register their business; and
- The potential risks and liabilities they are willing to incur, both personally and professionally.
New business owners should also consider:
- Wind-up or termination procedures;
- The rights they want in terms of selling or expanding the business; and
- Their comfort level in having company details exposed to the general public.
Those who want to own a small business should consider forming an LLC. By forming an LLC, a small business owner will not have to pay out of personal assets if sued, as previously mentioned. LLC formation usually requires less paperwork to be filed with the state, and lower fees, when compared to corporation formation. In addition, keeping track of LLC income and expenses is relatively easy.
Do I Need An Attorney To Form An LLC In Alabama?
Although forming an LLC is relatively simple when compared to other types of business structures, you should consult with an experienced and local Alabama corporate lawyer.
An Alabama business attorney can help you understand the state’s specific laws and requirements in terms of creating an LLC, and can help ensure that you are filing all necessary paperwork correctly. Additionally, your business attorney will also be able to represent you in court, as needed, should any legal issues arise.
