If you are planning to start your own business in Alabama, you might be wondering what kind of ownership structure might be right for your business. Choosing the right entity is extremely important, as it can impact several aspects of your business including how you are taxed, whether you can have partners, and whether or not you can be held personally liable for your business debts and liabilities.
In this article, we take a look at five ownership structures or entities that you can consider for your business.
A sole proprietorship – as the name implies – is a business entity that is owned and operated by an individual. It is undoubtedly the simplest way to structure your business, as you are not required to file any paperwork or pay any fees in order to set up your business. The only thing you might require is a license and a permit, depending on the nature of your business.
One of the most notable aspects of a sole proprietorship is that the business and the person who owns it are one and the same. What it means is that you are not required to report the income you earn from your business separately. It is considered your personal income and you can file tax returns using your own social security number.
The downside of a sole proprietorship structure is that you can be held personally liable for your business debts and liabilities. Since the business cannot be legally separated from its proprietor, you have no protection against business-related liabilities like liens or court judgments.
Moreover, due to the restrictive nature of the sole proprietorship structure, you might not be able to raise the capital you need to expand your operations – if and when you want to.
It is a business entity that is owned by two or more partners. In order to set up a partnership, you need to create a partnership agreement that specifies the ownership interests of the partners, how profits, losses, and liabilities should be shared, and how the business should be operated.
Each partner can file their own tax returns and pay taxes on the income they earn from the business. As is the case with a sole proprietorship, the downside with a partnership is that you are not protected against business-related debts and liabilities.
It is a slightly more complicated form of partnership that allows other people to invest in your business. You – as the general partner – can have complete control over the day-to-day operations of the business and the investors – as limited partners – cannot have any say in it. They are entitled to receive a share of the profits generated by the business.
The biggest downside of a limited partnership is that you as the general partner can be held liable for business debts and liabilities, whereas the limited partners are protected against it.
Limited Liability Company (LLC)
If you want to protect your personal against business-related debts and liabilities, an LLC might be the best choice for you. The most notable aspect of an LLC is that the company itself – not the owner – is responsible for all the debts and liabilities it incurs.
In order to set up an LLC, you need to file paperwork and pay a filing fee. An LLC can have a single owner or multiple owners. If there are multiple owners, each has to pay taxes on the income they earn from the company.
The downside with an LLC is that it can be slightly more complicated to set up and operate compared to a sole proprietorship or general partnership. Also, your business might be subject to additional taxes at the state level.
If you want to be able to raise capital for your business with the help of investors when you need to, a corporation may be the right entity for you. If you choose to set up an S-Corp, you can raise capital through local investors. The corporation is required to pay taxes on the profits it earns. Apart from this, shareholders are also required to pay taxes on their share of the profits – resulting in double taxation.
If you choose to set up a C-Corp, you can raise capital through local as well as international investors. The corporation’s profits and losses can be passed on to the shareholders, who are required to pay federal income tax on their share of the profit.
Looking to Start a Business in Alabama? Let Our Business Law Attorneys Help You!
The business law attorneys at BHM Law Group have a deep understanding of state and federal laws governing small businesses and corporations and have decades of experience in providing legal counsel to businesses of varying sizes. We can help you choose the right ownership structure for your business and take care of all the paperwork involved.
We can also help you restructure your business, guide you through mergers and acquisitions, and provide you with the advice you need to expand your business operations.
To find out how we can help you with your business, call us today at 205-994-0902 or contact us online and schedule a free consultation.