Starting a business is exciting, but there are so many decisions to make. One choice affects every other aspect of the business: choosing which of Alabama’s business entities is right for you.
Sole Proprietorship
One of the easiest types of business to start, a sole proprietorship has only one owner.
Sole proprietors do not have to file formation documents or be registered with the State of Alabama. However, sole proprietors may need to apply for licenses and registrations depending on the type of business they operate.
Decision-making is straightforward. Management is flexible, because the owner does not have to answer to shareholders, other owners, or a board of directors. However, getting opinions and backup from other owners could lessen the stress of day-to-day operations.
One disadvantage to sole proprietorships is that the owner is completely liable for the business. In fact, the owner’s personal assets may be vulnerable.
Partnership
Two or more people are required to form a partnership. Typically, the partners will sign some kind of agreement to form the partnership, although it not required by law. As mentioned above, though, state and local governments may require licenses or registrations to operate within their jurisdictions.
Management and decision-making is still fairly flexible. Partnerships can be unstable, though, and dissolve when one or more partners leave the business.
Partners may find it difficult to sell or otherwise transfer their business interest.
Corporation
This is one of the more complicated business entities. Corporations are legal entities separate from the persons who own them.
Forming a corporation in Alabama requires filing documents, including a Domestic Business Corporation Certificate of Formation. The completed certificate and filing fees should be filed with the Office of the Judge of Probate in the county where the corporation’s registered office is located. Additional documents are filed, including a Name Reservation Certificate from the Alabama Secretary of State’s office. A charter that states the purpose of the business is sent to the new corporation.
One big advantage to the corporate structure relates to liability. The owners of the corporation have limited liability for the corporation’s actions. It’s also easier for shareholders to transfer or sell their interest in the corporation.
Taxation is a disadvantage, however. The corporation’s income is taxes, but also the dividends paid to the shareholders. Corporations are also required to file annual reports.
Limited Liability Company and Limited Liability Partnership\
Some feel these structures offer the best of both worlds: limited liability of a corporation, but the lower taxes of a partnership. LLCs and LLPs are relatively inexpensive and easy to form.
New owners do need to register with the Alabama Secretary of State/ and file a Certificate of Formation with the Office of the Probate Judge.
As the names indicate, owners of these business entities enjoy limited liability. Taxes are paid on a pass-through basis; the LLC and LLP are not taxed, but the owners are.
Learn More About Forming a Business in Alabama.
The attorneys at Miller Estate and Elder Law efficiently assist their clients with business matters. For a free consultation, contact us at 256-251-2137 or use our convenient Contact Form. Although we’re located in Anniston, we also help clients in the Birmingham, Gadsden, Hoover, Talladega, Vestavia Hills, and surrounding areas.