Why Is an LLC a Better Choice Than a Corporation for Most New Alabama Businesses?

Starting a new business is exciting, challenging, and sometimes overwhelming. You know that you have a passion for serving others, and you’ve found a skill that allows you to do so. However, having a business isn’t just about providing a product or service. There’s a lot more to it.

One of the first things to think about is what type of business entity you want to form. For more new businesses in Alabama, a limited liability company (an “LLC”) is the best choice.

Why is it important to form a business entity, and why is an LLC better than a Corporation? Let’s take a look.

Why Form a Legal Entity?

We strongly recommend that all business owners choose a legal entity, whether it’s an LLC or corporation. Why?

The biggest advantage is that it provides liability protection. If your business struggles or gets sued, you want the peace of mind that comes from knowing your personal assets are potentially protected from creditors. With an LLC or a corporation, your liability is generally limited to only the company assets. That means your retirement accounts, home, car, and other personal property may be safe suit and collection.Bottom of Form

Having a business entity can also protect your privacy. Maybe you don’t want all of your customers or vendors to know your personal details like your full name, address, and phone number. When you form a legal business entity, you can have a legal representative, called the registered agent, listed on official public records instead of you and your personal information.

Finally, having an official business entity helps you look more professional and established. To the public, there’s a difference in perception of professionality between “Smith’s Car Repair, LLC” and “Sammy’s Car Shop”. You want to give your prospects and customers confidence in your company, and a legal entity helps make you look more established.

Choosing Between a Corporation and an LLC

There are two primary choices for business formation. The first is a Corporation, and the second is a LLC.

Incorporation

When you go through the process of forming a corporation, you are incorporating your business using the traditional corporate structure. In Alabama, corporations must use the words “Inc.” or “Incorporated” at the end of the new business’s name.

When you incorporate your business as a Subchapter-C corporation, the business is taxed as an entity separate from you as an individual. Business taxes at the corporate-level can be lower than individual rates, so a C-Corp can be a good choice for some businesses. However, income from a C-Corp will be taxed again when dividends are paid to the company’s owners. Subchapter-S corporations are passthroughs, meaning that that the tax liabilities of the company are passed directly to the owners and income is not taxed at the corporate level.

Finally, the corporate entity allows your business to issue stock to shareholders. Compared to operating as a sole proprietorship ort a joint venture, issuing stock can be important to investors if your business needs to raise capital through outside funding. In a corporation, stockholders have a direct and legally defensible stake in your business, giving them the confidence to invest in your operation.

However, if you form a corporation, your company will face potentially higher fees and more organizational requirements – corporate structures have more rules and are more bureaucratic than LLCs or partnerships. A corporation must have directors and officers, hold annual meetings, and keep detailed organizational and managerial notes and records. This means that there’s also a lot of paperwork to keep track of for the owners and management.

Forming an LLC

Having an LLC in Alabama helps limit your liability, just like a corporation. LLCs must either use the words “limited liability company” or “LLC” after their business name to designate to the public their legal status. Again, using the entity structure help builds consumer confidence in your company and brand’s legitimacy.

As an LLC electing to be treated as a disregard entity or as a partnership, the business’s profits and losses aren’t taxed at the entity level. This means that all of the income passes through to you and the other the business owners, and is instead taxed as income at your personal level. Compared to a C-Corp., this is beneficial because many companies will save money on taxes by only having that income taxed at one level.

LLCs are also less paperwork-heavy than corporations. You don’t necessarily have to have directors, annual meetings, or a lot of the other paperwork. This is beneficial because you can focus on building your business, not on pushing paper to government agencies and internal stakeholders. Many Alabama business owners prefer an LLC because they get protection without the hassle. LLC’s are low-maintenance and less expensive to form and maintain. Depending on how the LLC Agreement is written, the owners can make executive decisions without needing to go through corporate resolutions or updated other documentation.

How Do You Form a New Company?

Forming an LLC or a corporation is best done by an experienced lawyer. While you can find the appropriate forms online and submit them to the state, it’s easy to overlook specific details or make mistakes that will later come back to bite you – such as selecting the wrong taxing structure with IRS.

A lawyer can also help you understand what rules to follow to ensure that your limited liability holds up in the future and is not subject to any attacked on its limited liability status. For instance, you and your new company need a separate personal and business bank accounts. Your personal and business finances need to be independent from each other to preserve all protections.

If you’re looking to escape the 9-5 grind and start your own business, it’s time to take the leap. However, don’t overlook essential elements of business ownership, such as setting up a legal entity.

By Sarah S Shepard, LLC, Alabama

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