In the business world, there are a variety of forms of business organization, and each one has its own positive and negative aspects. The LLC, or Limited Liability Company, is a relatively new occurrence in the United States (1977), and wasn’t brought into existence in Alabama until 1993. The LLC will blend some of the best aspects of a corporation (primarily the limited liability) with some of the best aspects of partnerships (pass-through income taxation). Paperwork and overall management are much less than the traditional corporation, which makes it a very good choice for many small businesses. But, you may be surprised to note that even some very large businesses even use the LLC as their preferred option (check out Amazon.com, LLC).
The LLC itself can then be taxed in a number of different ways, all at your choosing. By default, if you start an LLC in Alabama, you will be taxed as a sole proprietor if you are solo and as a partnership if you are forming the LLC with more than one person. However, you can also elect to be taxed as either a traditional C-corporation or a non-traditional S-corporation. The former will cause profits to be taxed at the corporate tax rates, and then any dividends, etc. to also be taxed at that tax rate. The latter functions as a pass-through device and causes the income to show up on your normal tax return.
Depending on your situation, one of those four options will be the preferred option for you. But, because there are so many options, you really get the best of all worlds. You can have the ease of starting and maintaining an LLC, get the liability protections of a corporation, and pick the tax treatment from a variety of options. Thus, you may strongly consider forming an LLC when the time comes for you to start that business. Already started and looking for more protection, then now may be the time to switch from being a sole proprietor to an LLC. Let us help you with that today! Contact us for a free consultation.