There are many decisions that need to be made in the early days of forming a business. How will you execute a marketing plan? Where will your office be located? Who will be joining your team? These are just a few questions that Alabama entrepreneurs can face when launching their own business venture. Another item of particular importance is weighing an LLP vs. LLC in Alabama.
How you opt to structure your business can prove to be a crucial choice. There are sizable tax and liability implications that come with the varying formation options in the state of Alabama, and knowing what is right for you and your business is key. Whether you select a Limited Liability Partnership (LLP) or a Limited Liability Company (LLC), understanding the nuances of each structure is a prudent business move.
What is a Limited Liability Partnership?
If you have spent years in one particular industry, you have probably made a few close colleagues along the way. If you and one or more like-minded individuals have an interest in starting your own business, a partnership can make a lot of sense. A General Partnership (GP) takes place when two or more people go into business together, and it can be a rather informal arrangement. While a GP allows you to lean on the expertise of your partners and share management responsibilities, it offers little in the way of liability protection. For this reason, some businesses choose to add a layer of legality to their arrangement by forming a limited liability partnership.
In an LLP, the benefits of a partnership remain intact. You can work together with your partners to manage your business on a day-to-day level, as well as enter into a profit-sharing agreement. You will also receive the advantages that come with the concept of “limited liability”. This means that in the event one of your partners commits malpractice or misconduct that is detrimental to your business, you will not personally be found liable. In other words, your individual assets (home, 401k, etc.) are shielded from any legal judgements.
Limited liability partnerships especially make sense for licensed professionals. Doctors, lawyers, and dentists tend to favor LLPs because of the risk mitigation aspect. In fact, some states only allow licensed professionals to form LLPs–though Alabama offers some flexibility in this area.
Understanding the Concept of an LLC
A limited liability company is similar to an LLP in many ways. An LLC is made up of individual members who own and manage the business. In an LLC, there is also the option to appoint managers outside of the membership. Limited liability is also featured in this business entity, so you can shield your finances from lawsuits or bankruptcy that result from your business.
One key difference between LLCs and LLPs is that in an LLP individual partners can be found liable, while others can be protected. An LLC, conversely, is not structured in this way. Again, this mode of targeted accountability makes sense for certain lines of work, while LLCs are hugely popular among businesses of all types.
Common Grounds: The Tax Advantages of LLCs and LLPs
So, now you have a sense of the differences between LLCs and LLPs, but you may be curious about their commonalities. The greatest shared benefit between the two structures comes in the form of taxation. The Internal Revenue Service (IRS) views both limited liability companies and limited liability partnerships as “pass-through” entities. In plain terms, that means that the profits generated by the business itself are not taxed. Instead, those funds “pass through” to the individual partners or members who then pay taxes on their income.
As you can imagine, such a tax incentive makes these business structures appealing to business owners. Before deciding on which mode is right for you, you may wish to consult with an experienced tax attorney. Having your taxes in good order is a must as a business owner, and you will want to make calculated, informed decisions in this area.
LLC vs LLP in Alabama: We Have the Answers
Whether you have decided to forge ahead with an LLC or an LLP, you can expect to navigate some paperwork. You will need to contact the Alabama Secretary of State’s office to locate the appropriate registration form. After that, you will need to fill it out completely with some relevant details about yourself and your business. With your forms completed and any supplemental materials in place, you can then package everything and return it to the correct government office.
Of course, there is also an easier way. At the Corporation Center, we offer easy-to-complete online forms for Alabama business owners. Whether you are forming an LLC, LLP, or an S-corp, we have the tools to help you. Contact us today to learn more.