Like we said in the introductory post in this series, a Limited Liability Corporation (LLC) offer a more formal business structure than a DBA. Like the name suggests, they too offer limited liability, protecting the owner(s) from personal assets from losses, company debts, or court rulings against the company.
LLCs are not required to have annual meetings, board meetings, or notes from any of these meetings. The owners (also known as members) of the LLC may choose to have the owner(s) or choose managers to run the day-to-day business. The operating agreement will establish who has the authority to conduct specific transactions on behalf of the LLC. If this structure changes, it is important to amend the operating agreement to note the changes.
Profits go directly to the owner(s) as personal income (the same “pass-through” as an S corporation discussed above), meaning only the owner pays taxes on the income.
How an LLC Pays Taxes
The IRS says, “Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return… [a] domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation.”
Establishing an LLC in Alabama
To establish an LLC in Alabama, you’ll need to file the Domestic Limited Liability Company Certificate of Formation with your county and the state. You’ll also need to file a form to reserve the name of your LLC. (You can check that your desired name is available here.) The form will be submitted along with the Certificate of Formation. (Your LLC’s name must include the words “Limited Liability Company” or the abbreviations “L.L.C.” or “LLC.”)
The Certificate of Formation will require the name of the LLC, the name and address of the registered agent, and the type of LLC being formed (if applicable).
A sole proprietorship LLC will not require an operating agreement, but an LLC with more than one member will require one.
We take a closer look at operating agreements in the final post in this series.
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We’d love to chat with you about how we can help you get your business off the ground.
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