Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Alabama, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. A corporation provides limited liability protection to its shareholders, but may be subject to double taxation unless it elects S corporation status. General partnerships and limited partnerships offer different levels of liability and involvement in management, with limited partners typically enjoying liability protection. A limited liability company (LLC) combines the liability protection of a corporation with the tax benefits of a partnership, making it a popular choice for many businesses. Sole proprietorships are the simplest form, with no separate legal entity from the owner, leading to personal liability for business debts. Alabama has specific statutes governing the formation and operation of these entities, including the Alabama Business Corporation Law for corporations and the Alabama Limited Liability Company Law for LLCs. Costs, filing requirements, and maintenance obligations vary by entity type, with corporations and LLCs generally requiring more formalities than sole proprietorships or partnerships. When choosing an entity, it's advisable to consult with an attorney to understand the implications for asset protection, tax strategies, attracting investors and lenders, offering equity incentives, and complying with state requirements.