How to start an LLC in Alabama
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Before you can start doing business in Alabama, your LLC will need to be formally established as a business entity with the state. Achieving this milestone can be done by following this step-by-step guide.
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Alabama is home to many multinational corporations and thousands of small businesses spanning industries. The pro-business climate makes the state home to businesses of all types, including LLCs. Entrepreneurs who choose the limited liability company structure can rely on Alabama’s resources to start their businesses. Below outlines all of the important aspects of starting an LLC in Alabama.
Name the LLC
Have a name in mind? See if it’s already listed in the state’s business directory. If the name comes up in a search, it’s taken. If it doesn’t, it’s yours to claim.
The first step in forming an LLC in Alabama is to reserve the chosen name with the Secretary of State, which means you will need to know your official name before beginning the process. The name that you choose needs to meet a series of requirements:
- With this type of business structure, the LLC name must be distinguishable from the names of all other business entities in the state of Alabama. You can use the state’s business name search to check on name availability before committing to it.
- LLC names must contain either the words “Limited Liability Company” or an abbreviation like “L.L.C.” or “LLC”.
- The name of an LLC may not contain words or phrases that indicate it is organized for a purpose not contained in its Certificate of Formation, or that imply it is organized for illegal purposes.
- Some words may be restricted, like those that imply the business is a government agency or require additional licensing.
Once you have chosen a name that meets all of these criteria, you must file a Name Reservation with the Secretary of State. This can be done online for $28 or through the mail for $25. This reservation will last for one year, or until you form an LLC under that name.
Other considerations
While any name available in Alabama is an option for your business, availability and the rules are not the only things you need to think about during the naming process. Clients will use your name to find your business, so choosing something easy to remember and easy to spell can help them more easily find you.
A good exercise is to search your business name and see what comes up, including whether that brings up any competitors. You can also see whether your domain name is taken or social media handles are in use, which can help you decide if your brand name is a good choice or will be confusing.
You can reserve a business name in Alabama for one year.
Select a registered agent
In the case that your LLC is sued or needs to receive official government correspondence, there must be a person or corporation designated to accept the legal paperwork. This is known as a registered agent and one must be appointed for every LLC in Alabama.
A registered agent can be any of the following:
- An individual over the age of 18 who resides in Alabama. This person can be the LLC owner, a member or employee, or any other person who you trust, but he or she must have a physical address in the state, not a P.O. box.
- A business entity formed in Alabama that provides this service, is known as a registered agent service.
- A business entity from another state that provides this service, provided they have an office in Alabama.
The Secretary of State has a full listing of registered agents recognized in Alabama if you choose to use a registered agent service. For some businesses, this is preferable as registered agents are expected to keep normal business hours, which may be difficult for an individual.
Any registered agent must agree to accept mail, including service of process, on behalf of the LLC before being designated as such.
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File Certificate of Formation
In order to create an LLC in Alabama, you must complete and submit a Certificate of Formation through the Office of the Judge of Probate in the county where the LLC’s initial registered office is located. It will then be the responsibility of the Probate Court to file the forms with the state and provide you a stamped copy, as well as transferring your payment. You can find the probate judge for all Alabama counties on this state website.
For the Certificate of Formation, (known as Articles of Organization in other states) you will need to include the following information:
- The LLC’s name
- The name and mailing address of the registered agent
- Indication of whether the LLC is a series LLC, professional LLC, or non-profit LLC
- The effective date when the LLC will begin
- Signatures of the organizer and attorney
Along with the Certificate of Formation, you must include a copy of your Name Reservation Certificate from the Secretary of State.
Sole proprietorships do not file these forms.
You can fill out and submit your LLC formation documents here.
Filing fee
There is a $200 filing fee for submitting your Certificate of Formation to the Secretary of State. In addition, there is a separate Probate Court filing fee which is typically at least $50.
Alabama processing time
For both online and mail filings, there is an expected turnaround of 10 days for processing a Certificate of Formation. For an additional fee, this can be expedited.
Create an LLC operating agreement
An operating agreement refers to a legal document that dictates the daily operation of a business as well as how decisions will be made. There is no requirement in Alabama that an LLC has an operating agreement or turn it into the state, but that should not stop you from creating an agreement for your internal use. It is recommended that every business have an operating agreement in place.
A comprehensive operating agreement can help your new business in a variety of ways:
- Helps to separate your LLC from your personal assets. In the event that your business has debt or legal liabilities, this protection can be critical.
- Prevents conflict or helps to resolve conflict that may arise between members. Many disagreements can be addressed in the agreement so that they never become an issue. Without clear rules, the state may step in and use default LLC rules, which are not always the most beneficial for you.
Most versions of this agreement will include similar provisions, such as:
- Percentage of LLC ownership interest: It is common for LLC members to receive ownership shares in proportion to the amount of capital they initially contributed to the business, but it can be divided in any other way. This should be spelled out in the agreement so there is no confusion.
- Distributive share: Since LLC members typically claim business profit and loss on their personal tax returns, it needs to be determined how these profits and losses will be allocated. This often corresponds to the percentage of each member’s ownership, but it can be assigned in any formation you’d like.
- Profit distribution: Outside of taxation, you should account for how profits can be distributed and accessed by each owner.
- Voting rights: In the event that there is a decision to be voted on, you should specify what voting power each member has. You should also decide if a majority is required or the vote has to be unanimous to move forward with a decision.
- Management structure: Will the LLC be manager-managed, member-managed, or will it run as a single-member LLC?
- Dissolution: Even if you intend to operate any type of business perpetually, there is always a chance you will decide to close it down. The operating agreement should account for how this will happen and what the procedures will be.
While this should all be agreed upon and signed off on, the operating agreement can also be amended at any time to reflect new decisions.
At both the state and federal level, LLCs and other business entities are regulated to ensure that all tax and legal requirements are met. Part of being a business owner means keeping up with these rules and ensuring your business remains in good standing. Setting these elements up early in your business will help you stay on track and make tasks easier throughout the years.
Get your EIN
To keep track of business taxes, the Internal Revenue Service issues something called an EIN, or Employer Identification Number. Despite the name, any business can obtain this tax ID for free, even if they do not have employees. However, any business with employees is legally required to have an EIN for tax purposes.
An EIN can be useful in a number of other ways. For example, most banks will require an EIN in order to open a bank account. It can then be used to create a credit report for your business, similar to the way your Social Security Number ties to your personal credit report. It can also be a safer option to provide an EIN instead of your personal information.
You can get your EIN by visiting the IRS website.
Get Alabama business licenses
There are three primary, state-level licenses that a business will need to obtain before operating in Alabama.
- The Business Privilege License and Store License are each obtained through the county probate’s office in each county where your business operates. You can find the contact information for the appropriate office to understand any requirements and fees for this process. These licenses act as general licensure that allows your business to be run in that county.
- In addition, each business must obtain a business tax registration or seller’s permit if they are intending to sell or lease tangible personal property that is subject to sales tax.
- Each county probate may also have additional licensing requirements for businesses that operate in that county. It is also important for some occupations to obtain professional licensing.
Open business bank accounts
Keeping your personal and business financials separate is a key piece of owning an LLC. Not only does it make accounting simple and tax filings quicker, but it is also critical to maintaining your LLC status. If it is found that you are mingling assets, you could lose the personal asset protection an LLC offers and be held liable for the business’s obligations. This phenomenon is known as “piercing the corporate veil” and can be very costly.
Using a business checking account for all business income and expenses is the best way to prevent this from happening. Savings accounts and credit cards are also helpful, especially when trying to build up a credit score for your business.
Review LLC tax rules in Alabama
The majority of LLCs are structured as pass-through entities. This means that the responsibility of federal taxes and state taxes is passed through the LLC itself and is reflected in the personal income taxes of LLC members. Thus, no state income taxes are paid by the LLC itself in most cases. If an LLC is taxed as a corporation instead of in this way, it will be subject to the flat 6.5% Arkansas corporation income tax.
Alabama does impose an annual Business Privilege Tax, or BPT, on LLCs. There is a minimum of $100 for this tax, which is calculated based on the total amount of income passed through to the LLC members. BPT is paid to the Department of Revenue and includes an Annual Report form as a part of the filing.
Other states call this a franchise tax.
In the first year of your LLC’s existence, there is a separate form for the return, which is due two-and-a-half months after setup. Aside from your first year, BPT filings are due no later than three and a half months after the beginning of the LLC’s tax year. For example, if your LLC’s tax year matches the calendar year and begins on January 1, the return is due by April 15th.
Get insurance for your LLC
As a business owner, a large legal obligation or settlement could be a financial disaster if brought against you unexpectedly. The LLC structure is designed to protect personal assets of the owner, but the business assets can still be compromised in these cases. To guard against this, you may want to purchase insurance for your LLC.
The most common forms of insurance are liability insurance. General liability plans can apply to any business and offer protection against claims of bodily injury, personal injury, and property damage. Certain occupations and industries may also choose to look into professional liability insurance, which is useful if you are accused of malpractice or business errors as a part of professional service offerings.
If your LLC has five or more employees, it is also required by state law to have workers’ compensation insurance. This employee count includes LLC members and other officers.
About BOI Reports…
For LLCs to operate legally, owners must understand and comply with Beneficial Ownership Information (BOI) reporting rules under the Corporate Transparency Act. Properly filing your report with the Financial Crimes Enforcement Network (FinCEN) is crucial to avoid penalties. If you are unsure whether your LLC must disclose ownership information to FinCEN, see our post about BOI reporting here.
Additional resources to help you set up a business in Alabama
The Alabama Secretary of State is responsible for all management of business entities in the state, including LLCs. Whether you are a seasoned entrepreneur or a first-time business owner, their website is set up to provide comprehensive information on all processes and files related to running your business. Some examples of these resources include:
- A brochure on all elements of domestic business entities in the state of Alabama.
- Full listing of each form available related to domestic entities in Alabama.
FAQs
Do I need to submit a Certificate of Formation to the Alabama Secretary of State?
While the Secretary of State manages business filings, you will actually submit the forms to the Office of the Judge of Probate in the county where your initial LLC office is located. They will then file the form with the Secretary of State and pass along your fee. You will be provided with a stamped copy before this is done.
Do Alabama LLCs pay extra taxes?
In addition to the normal state and federal income taxes, Alabama LLCs pay an annual Business Privilege Tax each year. This tax has a minimum cost of $100 and is then calculated as a percentage of business income. Each LLC will also have to pay applicable sales and employment taxes to the Alabama Department of Revenue.
Is there a state business license in Alabama?
Yes, Alabama has three state-level licenses that most LLCs will need. One is a seller’s permit or business tax registration, which allows the business to collect and pay sales tax. The other licenses are a Business Privilege License and Store License, which are issued at the county level though they are required by the state.
Does Alabama require operating agreements for LLCs?
Alabama does not have any mandate that LLCs have an operating agreement in place or that one is submitted to the state. However, this is still considered best practice and it is advisable to have one written and stored.
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