Why Start a LLC in Alabama?
Forming your business as a Limited Liability Company (LLC) in the United States wreaths it with many benefits that the status of a conventional corporation, sole proprietorship and partnership cannot individually offer as an LLC possesses a unique hybrid make-up that merges the defining features of these traditional business structures with one another.
To illustrate, an limited liability company offers the flexibility of sole proprietorships and partnerships as it is free from most of the formalities and paperwork necessitated with corporations, and yet it also provides the limited liability inherent to a corporation, offering liability protection to you and your personal assets if you are faced with a lawsuit. Its hybrid structure also crucially bestows upon you your taxation of choice.
Anyone can form an limited liability company in the United States – even foreign citizens and companies. However, the requirements for forming an LLC varies slightly from state to state.
In this article, we will be looking at how to set up an limited liability company in the state of Alabama. With every passing year, Alabama gains another 15,000 LLCs and this constant economic growth has a sound rationale behind it, Alabama lands the 6th spot nationally in the small business survival index and it has the 3rd lowest tax burdens in the country.
Steps to Start an LLC in Alabama in 2023
STEP 1: Name of the LLC
First and foremost, you would have to pick a unique name for your limited liability company that complies with Alabama’s naming requirements:
- The name must contain either the words “Limited Liability Company” or one of its abbreviations, “LLC” or “L.L.C.”
- The name cannot insinuate that it is a business entity other than an limited liability company.
- The name cannot contain words that may associate the limited liability company with a government agency.
- The name cannot contain prohibited words, if it contains restricted words it would need to go through additional paperwork and it may necessitate a licensed person whose profession respectively correlates to those restricted words being a part of the limited liability company.
- The name must be unique, distinguishable from the names of pre-existing business entities in Alabama. The LLC examiner within the Alabama Secretary of State will determine if the name that was chosen is sufficiently “unique” or “distinguishable”. If it is not, the rejection of the application will be accompanied with a letter explaining why it was rejected.
Unlike most states where it is an optional choice, a name reservation for your limited liability company is compulsory in Alabama. You must do so before you file your formation documents to the Alabama Secretary of State or while filing your formation documents if you are forming your LLC virtually.
To reserve a name, you could either submit the Name Reservation Request Form for Domestic Entities through the Alabama Secretary of State’s website for a fee of $28 or physically mail the said form to the Alabama Secretary of State’s postal address for a fee of $10. You need not check the availability of the name you have envisioned if you are opting for the online route as the website will automatically inform you if it is indeed available.
You should also check if your LLC’s name is available as a web domain name. You may preemptively buy the URL in order to ensure that the web domain name matches your limited liability company’s name.
Though you are not required to register a “Trade Name” for your limited liability company in Alabama, you may want to do so if you intend on operating under a name other than your LLC’s filed legal name. To acquire a “Trade Name” you must file for an Application to Register Trade Name In Alabama with the Alabama Secretary of State for a fee of $30.
STEP 2: Appointment of Registered Agent
You are required by Alabama’s state laws to nominate a designated Registered Agent for your LLC while filling out your formation documents.
A Registered Agent is a business entity or an individual that acts as the LLC’s point of contact with the state, being responsible for receiving on the behalf of the limited liability company any tax forms, notices from the Alabama Department of Revenue and even legal documents from lawsuits. The Registered Agent also keeps the LLC afloat by ensuring that the proper paperwork is updated and correct.
One of the requirements of being a Registered Agent in Alabama is that the agent must either be a resident of Alabama or a corporation present within the state with authorised Commercial Registered Agent services. The Registered Agent must have a physical street address within Alabama, the state where the business of the LLC is to be conducted and where the documents are to be sent. Additionally, the Registered Agent must always be available during business hours to receive a Service of Process when necessary.
Anyone within the LLC who is over the age of 18 and has a physical address could suffice, even friends and family who satisfies all the above could also suffice. You could also appoint yourself as the Registered Agent if need be, as the business owner you are not barred from having a dual position.
Nevertheless, though it will cost you some additional expenses, it is suggested that you hire a professional Registered Agent service as it greatly cuts down the risks of mistakes that a mere amateurish individual would make, therefore avoiding the accumulation of even more expenses over time.
The service provides you with the luxury of privacy whereby the service’s address will be listed in public records instead of yours, moreover, if you do get into a lawsuit, the service will immediately and discretely inform you, allowing you to avoid being served those documents in public. It will also shoulder the burden of being up to date with the necessary legal documents and free up your schedule as it is no longer a necessity to be on-site at all business hours.
You may nominate your Registered Agent via the Alabama Secretary of State website while you are filing your formation documents or by mailing a physical copy of the Certificate of Formation with your Registered Agent’s information to the Office of the Judge of Probate in the county of your limited liability company.
It is also possible to change your nominated Registered Agent, simply complete the proper form provided by Alabama’s Department of Revenue through mail or by being there in person. The fees shall be $25.
STEP 3: Filing the formation documents
Prior to 2021, Alabama dictates that you would have to mail your formation documents or physically deliver them to the Office of the Judge of Probate in the county of your limited liability company instead of the norm for most places, the Secretary of State. You would also have been barred from forming your limited liability company through virtual means.
Now, an LLC in Alabama may be formed once the Certificate of Formation is filed and mailed to the Alabama Secretary of State.
Furthermore, you could now form your LLC in Alabama by opting for the more convenient route of filing the Certificate of Formation online through the Alabama Secretary of State’s website.
Regardless of the available routes chosen, the filing must include these necessary details of the Alabama LLC:
- An indication of what type of Alabama LLC is being formed;
- The effective starting date of the Alabama LLC if it differs from the filing date of the formation documents;
- Registered Agent’s name;
- Registered Agent’s address, and;
- The signature of the organizer or attorney-in-fact.
The filing fee for the Certificate of Formation will be $200 if mailed and $208 if done online. It is a non-refundable one-time fee.
Before you submit the document, do ensure that you have reviewed it thoroughly to affirm that there are no mistakes made, these mistakes could carry on and even affect the business if they are as glaring as a misspelling of the LLC’s name.
Once the formation document is submitted and approved, usually within 4-7 days if transacted through mail or instantaneously if transacted through the online route, your Alabama LLC will be officially formed.
STEP 4: Register the Business for Tax and Regulatory Requirements
Once you have formed your Alabama LLC, you may have to apply for business licenses or permits depending on the trade and location your LLC is in. Most of the said licenses like a Business Privilege License which allows you to carry out business within the county the LLC is in or a Store License which allows the LLC to sell and receive physical goods are provided by either your County Probate Office or your County Licensing Commission.
In order to ascertain which exact license or permit is necessary for your Alabama LLC, you may contact the specific County Probate Office for your business.
Your Alabama LLC may also be necessitated to register for one or more forms of state tax depending on the trade your LLC is in and how the business is conducted. You may find and apply for the necessary tax forms through the Alabama Department of Revenue’s website.
STEP 5: Prepare an Operating Agreement
Albeit of the fact that having an Operating Agreement is not compulsory within the state of Alabama in order for an LLC to function, it still highly suggested that you prepare one for your business as it plays a vital part in determining the dynamics within the limited liability company and how it is run.
An Operating Agreement is a foundational legal document that establishes who owns the limited liability company, how much of it they own and member terms. It is a comprehensive internal document that also serves as the core of the business by listing out a multitude of crucial information in order to reduce future conflicts. Alabama’s limited liability company Law would only affect the internal affairs of the LLC in the absence of an Operating Agreement.
The Alabama LLC Act provides that members of an limited liability company have the contractual freedom to customize their capital contributions and their shares of profits and losses through the use of the Operating Agreement.
Amongst the most important structural support an Operating Agreement provides to an limited liability company that you should have within your own version are:
- Its organization of how the ownership of the limited liability company is divided as mentioned above.
- The verdict on whether the limited liability company would be managed by managers or by multiple members and if the latter case occurs, how the voting powers are divided amongst the members.
- Records of the capital contributions that each member had invested in the limited liability company.
- The calculation of how the profits and losses of the limited liability company are to be divided amongst the members. The most regular route entails that the profits and losses are to be divided equally.
- The regulation of how members are introduced into the limited liability company and how members could leave the LLC.
- The outlines for a potential dissolution in the scenario where the members of the limited liability company have decided that the business should cease to exist.
Moreover, it serves the fundamental role of preserving your shield of limited liability by aiding you in proving that your limited liability company truly does stand as itself, a separate legal entity from you.
STEP 6: Obtain an EIN
An EIN, or “Employer Identification Number” could be seen as a 9-digit “social security number” that is assigned by the Internal Revenue Service (IRS) to a business in order for the IRS to clearly identify it for tax and filing purposes.
The EIN may also be referred to as the Federal Employer Identification Number (FEIN) or a Federal Tax ID Number, nevertheless, they are just different names as they are essentially the exact same thing as an EIN.
It is required for you to obtain an EIN from the IRS for your LLC if you:
- Own an LLC that has more than one member, even if there are no employees hired.
- Intend on hiring employees for your LLC.
- Intend on filing and managing Federal and State taxes.
- Intend on opening a bank account for your LLC.
- Intend on having the LLC taxed as a corporation.
- Intend on applying for specific business licenses that would require it.
Additionally, an EIN also serves the functions of maintaining the shield of limited liability as it once again enforces that your LLC exists as a separate legal entity and strengthening your position against identity theft as it is less probable that someone could intrude into your accounts when you separate your personal and business finances.
Evidently, due to the wide ambit it covers, an EIN is functionally compulsory for your business to run. The only way for you to justifiably refuse to obtain an EIN is if your LLC has only one member, no employees and its business structure is akin and taxed like a sole proprietorship.
Getting an EIN is also the stage where you are offered to pick one of the variations of taxation options available to an LLC. As mentioned above, most would pick a “pass-through” taxation option, the default, however, if you wish for the LLC to be taxed as an S Corporation or even a C Corporation you could file certain forms to do so once you have obtained your LLC’s EIN.
You could obtain an EIN by applying for it through the IRS website or by physically mailing it to the IRS with a “Form SS-4”, Application for EIN. No filing fee will be charged.
There are no filing fees necessitated for obtaining an EIN.
STEP 7: Business Privilege Tax Returns and Annual Report for Annual Renewal
Finally, once you have done all the groundworks to set up an LLC, you will have to ensure that its upkeep goes swellingly as well. It would be distressing to watch all the work poured into the LLC go to waste just after a year and just because of inadequate maintenance of paperwork.
Like many other states, Alabama dictates that all LLCs within it must file an annual report as a means to renew their applications and remain in compliance and good standing with the state laws. As indicated by the name, this report must be filed once every year – without fail.
Unlike many other states however, the annual report that must be filed to the Alabama Department of Revenue comes in the form of a Business Privilege Tax Return, the annual report and its functions are subsumed under it. The Business Privilege Tax performs the role of being both an annual report and a license and tax on the business of the LLC. It provides updated information to the necessary authorities and governs your business as well.
With the Alabama LLC formed, you need to file a preliminary “BPT-IN Form”, the “Initial Business Privilege Tax Return”, to the Alabama Department of Revenue. This initial report must be filed before 2 months and 2 weeks have passed since the formation date of the LLC.
Subsequently, you are compelled to file the combined Annual Report and Business Privilege Tax Returns, the “PPT Form”, to the Alabama Department of Revenue before the third week of April every year.
The reports may only be filed through mailing, the fees for the Business Privilege Tax Returns will be a minimum of $100 annually. The exact charge shall be calculated in correlation to the income of the LLC in the previous taxable year, it usually ranges between 0.00025% to 0.00175% of the net worth of the LLC.
Failure to do either of the above could result in the automatic dissolution of your LLC.
Additional Information on Forming an LLC in Alabama
With all the above carried out, your LLC would be up and running and hopefully flourishing. They are the compulsory components that you would have to perform for your business to even begin and continue on as an LLC.
Nevertheless, there are additional considerations that you may want to weigh your options on in order for your LLC to succeed even further:
Opening a Bank Account
If you possess an EIN you could open up a bank account for your LLC which is highly suggested for the smooth sailing of your business. The bank account need not be in the same state as the LLC.
A business bank account will ease transactions with other businesses in the United States and crucially, maintain your personal liability protection. Allowing your own personal bank account to be involved with the business could lead to confusions concerning what assets belong to who. This would lead to personal liability issues and consequently, damage done to your personal assets.
Knowing which Taxation Variant you are opting for
The principal utility of an LLC is that it provides you with your taxation of choice at a federal level. As an LLC you could choose to be taxed as either a:
- Sole Proprietorship, if the business is a single-member LLC;
- Partnership, if the business is a multi-member LLC; or
- Corporation (either S Corporation or C Corporation).
Most companies will fall into the default, the former two on the list, which is what they prefer as the LLC will be treated as a “pass-through” entity, allowing you to be taxed directly and as such, avoid double taxation. They are considered the main tax benefit of having an LLC as you are allowed to operate like a company without its burdening taxations.
Opting to be taxed as an S Corporation would also allow you to avoid double taxation, however, the IRS imposes certain restrictions to limit the kind of businesses that could choose an S Corporation status. The LLC would need less than 100 allowable shareholders and have only one class of stock.
Opting to be taxed as a C Corporation would incur double taxation upon you, however, the upside to it is that you are allowed to have an unlimited amount of shareholders.
To change your LLC from the tax default of a Sole Proprietorship or Partnership, you need to file Form 8832 and Form 2553 with the IRS to be taxed as a C Corporation and an S Corporation respectively.
Deciding if the LLC should be Member-managed or Manager-managed
If the Alabama LLC is rather small and the members are on board with managing the day to day operations of the business then the LLC could pursue a “member-managed” structure. If the Alabama LLC is rather large with copious amounts of members and the majority of them are not keen on running the day to day operations of the business, then the LLC could pursue a “centralized management” system and focus its organizational roles onto one or more managers selected.
List of Necessary Addresses for the purposes of setting up the LLC
Alabama Secretary of State’s Mailing Address:
Secretary of State
P.O. Box 5616 M
Montgomery, Alabama 36103-5616.
Alabama Department of Revenue’s Mailing Address:
Alabama Department of Revenue
Business Privilege Tax Section
PO Box 327320
Montgomery, AL 36132-7320
Internal Revenue Service’s Mailing Address:
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
Frequently Asked Questions (FAQs)
How much does it cost to form an LLC in Alabama?
In order to first form your Alabama LLC you would have to spend around $228 to $236 for both the compulsory reservation of your LLC’s name and the actual formation fee of your LLC. You also would have to pay a minimum of $100 every year in order for your LLC to remain compliant.
Can a foreign LLC conduct its business in Alabama?
Yes, a foreign LLC may. However, all foreign LLCs are required to register with the Alabama Secretary of State prior to doing so. This could be done through performing a “foreign filing” on the Alabama Secretary of State’s website. Do keep in mind that you would also need a Registered Agent present within the state of Alabama itself.
What is the minimum wage for workers in Alabama LLC and are there any regulations on how often I would have to pay them?
The minimum wage of Alabama LLC is $7.25 per hour and there are no regulations that dictate the correct frequency of the payments toward the employees.
How do I dissolve my Alabama LLC?
You would need to submit an Articles of Dissolution form to the Office of the Judge of Probate of the county the LLC is formed in. The Alabama Secretary of State will then regard your Alabama LLC as a dissolved entity. The filing fee for this form would be $100, additionally, you would have to pay the respective fees demanded by your specific Office of the Judge of Probate.
What Is The Differences Between a Domestic Alabama LLC and A Foreign LLC?
Limited liability company LLC is referred to as a “domestic LLC” when it conducts business in the state where it was formed. For instance, a domestically formed business Alabama is a form of LLC. Meanwhile, a foreign limited liability company LLC is commonly formed when an existing LLC looking forward to form an LLC elsewhere in another state which requires business licenses and permits.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.