Are you looking to form a limited liability company (LLC) in the state of Alabama, but you’re not sure how the formation process works? There are several important steps when it comes to creating an Alabama LLC that is compliant and able to do business in the state.
What is an Alabama LLC?
The Alabama LLC is one of the most popular business structures in state. It's a more casual and flexible type of business than a corporation, but includes the same personal asset protection you get with a corporation. That means you aren't personally liable for debts or lawsuits against your business. This is a critical protection that is lacking from sole proprietorships and general partnerships.
LLCs in Alabama have simple formation and maintenance requirements, several options for how they can be taxed, and flexible management. From one-person businesses to multi-member LLCs with several owners, the LLC is a popular choice for a reason.
Forming an LLC in Alabama (in 6 Steps)
Step One) Choose an LLC Name
Your LLC’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
Legalities: In the state of Alabama, every limited liability company is required to have either the initials “LLC” or the phrase “limited liability company” in the name. In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Explanatory Naming: Another aspect to consider is including language that explains what your business does ― for example, if you’re a plumber, put the word “plumber” or “plumbing” in your LLC name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
Do You Like It?: At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your LLC name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LLC is to not get too attached to any one business name until you have either reserved the name with the state of Alabama, or you’ve officially formed your business. Before filing for business formation, Alabama requires that you reserve a name for your business. Alabama law states that the name must be unique compared to other businesses registered with the Alabama Secretary of State. They make the process to check if your business name is available easy, as you can search their entire state business database here. Once you’ve confirmed your preferred name is available, you can access the Name Reservation form here. Reserving a name costs as little as $10, with no guarantee on processing time, or $25 for a 24 hour turn around. Although it is not required, you may also want to consider registering your LLC’s name as a federal or state trademark to further protect your business name.
Step Two) Designate a Registered Agent
Every LLC in Alabama is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Alabama Business and Nonprofit Entities Code,
Each filing entity, each foreign filing entity, each foreign registered limited liability partnership registered pursuant to Article 7, and any registered limited liability partnership that does not maintain a place of business in this state shall designate and continuously maintain a registered agent [in Alabama].”
Without a registered agent, you could lose your good standing with the state of Alabama, and the state also has the right to dissolve your LLC if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
Our Recommendation: At the end of the day, we recommend designating a Registered Agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record. Incfile and Northwest Registered Agent both offer a free Registered Agent service when you utilize their services to form an LLC. Both are fast and affordable. In fact, they’re the best available.
Step Three) File Formation Documents with State
Once you are ready to form your Alabama limited liability company, you will fill out the Articles of Organization.
This is THE document that will register your LLC with the state. You’ll want to ensure all of the following information is correct on the form:
- Your chosen business name
- Name and address of your registered agent
- Management style (member-managed or manager-managed)
- Name(s) and address(es) of the LLC’s manager
- Name and address of the LLC’s organizer
- Signature of organizer and registered agent
- Effective date
Alabama’s Certificate of Formation is unique from other states in that they request your business structure is listed, and so it is vital to put together your Operating Agreement before filing for organization. Further details are outlined in Step Four on creating an Operating Agreement, but if you’re requesting for additional members to be added in the future this needs to be specifically included in your Operating Agreement outline. There are two ways to file your Certificate of Formation in Alabama. A Certificate of Formation form can be filled in online, downloaded as a pdf, and printed before being filed with the county Probate Judge’s office by postal mail. You can find a list of the names and addresses of Probate Judges in every Alabama county on the Alabama Secretary of State website. After the Probate Court has filed the form and collected your filing fee, you will be provided with a stamped copy. The certificate will then be sent to the Secretary of State by the Probate court, along with your fee. Alternatively, Alabama offers an online service where you can digitally file your Certificate of Formation. Subscribers to Alabama Interactive, which costs an annual fee of $95, also receive a discount on some filing fees.
Cost to Form an LLC: The state of Alabama charges a $100+ fee to form an LLC.
Processing Time: For a standard filing, it takes approximately 10 business days after the certificate is filed for the paperwork to be processed. Be aware that the estimate of business days only begins once all of the required paperwork has been received and filed correctly with the Office of the Judge of Probate. For an extra $100 you can expedite the service. Your filing will be processed within approximately 3 business days after date of receipt from the County Probate Office. Note that if you file your paperwork online the additional $100 expedited fee is included in the filing fee. When the Secretary of State’s Office has processed the filing, you can search by entity name to view the information online.
Step Four) Create an Operating Agreement
After you register an LLC in Alabama, create a detailed outline that explains how you will run and manage your new business. Even though it doesn’t need to be filed with the state, put one together and keep it for your records.
When you open a bank account, you may be asked for this document in order to open an account. You’ll also want to keep in mind that any future business partners or managing members may also be interested in seeing your Operating Agreement before joining your company. After all, this document essentially serves as your overall plan for success.
An attorney can help you outline your Operating Agreement or create one from a free template online. You can read more about Operating Agreements here, but some of the basic information you’ll want to have includes:
- Individual members' ownership percentages
- Rights and responsibilities
- Voting powers and meeting guidelines
- Allocation of profits and losses
- Management rules for the LLC
- Provisions for buying a member owner out, or transferring their shares in the case of illness or death
Step Five) Handle Taxation Requirements
The vast majority of LLCs require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LLC functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LLC for free through the IRS.
Before your LLC can operate in Alabama, you must obtain the appropriate identification numbers, licenses or permits for tax registration. Businesses in Alabama must use the My Alabama Taxes (MAT) portal to apply for a tax account number.
Alabama levies state taxes dependent on the nature of your LLC. Most LLCs are required to register for sales and use tax, and if you have employees make sure you register for employer’s withholding tax also. While working out which tax requirements your LLC needs might seem overwhelming, Alabama couldn’t have made the process simpler. When you register for MAT, you’ll be notified of the tax returns you’ll be required to file electronically with the state.
A unique feature of Alabama’s tax system is the Alabama Business Privilege Tax. According to the Alabama Department of Revenue, this tax is levied on businesses,
“for the privilege of being organized under the laws of Alabama or doing business in Alabama (if organized under the laws of another state or country).”
All LLCs are obligated to file an Initial Business Privilege Tax Return within 2.5 months of formation. A minimum tax of $100 is due, but as the total is calculated according to your federal taxable income and net worth it is wise to consult a tax professional for help.
Depending on where in Alabama your business is located, you could also need to pay some local taxes. The largest cities in Alabama all have their own online business resources ― including Birmingham, Montgomery, Mobile, and Huntsville ― so don’t overlook this potentially crucial step.
Step Six) Obtain Business Licenses and Permits
Just as the state has industry-specific tax requirements, there are certain licenses and permits that a business requires to operate in certain industries. Alabama requires that an LLC obtains all necessary licenses and permits before starting operations. State law decrees that an LLC can only provide one specific type of service. All owners of the LLC must be licensed or registered to provide the specific service under which the LLC was assembled.
The type and cost of the permits that your business may require varies depending on the nature of the services your LLC offers. We recommend that every LLC owner check the The Business Licensing page by the Alabama Department of Revenue. Here you will be provided with up to date information on state laws and notices, as well as the answers to many FAQs regarding Alabama business licenses. You may also find additional resources and information on the Alabama.gov website.
Would you prefer to have a professional form your LLC?
If you would prefer to have a professional handle the paperwork for you, consider hiring an online incorporation service like LegalZoom and Incfile. To see which is the better option for you, check out our side by side comparison.
Next Steps: What to do After Creating an Alabama LLC
Open a business bank account: We highly recommend that you establish a separate business banking account so that your business and personal finances are maintained completely separate. This is important because it helps protect your personal assets and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
Get Business Insurance. Every Alabama business with employees is strictly required to pay unemployment compensation tax and workers’ compensation insurance. For more information on either of these policies, check out the Employer Information page or the Insurance Requirement Information page by the Alabama Department of Labor. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies. The Alabama Department of Labor provides a list of field tax service providers across the state who can answer further questions and advise on your business insurance obligations. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Understand income reporting. Income reporting is just what it sounds like – reporting the income you made from your business. It’s important to note that you must file this form whether you made or lost money over the course of the year. Alabama LLCs include an income report within their Annual Report, submitted to the Department of Revenue. As an LLC owner, you must complete a copy of federal Form 1065 including all federal K-1s, statements, and attachments. The LLC owner is also required to complete an Alabama Schedule K-1 for each person who was a partner or owner of the LLC at any time during the taxable year. The state of Alabama has several forms based on how your business is set up that you can access here.
Understand annual reporting. All business owners operating in Alabama must complete an Annual Report filing showing that their business is still open. An annual report serves to update the state on any pertinent information regarding your business that may have changed over the course of the year. Unlike other states, an LLC’s annual report is filed with the Department of Revenue. Alabama combines an LLC’s annual report with the state’s Business Privilege Tax return into a single filing. LLCs are mandated to file annual reports in Alabama and pay a minimum of $100 Alabama Business Privilege Tax in order to remain compliant with state regulations. The Initial Report / Business Privilege Tax return is due within two and a half months of your LLC’s formation. After that, an annual report should be filed by April 15th at the latest, to ensure compliance with state regulations.
Find an accountant. We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how best to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.