LLC as a business structure is a common choice for small businesses. It’s a cost-effective legal option for protecting your personal assets without assuming more complex tax liabilities as with a corporation.
Moreover, forming an LLC is a straightforward process any business owner in Alabama can handle.
In the Heart of the South, anyone can form a new business for any reason as long as it's legal.
For tax purposes, an Alabama LLC itself is not taxed. Any profits and losses are passed through to the members' individual tax returns.
Table of contents:
- Step 1: Name your LLC
- Step 2: Select a registered agent
- Step 3: Draft and submit the Certificate of Formation
- Step 4: Obtain a certificate of LLC registration from the state
- Step 5: Create an operating agreement
- Step 6: Get an Employer Identification Number (EIN)
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Step 1: Name your LLC
To start an LLC in Alabama, you'll need to come up with a business name first.
Make sure you come up with a brandable name reflective of your business. Also, remember that your business name:
- Must include “Limited Liability Company” or an “LLC” or “L.L.C.” abbreviation.
- Must not interfere with any other registered business name or trademark.
You can run up a name search on the Secretary of State website. Online filers can skip this step since the name search is part of the online filing process.
The online reservation is immediate, and the customer will print the certificate from their printer. The name can’t be the same as another entity (minus the entity ending) and must distinguish from an active business entity name.
If you plan to sell products in other states, it’s a good idea to follow these same suggestions and do name searches in the states where you plan to do business. Your business will be considered a foreign LLC in states where you do business other than Alabama.
Name reservation
Once you have a name, you can file a Name Reservation Request to the SOS before filing your LLC formation documents. The name reservation fee in Alabama is $25. It’s a good option if you’re still preparing your documents and plan to submit a paper-based application.
Doing business as (DBA)
If you plan to offer products/services under different brand names as part of your business, securing another trade name can be a good idea.
Also called “DBA” (short for doing business as), assumed name, or fictitious business name, this application establishes a connection between your business entity (LLC) and other trade names you’re using.
To apply for a DBA in Alabama, you will need to file an Application to Register Trade Name form with the Secretary of State by mail and pay a $30 fee. Registration is not mandatory and doesn’t imply any legal rights but does alert others the name is in use in Alabama.
Step 2: Select a registered agent
Once you’ve chosen a name for your LLC, the next step is to select a registered agent.
Your registered agent is a person or professional service who agrees to be your point of contact with the state.
Registered agents can help businesses maintain compliance with local regulations and laws.
For example, they will receive government notices on behalf of your business. If your business is sued, your registered agent will accept the subpoena or court papers at the designated address. Remember, you can’t use a P.O. box as your registered office address.
Thus, your Alabama registered agent must be someone who lives there or a business whose principal office is in the state.
If you're wondering whether you can be your own registered agent, then the answer is yes. Some business owners choose to be their own registered agents instead of hiring another person or firm. A registered agent service charges a fee but provides privacy, flexibility, and availability that you may not have as a new business owner.
There are pros and cons to serving as your own registered agent, including:
- Lack of privacy as your street address becomes public if it’s your principal place of business.
- You may receive more marketing or junk mail from companies that purchase public mailing lists from the secretary of state.
- If you’re served legal papers, your family, friends, and neighbors may witness this, which can be embarrassing.
- Anytime you move, you will have to update your mailing address with the officials.
There’s a fee to hire a registered agent service. The cost is often well worth the assurance that official mail and business filings are handled on time.
Step 3: Draft and submit the Certificate of Formation
To create your LLC in Alabama, you need to file a Certificate of Formation with the probate court in the county where the registered agent's office is located. The paper forms are available for download on the Alabama Secretary of State's website.
Or you can submit an online application on the Alabama Secretary of State’s website.
The LLC filing fees in Alabama are:
- $100 (county fee + secretary of state fee)
- $200 (county fee + expedited processing fee)
Overall, document processing times can take up to 14 days, but expedited service is processed within 3 business days after receipt from the County Probate Office.
When mailing the completed Certificate of Formation, you must include a signed original plus two copies along with the filing fees. If your county accepts credit card payments, you can include card information on the form (but mind the extra fees).
Step 4: Obtain a certificate of LLC registration from the state
Once the filing is completed by the office of the Judge of Probate, it becomes effective immediately, and your business will appear on the Alabama Secretary of State's website.
That means you’re officially registered as an LLC and ready to operate!
Step 5: Create an operating agreement
An LLC operating agreement is a legal document that denotes:
- Who are the LLC members
- What right each person has
- How the business operates
- How profit and losses are distributed
An operating agreement is internal to the LLC and not required to be filed with the Alabama Secretary of State.
However, a multi-member LLC can benefit from one since it helps establish clear boundaries and responsibilities. In this case, an operating agreement should be signed by all LLC members and updated as needed for registered agent changes or ownership updates. Lenders, accountants, or attorneys may request your operating agreement to provide services or make financing decisions.
You can find an online template for creating an operating agreement. Or hire an attorney to draft the operating agreement on behalf of the LLC.
Step 6: Get an Employer Identification Number (EIN)
Getting an EIN is free and easy by following the instructions on the IRS website. Once you complete the application, your EIN is available immediately for use.
When applying for your EIN, you must select a business structure, sole proprietorship, single-member LLC, or multi-member LLC. That tells the IRS how you want your LLC to be taxed.
- A sole proprietorshipis the most basic federal tax treatment and doesn’t require additional tax forms. Profits and losses from the business are reported on the business owner's personal tax return.
- A single-member LLCis not recognized as a taxable entity by the Internal Revenue Service. Thus, this business structure will be taxed similar to a sole proprietor.
- Multi-owner LLC, however, may elect to get taxed as an S-corporation. Doing so provides added benefits where LLC members pay only half of the self-employment tax. The S-corp must complete its own tax return on Form the 1120S, and each owner will receive a Schedule K-1. The K-1 reports each business owner's share of income, credits, and deductions, which will be included on each owner's personal tax return.
Few LLC owners choose to get taxed as a C-corporation. Because in this case, your business profits are taxed twice — once when the company pays income taxes on profits and again when distributions are made to shareholders.
Costs to set up an LLC in Alabama
To start an LLC in Alabama, it will cost at least $200 in the first year and $100 in the second year. The first year cost includes LLC formation expenses but may be higher if you choose to reserve your LLC name or opt for expedited processing. If your operations fall within an industry that necessitates licenses and permits, you can expect additional yearly costs.
Additionally, you will be required to pay a minimum of $100 each year for the business privilege tax, which Alabama imposes on LLCs. Depending on your LLC's net worth, this amount could potentially increase to $15,000 annually.
Next steps
Open a bank account
Alabama has no state requirements for opening a business bank account. But for tax purposes, it’s best to have a separate account for a new LLC after it’s registered with the state.
One of the limited liability company law requirements is not to commingle or mix your business and personal transactions.
For example, you should not pay for business items out of your personal checking account or vice versa. It implies that your LLC isn’t truly a separate entity.
If you’re commingling funds and you get sued, you could lose the added asset protection that an LLC provides. Respectively, your personal assets could be in jeopardy if you get sued.
Permits and licenses
Alabama requires LLCs to pay an annual business privilege tax. Other permits and licenses may be required for industry-specific businesses like restaurants, real estate agents, or nail salons. Costs vary by profession but most licenses and permits must be renewed – an added cost to factor into your LLC startup costs.
Annual report/tax filing
All LLCs must file the Alabama Business Privilege Tax Return and Annual Report. The purpose of this filing is for the state of Alabama to have current information about your business, including your principal office address, registered agent information, and ownership information.
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Last updated: Dec 2023