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, the first step is coming up with a business name.
You want a brandable name that reflects what your business provides. Your Alabama LLC name must:
- Include “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.”
- Not interfere with any other registered business name or trademark
Your LLC’s name must not be the same as an existing business. It needs to be unique and distinguishable from any established business entity name.
Use the Business Entity Search on the website of the Secretary of State (SOS).
If you plan to sell goods or services in another state, it’s worth searching those business listings too. Your business may be considered a foreign LLC in states outside of Alabama.
Online filers complete the name search as part of the filing process.
Name reservation
Once you have a name, reserve it by filing a Name Reservation Request with the SOS. There’s a $25 fee.
This is a required step before you can file the formation documents. It also stops others from taking the name while you prepare the documents to form your Alabama LLC.
The online reservation is immediate. You can print the Certificate of Name Reservation right away.
Doing business as (DBA)
Trade names provide flexibility with your Alabama LLC’s name. It allows you to operate under names other than the LLC’s legal name.
This popular technique is also called “DBA” (short for doing business as), assumed name, or fictitious business name. You can run multiple businesses under one entity. Or use a name that’s closely related to your goods or services.
You can file an Application to Register Trade Name form in Alabama. There is a $30 fee. Registration is not mandatory and does not come with legal protections. But it alerts others that 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. They maintain compliance with local regulations and laws.
Registered agents receive legal and tax notices on behalf of your business. If your business is sued, your registered agent will accept the court papers.
You can’t use a P.O. box as your registered office address. Your Alabama registered agent must be either:
- Someone who lives in Alabama
- A business with a principal office in the state
Some business owners elect to serve as their own registered agents. But many experienced owners hire a registered agent service.
There are pros and cons to serving as your own registered agent, including:
- Lack of privacy since the address is public information
- You’ll have to sort junk mail without missing critical notices
- Legal papers could be served in front of customers
- You will have to update the registered address if you move
Many seasoned entrepreneurs hire a registered agent service. It saves time while ensuring official mail is handled with care. And it keeps your contact information confidential.
Step 3: Draft and submit the Certificate of Formation
Now it’s time for the most exciting step to forming an LLC in Alabama. The Certificate of Formation is the document that brings your business into existence.
To file your formation documents, you’ll need the:
- LLC’s name
- Certificate of Name Reservation
- Registered agent’s information
You can submit an online application on the Alabama Secretary of State’s website. Or you can mail in a paper application to the probate court where the registered agent is located.
The LLC filing fees in Alabama are:
- Domestic Filing: $200 ($208 online)
- Foreign Filing: $150 ($156 online)
Document processing times can take up to 14 days. If you’re tight on time, expedited service is available for an extra $100. Your filing will be processed within 3 business days after receipt.
Step 4: Obtain a certificate of LLC registration from the state
Once the Judge of Probate processes it, your LLC formation becomes effective immediately. Your business will appear on the Alabama Secretary of State's website.
That means you’ve officially formed an Alabama LLC!
Step 5: Create an operating agreement
Before you start operations, you may want to create an operating agreement. This legal document specifies:
- Who the LLC members are
- The rights and duties of members and managers
- How the business operates
- How to distribute profit and losses
Without an operating agreement, the LLC defaults to the state law. This may not align with your interests. And if disputes arise, it can result in unexpected outcomes.
An operating agreement is internal to the LLC. You don’t have to file one with the Secretary of State.
The importance of operating agreements grows for multi-member LLCs. It helps establish clear boundaries and responsibilities. The operating agreement gets signed by all LLC members. And it is updated for registered agent changes or ownership modifications.
Lenders, accountants, and attorneys may request your operating agreement to provide services.
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)
The IRS issues unique identifiers to help track businesses. These are Employer Identification Numbers (EINs). These are like Social Security numbers for businesses.
You can apply for an EIN on the IRS website. It’s easy and free. Your EIN is available immediately.
The most challenging part of the EIN application is selecting the business structure. This classifies the tax treatment for your entity. The options include:
- Sole proprietorship: The most basic federal tax treatment that doesn’t require LLC formation. No extra IRS filings either. Profits and losses go directly on the owner's personal income tax return.
- Single-member LLC: The IRS treats these as “disregarded entities.” They are taxed like a sole proprietorship with the income reported on the owner’s tax return.
- Multi-owner LLC: By default, the IRS considers these partnerships. The partnership files a tax form, but it does not pay taxes directly. Instead, the income flows over to the personal income tax return of each partner on a K-1.
Multi-member LLCs can also elect S-corporation or C-corporation taxation. Both come with more reporting duties and different tax treatments.
S-corps can be attractive. They may lower the self-employment tax that the LLC members have to pay.
Most LLC owners avoid C-corp elections because it results in double taxation. The company must pay taxes on income. Then shareholders are taxed again on any distributions they receive.
Costs to set up an LLC in Alabama
To start an LLC in Alabama, it will cost at least $225 in the first year. This includes $25 for the Certificate of Name Reservation, the county fee, and the Secretary of State fee.
Additionally, Alabama has a business privilege tax. It is based on your LLC’s net worth, with a minimum tax of $100 per year. If your business is very successful, this can increase to $15,000 per year.
You may have other costs for licenses and permits if you engage in regulated activities.
Next steps
Open a bank account
Alabama has no state requirements for opening a business bank account. But it’s important to keep the protections the LLC provides.
A business bank account helps separate your business and personal funds. This maintains the idea that your business is a separate entity.
If you commingle your business and personal funds, it implies that your LLC isn’t truly a separate entity. This is a problem that happens if you pay business expenses from a personal account or vice versa.
If you fail to separate funds and you get sued, the LLC’s protection may disappear. Your personal assets could be in jeopardy.
Permits and licenses
You may need to get business licenses and permits from the State. These apply to professional services and specific activities. Things like restaurants and nail salons often need these.
Local licenses and permits can also be necessary. For example, all operations in Huntsville need a business license. And there’s a list of activities that need a local permit too.
Costs vary by profession and most licenses must be renewed – something to factor into your LLC 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 to have current information about your business. This includes your principal office address, registered agent information, and ownership information.
Other considerations
You also may want to look into insurance policies. A general liability or workers’ compensation policy can step in when things go south.
Connecting with the Alabama Chamber of Commerce and Small Business Development Center can propel your business forward. Learn from others to discover the shortcut to success.
Get the ball rolling by securing your Alabama LLC Name Reservation. Then keep moving through the items on this list. And before you know it, you’ll be able to launch your new business in the heart of the South.
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Last updated: Apr 2024