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.
Steps to form an LLC in Alabama
Forming your Alabama LLC starts with filing formation documents and paying the state filing fees:
- Step 1: Choose a name for your Alabama LLC
- Step 2: Hire a registered agent
- Step 3: File Certificate of Formation with County Probate Court
- Step 4: Obtain an EIN (Employer Identification Number) from the IRS
- Step 5: Prepare an LLC operating agreement
- Step 6: Open a business bank account
Step 1: Choose a name for your Alabama 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.
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: Hire 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 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.
Can I be my own registered agent in Alabama?
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: File 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:
- $200 (county fee + secretary of state fee)
- $300 (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).
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 4: Obtain an EIN (Employer Identification Number) from the IRS
Another step of company formation is getting registered with the federal tax authorities.
An Employer Identification Number (EIN) is like the social security number for your business. When you open a bank account or apply for business credit, lenders will likely ask for your EIN. If you plan to hire employees, an EIN helps authorities ensure that you comply with payroll regulations.
Single-member LLCs, partnerships, and multi-owner LLCs are required to obtain an EIN.
How to get an 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 proprietorship is 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 LLC is 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 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.
Step 5: Prepare an LLC 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.
For single-member LLCs, an operating agreement is not needed since you’re probably in agreement with yourself.
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: Open an Alabama business 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.
Alabama LLC taxes, costs, and fees
Like every other type of business entity, ownership of an LLC comes with annual state fees and state-wide taxes.
Sales tax in Alabama
If your business sells physical products, you may be required to collect and remit sales taxes to the state of Alabama. Sales tax must be added to the sales price of your product so you can collect it from your customers. It applies to sales made in Alabama and other states.
State sales and use taxes vary, but generally is 4% of all tangible personal property sales gross proceeds, other than that listed previously and expressly exempted by law, and the gross receipts from places of entertainment or amusements.
The sales tax is due monthly. Returns and remittances must be filed on or before the 20th day of the month for the previous month’s sales.
Franchise tax and annual report in Alabama
In Alabama, every LLC is bound by a minimal annual franchise tax, called the Business Privilege Tax (BPT).
Respectively, every year you need to submit a Business Privilege Tax Return and Annual Report.
This filling has a dual purpose:
- Provide the authorities with the current information about your business, including your principal office address, registered agent information, and ownership information.
- Collect the tax for the privilege of doing business in the state of Alabama. The tax applies to all businesses that were (1) formed or (2) do business in the state.
Note: Some entities like governments, HOAs, and political campaigns are exempt from the BPT tax.
Taxes are based on the net worth of your Alabama-based business. If you have operations in other states, you must calculate your tax based on net worth generated in Alabama only.
Overall the annual tax costs go like this:
- $100 if your company’s net worth is zero
- $0.25 to $1.75 for each $1,000 of net worth in the state
- $15,000 — the maximum upper limit for most businesses
- $3 million — the maximum upper limit for financial and insurance companies
Alabama business privilege tax returns must be filed no later than two and a half months after the start of the LLC owner’s taxable year. For example, an LLC operating on a calendar year would need to file the BPT return by March 15th of each year.
As an LLC owner, you’re required to file a BPT every year as long as your business operates in Alabama.
For LLCs that plan to hire employees, the LLC must have worker’s compensation insurance. The business must also establish a process to pay federal and state payroll taxes and unemployment insurance known as FUTA and SUTA, explained below.
Federal Unemployment Tax (FUTA)
The Federal Unemployment Tax (FUTA) provides payments for employees who lose their jobs voluntarily. When someone loses a job and files a claim, they may be eligible for unemployment benefits if they meet the requirements.
Although FUTA is a federal program, it’s managed through state unemployment systems that manage claims and payments to unemployed individuals.
State Unemployment Tax (SUTA)
The State Unemployment Tax (SUTA) rates are assigned to Alabama employers based on a benefit ratio calculated using the three most recent fiscal years of taxable payroll. The fiscal year is July 1st through June 30th of the following year. Taxable payroll includes wages paid by July 31st of the prior year. The benefit ratio is determined by the payroll and benefit charges for the current year divided by the total taxable payroll for the three most recent taxable payroll years. The annual tax rate ranges from less than 1% to almost 7%, depending on the benefit ratio.
Alabama business permits and licenses
Businesses in certain professions require licenses or permits to operate in Alabama, including:
Banking and insurance companies require written approval from the Alabama commissioners’ offices to form an entity.
Pros and cons of forming an LLC in Alabama
Any entity doing business in Alabama must obtain a Business Privilege License from the Department of Revenue.
Licenses are effective from October 1st through September 30th of the following year and must be renewed annually.
Depending on the products and services offered, a business may be required to obtain additional licenses and permits for salons, auto dealers, and accountants, for example.
These are county-level licenses, and depending on location, some cities like Huntsville, Montgomery, and Birmingham require to obtain city and occupational permits.
License and permit costs vary location so check your city and county requirements.
Alabama LLC pros
- Simple and low cost of forming an LLC
- LLCs provide personal asset protection for members
- LLC not taxed – taxes flow to members’ individual tax returns
Alabama LLC cons
- LLC members can’t mix business and personal funds
- LLC may be dissolved upon death of members, whereas a corporation keeps operating
- Filing fees + added cost of doing business vs. partnership or sole proprietorship
- Alabama LLCs must have a registered agent to receive legal documents on behalf of the business.
- Every business in Alabama must file a Business Privilege Tax Return each year.
- License and permit requirements vary depending on products, services, and location.
Alabama LLC formation FAQs
Here are the most frequently asked questions (FAQs) regarding LLC formation in Alabama.
1. How much does it cost to start an LLC in Alabama?
The cost to start an LLC in Alabama is $100 for standard LLC filing and $200 for expedited processing with the state. You may pay more if you hire an attorney to draft an operating agreement for your company or file the paperwork for you.
2. What is the processing time to form an LLC in Alabama?
It typically takes 10-14 days to form an LLC in Alabama. However, longer processing times are common too. However, business owners can pay a higher fee ($200) for rush processing. In that case, your LLC will be formed in 3 business days.
3. How do I know if my LLC name is available?
The Alabama Secretary of State has a Business Entity Search page that lets you look up business names. Use it to check availability. If you found other businesses using a similar-sounding name, it’s best to develop another business name to avoid any legal mishaps.
4. Can I be my own registered agent in Alabama?
Some business owners choose to be their own registered agents instead of hiring another person or firm. Note that there are tradeoffs to being your own registered agent, including the loss of privacy and the need to be available during regular business hours for service of process.
5. Does Alabama LLC require an annual report?
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.
6. Can an Alabama LLC do business in other states?
If you plan to sell products in other states, your business will be considered a foreign LLC in those states. You may be required to register as a foreign entity in those states and pay state sales taxes if you sell physical products.
7. Do I need to file an operating agreement with the state of Alabama?
No, you don’t have to file an operating agreement with the local authorities. It’s an internal document you may create for your LLC if you have multiple members.
8. Which licenses and insurance are required for an LLC in Alabama?
Any entity doing business in Alabama must obtain a Business Privilege License from the Department of Revenue. Other permits and licenses may be required for your LLC, depending on products, services, and location.
General liability insurance is required for most business owners in Alabama. This insurance helps protect business owners and pays damages and injuries in the event your business is sued.
9. Does an LLC need a business license in Alabama?
Alabama requires every company doing business to secure a Business Privilege License from the Department of Revenue.
10. Do I need to renew my LLC every year in Alabama?
Both domestic and foreign LLCs doing business in Alabama must file a Business Privilege Tax Return and annual report each year unless the business files for dissolution.