Are you looking to run a business with one or more partners in the state of Alabama?
The simplest way to do this is to form an Alabama general partnership, which at its core is essentially just a handshake agreement between two (or more) people to operate a business together. However there are still a few formal steps you should plan to take while setting up a general partnership, and this guide covers each of those steps in detail.
General partnerships are just one of several ways for multiple people to co-own a business, so in this guide we’ll also describe how the general partnership compares to some other more formal business structures in Alabama.
How to Become an Alabama General Partnership
If you want to start a general partnership in the state of Alabama, there is no formal business registration process to complete.
To form an Alabama general partnership, you simply need to start working with your partner or partners. In addition, unlike corporations or LLCs, there aren’t any formation fees or ongoing maintenance fees associated with filings like annual reports.
While the actual legal requirements are incredibly simple, there are still some other steps that you might want to take, depending on your preferences and your goals for the company. Let’s discuss the additional steps that may or may not suit your business needs.
If you don’t want to use your personal name as your official business name, you can acquire a doing business as (DBA) name from the state of Alabama. With a DBA, you can use an assumed name in an official capacity, which is a great way to attract customers, as most people find that a business name adds legitimacy and professionalism to a business, as opposed to simply using the owners’ own names.
With a DBA, your general partnership can also open business bank accounts using the assumed name, which is another way to increase the professional aspect of your company. After all, it looks much better to have your company name on your checks, rather than just writing checks from your personal accounts.
To obtain your desired DBA in Alabama, you first need to determine whether your desired business name is available by running a business name availability search. After you confirm that your desired DBA is not already in use by another entity, you can fill out a Trade Name Registration Form to officially claim your business name.
Do you want more information on DBA registration in Alabama? Take a look at our full article on the subject.
Get Your Business Domain
To fully embrace the business name, register your URL. With GoDaddy you’ll be able to quickly build a company website so that nobody else can use or take it.
Register for Taxes
Other than the fact that general partnerships have more than one owner, the other major difference between a sole proprietorship and a partnership is the fact that a general partnership needs to acquire a federal tax ID number, otherwise known as an EIN.
While sole proprietors can get away with just using their personal social security number, the partnership needs an EIN because ― even though partnerships do not file business tax returns ― it needs to file an annual information return with the IRS.
In addition to the EIN, your business may need to register for state or local taxes.
For instance, if your general partnership owns vacation rental properties, then you must pay all relevant property, rental, and lodging taxes. To ensure that you understand which taxes your general partnership must register for, use the Alabama Department of Revenue’s online registration system, My Alabama Taxes, to register for all taxes that your business will need to pay.
Determine License and Permit Requirements
The state of Alabama does not have a general business license that all general partnerships are required to obtain. However, depending on what industry you operate in, your business may need licenses or permits to enable you to run your company in a compliant fashion.
Alabama has many different permitting and licensing requirements for specific types of businesses, so you should use the Alabama Department of Revenue’s business portal to find any licenses and permits that you may need for your business.
Additionally, you will likely also need additional local licenses or permits. Large cities like Birmingham, Montgomery, Huntsville, Mobile, and Tuscaloosa typically have their own requirements, and even small localities can have their own individual requirements. You should therefore check with your local government to ensure that your general partnership meets all local licensing requirements.
What Is a General Partnership?
At its core, the general partnership bears the most similarities with the sole proprietorship. Both are unincorporated business entities that are viewed as extensions of their owners as people, rather than as separate legal entities. General partnerships often don’t even have business names, as they can be operated using the owners’ personal names.
Let’s take a look at two of the most important differences between general partnerships and formal business entities:
1) Taxation and Signature Requirements
Due to the lack of legal distinction between the general partnership and its owners, the “pass-through” model of taxation applies to this type of company. This means that the profits and losses of a partnership are claimed on the owners’ personal tax returns. Along those same lines, general partnership owners can sign business contracts using their own names instead of signing on behalf of the company, and customers are also welcome to write checks to the owners personally.
2) No Asset Protection
The most important distinction between general partnerships and formal business structures like corporations or limited liability companies (LLCs) is the issue of personal asset protection. In a general partnership, if your business is sued, your creditors are free to pursue your personal assets, including but not limited to your house, car, and even the contents of your personal checking account.
On the other end of the spectrum, owners of LLCs and corporations enjoy limited liability protection, which means that for the most part, creditors can only go after business assets, and the personal assets of the ownership group are left intact.
The general partnership is a much simpler business for multiple owners than a corporation or a limited liability company.
The state of Alabama doesn’t require any official formation for general partnerships, and they’re also not required to pay any formation fees or participate in ongoing maintenance filings like annual reports. However, the general partnership as a business structure has some serious weaknesses as well, like the lack of personal asset protection that leaves owners’ assets exposed to potential lawsuits.
We hope this article helped you determine whether you’d like to form an Alabama general partnership, or if there’s another business type that would better suit your needs. As always, we wish you a successful business future!