Are you looking to form a limited liability company (LLC) in Alabama, but you’re not sure how the process works? There are several important steps to create a compliant Alabama LLC that can do business in the state.
To get started, please reference our five-step guide below or hire an affordable online LLC formation service.
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What Is an Alabama LLC?
The Alabama LLC is one of the most popular business structures in the state. It’s a more casual and flexible type of business than a corporation but includes the personal asset protection that’s lacking in 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.
Setting Up a Brand-New Alabama LLC in 5 Steps
For the first part of this guide, we’ll cover the five essential steps to setting up an Alabama business that doesn’t have employees yet. These steps also apply to businesses with employees, but we’re keeping things streamlined to start. If you do have employees, make sure you complete these steps and the steps for employers (which we’ll cover later in the guide).
Step One: Choose and Reserve a Business 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 consider when naming your business.
In the state of Alabama, you’re required by law to meet several requirements for your business name. Here’s a quick glimpse at the rules for LLCs:
- Your name must include the abbreviation “LLC,” the phrase “Limited Liability Company,” or a variation of these
- Your name cannot include abbreviations that apply to other entity types, like “Inc.” or “Partnership”
- Your name must be “distinguishable on the record” or distinct from the names of other state businesses
- You must reserve your business name before forming your LLC
For more information on naming rules in Alabama, please consult the Names of Entities Section of the Alabama Business and Nonprofit Entities Code.
Another aspect to consider is including language that explains what your business does ― for example, if you’re starting a coffee shop, put the words “coffee” or “brew” in your LLC name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.” This helps potential customers know exactly what to expect from your business.
Once you’ve picked the perfect name for your business, you don’t want to lose it to another aspiring entrepreneur. As we mentioned earlier, Alabama requires you to reserve your business name before you can register your business. To do that, you’ll need to file the Name Reservation Request Form along with a $25 fee. In Alabama, this is actually a required step, so you must file a Name Reservation Request. You’ll attach a copy of it to the Certificate of Formation.
Filing this reservation protects your chosen name for your exclusive use for a full year. You can learn more about name reservations here.
Step Two: Appoint 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.
When you appoint an Alabama registered agent, here are the state requirements to be mindful of:
- Every entity that files with the Secretary of State (both domestic and foreign) must appoint a registered agent
- The agent must be a resident of Alabama OR a business registered to do business in Alabama
- An agent must be continuously maintained
You can find a full rundown of the state laws here.
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, you could miss the alert regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
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Step Three: File Formation Documents
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Once you are ready to form your Alabama limited liability company, you will fill out the Certificate of Formation. You can either do this on your own or hire an Alabama LLC service. Some services, like ZenBusiness, will even form your LLC for free (just pay the state’s fee!).
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(s)
- Name and address of the LLC’s organizer
- Signature of the organizer and registered agent
- Effective date
Alabama is a bit unique because they require you to outline your membership and management structure, so it’s vital to draft your Operating Agreement as you work on this step (See Step 4). This is especially important if you intend to add members later on.
Don’t forget to attach a copy of your Name Reservation Request form; if you don’t, your filing will be rejected.
When you file, you’ll pay a $200 fee. You can either file on a paper form or online.
- Total cost: $200
- Processing speed: 24 hours
Step Four: Draft 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 you can create one from a free template online. You can read more about operating agreements, 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: Get Licenses & Permits
Alabama law requires an LLC to obtain all necessary licenses and permits before starting operations. The type and cost of the permits that your business may require vary depending on the nature of the services your LLC offers.
All Alabama LLCs need to acquire the Business Privilege License in order to operate in compliance with state law.
In addition, we recommend that every LLC owner check 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.
Last but not least, you should check with your city or county to see if they maintain any licensure requirements.
Next Steps for Newly Formed LLCs
1. Obtain a Business Bank Account
One of the most important aspects of running an LLC is ensuring that your business funds remain separate from your personal finances. And to do that, you’ll need a separate bank account for your business.
Obtaining a business bank account is pretty simple, and you can choose the financial institution you like best. Some banks will ask to review your LLC’s operating agreement, and it’s a near-certainty that they’ll ask to see your EIN (Employer Identification Number). This is a free registration with the IRS, and the number acts a lot like a Social Security number for a business.
Once you have your account, you’ll be able to get checks, make payments using your business card, and so on.
If you failed to get a business bank account, you would technically be blurring the line between your personal accounts and your business accounts. That compromises your personal asset protection.
2. Prepare for Tax Time
Regardless of how far away April 15th is, it’s never too soon to prepare for tax time and set up accounting software. As an LLC owner, the exact tax rates you’ll pay depend on the taxation structure you choose for your business. If you choose to be taxed as a corporation, the LLC itself will pay taxes from its own funds. Meanwhile, LLCs taxed as pass-through entities don’t technically pay taxes; their members do. The profits are distributed to the LLC’s members, and each member reports that income on Schedule C of their personal taxes.
If you choose to be taxed as a corporation, you’ll pay the following rates:
- Federal: 21%
- State: 6.5%
Meanwhile, LLCs taxed as pass-through entities pay these rates:
- Federal: 10-37%
- State: 2-5% (2% for the first $500, $4% for the next $2,500, 5% for $3,000+)
In order to compliantly file and pay your taxes, you’ll fill out a complete copy of federal Form 1065 including all federal K-1s, statements, and attachments. One of the most important state-level forms is Alabama Schedule K-1, a report 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. If you’re anticipating these filing requirements, they’ll be much easier to manage when their due date comes.
To top it all off, Alabama requires a variety of local taxes, including unemployment insurance taxes, sales taxes, and industry-specific taxes. That’s why Alabama requires all businesses to use the My Alabama Taxes (MAT) portal to apply for a tax account number. One unique feature of Alabama’s tax system is the Alabama Business Privilege Tax, a tax associated with the Business Privilege License and levied “for the privilege of doing business in the state.”
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.
Because taxes can be incredibly complicated, we highly recommend consulting with a business attorney or accountant to ensure that you cover all requirements on the state and federal levels.
3. Be Ready to File Your Business Privilege Tax Report
All business owners operating in Alabama must complete a Business Privilege Tax Report filing showing that their business is still open. This report serves to satisfy your annual privilege tax with the state and also update it regarding any pertinent information regarding your business that may have changed over the course of the year.
LLCs must pay a minimum of $100 for their annual Alabama Business Privilege Tax in order to remain compliant with state regulations. This report should be filed by April 15th at the latest to ensure compliance with state regulations.
4. Consider Business Insurance
The big advantage of the LLC is that it offers you personal asset protection. But that doesn’t mean that mishaps won’t happen along the way. We highly recommend obtaining a general liability policy with the right coverage for your business.
In the event of a mishap or natural disaster, an insurance policy can help you navigate unexpected expenses. Be sure to compare your different options to get the best coverage for your particular type of business.
Extra Steps for Businesses with Employees
When you’re operating as a one- or two-person show, operating a business is relatively streamlined. Things get more complicated when you bring employees into the picture, but employees also help raise your business to new heights. But to reach those heights, you need to comply with employee-related legal requirements.
Step One: Address Employee-Related Taxes
Obtaining an EIN does more than allow you to get a business bank account. It also lays the groundwork for other taxes, such as Social Security and withholding taxes. For example, you’re required to withhold income taxes from employee paychecks, make Social Security and Medicare tax payments, and pay unemployment fund taxes. For more information on employer taxes at the federal level, look here.
There are similar taxes on the state level. For example, Alabama requires withholding taxes, contributions to the unemployment insurance tax fund, and more. We recommend consulting with the Department of Revenue and the Department of Labor to learn what taxes apply to you and your business.
Step Two: Obtain Additional Insurance
Every Alabama business with employees is strictly required to get workers’ compensation insurance. For more information on this policy, check out the Insurance Requirement Information page by the Alabama Department of Labor.
If you haven’t already obtained a general liability policy, we highly recommend that you do so when you bring employees into the business. The more people you have involved in a business, the higher your risk of needing general liability insurance. Additionally, if you have at least five employees, you also need Workers’ Compensation insurance coverage.
Of course, proper care and discretion will eliminate most problems, but incidents happen —from faulty products to an employee slipping and falling. And in some cases, insurance can be the difference between a minor hiccup and a budget-breaker.
Step Three: Enlist Help
For some entrepreneurs, part of the fun of running a business is the opportunity to wear lots of different hats: accountant, manager, marketer, quality control expert — it’s a near-endless list. And if your business is still pretty small, you might be able to handle many of these tasks yourself, especially if you’re prepared with a business administration degree.
But if you aren’t (and it certainly isn’t a prerequisite), some of these tasks may leave you feeling overburdened or out of your depth. For instance, navigating employer-related taxes might steal valuable time that you’d rather spend promoting your business or developing a new product. An accountant or tax attorney, however, knows those tasks like the back of their hand. You may decide it’s worth the added expense to enlist their help.
Ultimately, it’s your decision whether to bring in professionals or to DIY. But in our opinion, it’s often worth it to get help from specialized pros.