Forming an LLC in Alabama
If you have an idea for forming an Alabama limited liability company, then you have come to the right place.
A limited liability company (LLC) is a business entity that many small businesses choose to organize themselves when they are just getting started. An LLC has a few advantages for small businesses but may not be appropriate for larger ventures or startups seeking investors. In addition, LLCs have a unique business structure that can get very technical.
It would help if you looked closely at other business entities like partnerships and S-corporations before starting an LLC.
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Advantages of LLCs:
- Limited personal liability for members for business debts and lawsuits
- Fewer reporting and recordkeeping requirements than other kinds of entities, including corporations
- Avoiding the double taxation—business and personal—of corporations if taxed as a pass-through entity
- Unlike corporations, Alabama LLCs do not have to file annual or biennial reports with the state
Disadvantages of LLCs:
- An LLC is not a good investment vehicle for outside investors
- LLCs and S and C-corporations pay commercial activity taxes, unlike sole proprietorships and partnerships
- LLC members may pay self-employment taxes
Registering Foreign LLCs in Alabama
Any foreign (out-of-state) LLC that wants to do business in Alabama must fill out a Foreign LLC Application for Registration with the Alabama Secretary of State. There is a $150 filing fee.
Step-By-Step: Forming an Alabama Limited Liability Company
With all of that, you have decided to form an LLC in Alabama. You have your members, your business plan, and a little startup capital, and you are on your way.
Here is a step-by-step guide for creating a fully operational Alabama LLC.
Step I: Name Your LLC
Creating a legally proper LLC name and then protecting it is one of the first actions in LLC formation. This process can be complex and time-consuming, but the LLC needs to operate legally in Alabama.
The first thing you have to do is create a great name (that's up to you). Alabama law requires that the name be unique and different from any other company's name.
So your first task will be to search the Secretary of State Business Center business name availability search page to make sure that your chosen name isn't already in use for an existing business.
This search is just a preliminary step to the state filing. You still need to go through the registration process to get your name approved by the state.
After you have decided on a name, the name you will submit to the Secretary of State must then contain one of these legal suffixes:
- Limited Liability Company
The name of the LLC cannot use any variation of the word “corporation." It cannot use language considered obscene or that claims a profession or business affiliation that does not exist.
Alabama law does not specifically allow for a professional LLC (PLLC) designation. However, it does allow for professional corporations, and an LLC may perform professional services as long as the member or employee(s) rendering the service is licensed in that profession.
Alabama law allows the formation of Series LLCs (SLLC). These consist of an "umbrella" LLC and one or more individual LLCs that branch off the original.
Step II: Appoint a Registered Agent
Alabama requires an LLC to have a registered agent for service of process before formally filing with the state. A registered agent is designated to receive process (legal documents) on behalf of the LLC. An Alabama registered agent can be an individual or a company (domestic or foreign), but it must have a physical Alabama street address.
There is no official state process for appointing a registered agent other than that the agent's information must be on your Certificate of Formation. The registered agent must personally receive service at that registered address from 9 AM to 5 PM, Monday through Friday.
A forming LLC will often choose a professional registered agent service or the company lawyer.
Alabama law requires you to submit a “Name Reservation Request Form for Domestic Entities" with your Certificate of Formation. You will then receive a certificate of name registration.
Reserving a name does not guarantee that your name will be approved, but it keeps anyone else from using it for the time it takes to process your application.
Step III: Legally Protect Your Business Name
Next, make sure that no one else can use it in business or on the internet. This means that you have to make sure that no one else uses that name. You do this by doing a name search to ensure that the internet domain name is available. If available, grab it immediately (that will only cost a few dollars).
If you want to do business nationally or operate in several other states, you should trademark the nonprofit's name with the United States Patent and Trademark Office (USPTO). This process takes some time and money. While that application is pending, the name is still protected as a common law trademark.
Once you receive your federal trademark, you can register it as an Alabama trademark or service mark. You may also trademark the Alabama LLC name with just the state, without a federal trademark.
Now, you can keep anyone else from using that name, and it conforms to Alabama law.
Step IV: Structure the Business
An LLC has a particular, unique business structure.
To begin with, the stakeholders of an LLC are called “members." There is no stock issued, so they cannot be “stockholders." This is the primary reason that an LLC is not a good investment vehicle for either the founders or potential investors.
There is no number of members required. You can have a single-member LLC—say, for a one-person office.
Then you should write an LLC operating agreement. This is not required under Alabama law, but it is a good idea to keep everybody's interests clear.
An Alabama limited liability operating agreement should contain the following points:
- Percentage of members' ownership
- Voting rights and responsibilities
- Powers and duties of members and managers
- Distribution of profits and loses
- Holding meetings
- Buyout and buy-sell rules (procedures for transferring interest or in the event of a death)
The members may manage an LLC or hire an outside manager.
Step V: Write and File Your Alabama Certificate of Formation With the Secretary of State
You are now ready to compose and register your Alabama LLC with the Alabama Secretary of State. Fill out the online forms, follow the directions, and print them out and mail them in.
This is for domestic LLCs. Foreign LLCs cannot use this process. They must register separately, as noted above.
Your LLC certificate of formation must contain the following:
- LLC name and mailing address
- Name and physical address of the registered agent – must have an Alabama street address
- Name of person filling out this form
- Checkboxes to indicate if this is a series LLC, a nonprofit LLC, or a professional LLC
- Attach the certificate of name registration
- State filing fee of $200
After You File Your Certificate of Formation Documents
You will have numerous state and federal requirements for your new LLC after filing with the state.
Initial Business Privilege Tax Filing
You must file an Initial Business Privilege Tax Return with the Alabama Department of Revenue within 2.5 months of filing your LLC formation papers with the state.
State Business Licenses
Certain Alabama businesses require business privilege licenses. These are issued via the local county governments.
Alabama Employment Rules
- Your LLC will be subject to state rules if it has employees—even if the employees are also members
- All new hires must be reported to the Alabama Department of Labor
- You may have to pay unemployment insurance
- Most employers are required to carry workers' compensation insurance
You will be subject to both state taxes and federal income taxes. This is a job for your accountant, but here is a brief outline of your tax obligations.
You will be subject to both federal withholding tax if you have employees and, of course, to business income taxation.
LLCs also have very specific requirements for filing taxes. You may choose one of several different tax designations for your LLC, including C or S-corporation, partnership, or pass-through organization with personal liability for the members. Consult with your accountant for the best approach.
If you have employees, you must file to receive an IRS Federal Employer Identification Number (FEIN) on the Internal Revenue Service website. You must also apply for your FEIN on the IRS website if the LLC has more than one member. You will be subject to all federal tax-withholding rules.
Alabama State Business Taxes
Alabama LLCs must file an annual report with the Alabama Department of Revenue.
Forming an LLC in Alabama?
Fortunately, forming an LLC in Alabama can be a straightforward process with FindLaw's Business Formation Service. However, if you have specific LLC formation questions, get legal insight from an expert by connecting with an Alabama business organizations attorney near you.
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