The Limited Liability Company (LLC) is a popular entity structure for many start-up businesses in Alabama. The LLC’s business structure is created under state law and provides personal liability protection, and has the potential to save money on taxes. With a little research, you can learn how to form an LLC in Alabama without an attorney.
Unlike a sole proprietorship or partnership where the small business owner can be held personally liable for lawsuits against the business, the LLC is a separate legal structure, protecting the business owner’s personal assets.
Related: How Does an LLC Protect You?
In addition to liability protection, the Limited Liability Company provides several other benefits over the sole proprietorship, partnership, and corporation because of the multiple tax options, ease of administration, and management flexibility.
Steps to Form an Alabama LLC
Total Time: 10 minutes
Step 1: Name Your LLC
The first step to forming an LLC in Alabama is choosing and reserving a unique name that isn’t already registered by another business with the Alabama Secretary of State.
If you haven’t yet checked to see if the name you want is available, see how to do an Alabama business name search.
The name can be reserved by filling out the Alabama LLC Name Reservation Request Form for $10 with standard processing, which will take about one week. The other option is to file online, which will cost $28 and the name will be available immediately. After applying, a Certificate of Name Reservation certificate will be provided, which is required before the Secretary of State will allow the processing of the LLC paperwork.
Alabama LLC Name Guidelines
There are a few guidelines to be aware of when selecting an LLC name in Alabama.
– The business name must be different form any other name that is registered with the Secretary of State’s office.
– The company name must not imply a business purpose that is different from what the business does.
– The business name must contain the words Limited Liability Company or the abbreviation L.L.C. or LLC.
– Unless the business is licensed by the state, words such as bank, insurance, attorney, etc. can’t be used.
Step 2: Appoint a Registered Agent
To have an LLC in Alabama, there must be a registered agent assigned to the LLC. A registered agent is a person or an entity with a physical street address in Alabama (PO Boxes aren’t allowed) who is available during normal business hours for service of process. The agent will be the central point of contact to receive important legal documents, tax notices, summons, subpoenas, etc. on behalf of the LLC.
Provided you live in Alabama, you can act as the registered agent. Many people choose to hire a registered agent service because, the registered agent’s name and address become public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when they are operating a side business, or run a home-based business. Hiring a registered agent service like Northwest Registered Agent to be the Registered Agent will reduce the number of unwanted phone calls and mailings.
Learn more about the requirements for a Registered Agent in Alabama
Step 3: File the Alabama Certificate of Formation
The paperwork to create an LLC in Alabama is the Certificate of Formation (called the Articles of Organization in many states).
If you chose to mail in the form fill in the PDF, note that it cannot be handwritten and must be typed out. Also be sure to attach the Name Reservation Certificate from Step 1.
Expect the LLC approval process to take around two weeks (3-4 days for the Judge of Probate and ten days for the Secretary of State. Expedited processing is available for an additional $100, which will reduce the Secretary of State’s filing time from 10 days down to 3 days.
Estimated Cost: 228 USD
When filing the Certificate of Formation, there are a few sections that may be unfamiliar.
Special Entity Selection
This question is optional and will only be used if the LLC intends to form a Series LLC or a Professional LLC.
These are not common selections. A Series LLC provides liability protection across multiple asset groups or business lines, each of which should be protected from liabilities from the other series. The Series LLC is more common with real estate companies. A Professional LLC is only for licensed professionals, like accountants, doctors, lawyers, etc.
Effective Filing Date
This is an optional field should you want to delay the formation date of the LLC. By default, the LLC has officially formed on the date the Judge of Probate files the Alabama LLC Certificate of Formation. A common reason for a delayed effective date is when the LLC is being formed at the end of a calendar year, and delaying the start will keep from having to file a tax return for only a few weeks of operation.
Most people will leave this section blank.
You don't have to form your LLC by yourself or pay an attorney!Forming an LLC is a little intimidating, especially when it’s your first time. Professional entity formation services help guide you to make sure it’s done right. Check out our reviews of popular LLC formation services to learn more.
Alabama Secretary of State Contact Information
Alabama Secretary of State – Business Services Division
Address: 770 Washington Ave., Suite 580, Montgomery Alabama 36104
What Do You Do After Filing Your Alabama LLC?
Once the LLC has been formed, there are a few additional steps to take care of. Below is a list of the most common tasks.
Prepare an Operating Agreement
The operating agreement is a document that governs the framework of an LLC. This document covers items like ownership rights, member responsibilities, how profits and losses are distributed, and more.
Most states do not require an LLC to have an operating agreement, but it is still worth considering. Without an operating agreement:
- The LLC could be subject to generic state rules that may be detrimental in the event of a lawsuit.
- Member’s personal liability protection may be diminished.
- Members may not fully understand their roles and responsibilities, which could lead to costly disputes in the future.
Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number or FEIN) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed in order to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying online, however, you can register by phone, fax, or mailing IRS Form SS-4.
Elect the LLC’s Form of Federal Income Taxation
One of the significant benefits of the Limited Liability Company is the tax flexibility it provides. When applying for the Employer Identification Number, you will choose how the entity will be taxed for federal income tax purposes. While there are some limitations, an LLC may be classified for federal income tax purposes as a:
- Sole proprietorship
While this may sound confusing, this refers to how the LLC is taxed, not the legal structure.
Related: How can an LLC be taxed?
By default, the taxation of an LLC is called pass-through taxation, which means the profits or losses of the LLC flow through to the members.
Single-member LLCs will, by default, be taxed as a sole proprietorship. The members can also elect to change the taxation to a C-corporation or an S-corporation.
Multi-member LLCs will, by default, be taxed as a partnership. The members can also elect to change the taxation to a C-corporation or an S-corporation.
In general, the difference between being taxed as a corporation and being taxed as a sole proprietorship or partnership the profits and losses are passed to the member’s federal income tax returns based on their percentage of ownership. As a result, the owner will pay self-employment taxes on all business profits. As an alternative, electing to be taxed as a corporation allows the members to take a reasonable salary and then pay payroll taxes. Any remaining profits are distributed and aren’t subject to payroll taxes, resulting in potential tax savings.
Before electing how your LLC will be taxed, be sure to talk with an accountant to assess which one will be best for you.
Open an LLC Bank Account
Opening a bank account for your LLC is important for liability protection as the account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original formation paperwork from the state showing the creation of the LLC.
- Driver’s licenses of the members.
- Depending on the LLC age, an Alabama Certificate of Compliance may be needed to prove the LLC is active and in good standing with the state.
Apply for Business Licenses and Permits
Depending on what your business does and where it is located, there will likely be various business licenses and permits needed before starting. Some common registrations include:
- Business License – Some cities require businesses to obtain licensing before they can start.
- Professional License – Certain services such as barbershops, accountants, salons, and others must be licensed.
- Sales Tax Permit – In order to sell products and certain services in the state, registration with the Alabama Department of Revenue will be necessary.
File the Initial Report and Initial Privilege Tax Return
Within 2.5 months of registering an LLC, the Alabama Initial Report and Initial Business Privilege Tax Return (Form BPT-IN) must be filed. The Privilege Tax is assessed on businesses for the “privilege” of operating in the state of Alabama. Learn more about the Business Privilege Tax from the Alabama Department of Revenue.
File Annual Reports
Each year, Alabama LLCs must file Form PPT, the Alabama LLC Annual Report, and Alabama Business Privilege Tax Return and pay the privilege tax to the Alabama Department of Revenue. The tax is based on the LLC’s net worth, with an annual minimum tax of $100.
Common Questions To Starting an LLC in Alabama
How much does it cost to start an LLC in Alabama?
There is a filing fee of $200, plus a name reservation of $10-$28 to start an LLC in Alabama.
Is there a yearly fee for an LLC in Alabama?
A $10 annual report will need to be filed each year, in addition to the Business Privilege Tax.
How long does it take to start an LLC in Alabama?
It normally takes 7-10 business days for an LLC to be approved in Alabama, though for an additional fee, one business day processing is available.
Can I be my own registered agent?
Anyone can act as a registered agent, provided they are a resident of the state, and are generally available during normal business hours.
If I have an LLC, is a business license required?
It’s sometimes thought that the LLC and business license are the same, but they aren’t. An LLC is referred to as the business entity, which is how the business is organized to conduct business. A business license is an approval from a government entity to legally operate.
What is a Foreign Limited Liability Company?
An LLC that is physically operating in states outside of where it was formed. Physically operating means having a presence such as having an office or employee. The LLC will need to register as a foreign LLC in each state that it plans to operate.
What is a Professional Limited Liability Company?
Businesses that require state licensing such as accountants, attorneys, podiatrists, physical therapists, acupuncturists, etc. often must file as a Professional Limited Liability Company (sometimes referred to as a Professional LLC or PLLC) instead of an LLC. Filing for a PLLC is very similar to that of the LLC.