If you’re here, then you’re either considering forming an LLC in Alabama or you’ve already made the decision to form an LLC. Congratulations! Forming an LLC is an exciting time for any company, and it’s a decision that you’ll remember for the rest of your life. No matter what your reason is for seeking information about Alabama LLCs, I’m going to teach you everything you need to know about forming a Limited Liability Company (LLC) in Alabama.
Some of the things I’ll touch on in this article are how to start an LLC, some of the reasons that other small business owners choose to form a Limited Liability Company, the pros and cons of forming an LLC on your own without professional services (like a registered agent or formation service), and more. Armed with all of this information, you’ll not only be able to make an informed decision about whether you want to form an LLC, but you’ll have the knowledge to go through with it if you decide an LLC is the right fit for your company.
(If you want to skip to the ‘how to form an LLC’ section, click here)
Table of Contents
What Is An Alabama LLC?
An Alabama LLC is a Limited Liability Company formed in the state of Alabama that is governed by the laws, regulations, and statutes of the state of Alabama.
Why choose An LLC?
There are lots of benefits to forming an LLC, many of which you’ll discover on your own over time. But there are three key reasons that small business owners choose Alabama LLCs over other business structures like corporations (C corp or S corp) or sole proprietorships. Here are the most common reasons small business owners choose to form a Limited Liability Company.
1. Limited Liability And Asset Protection
As the owner of an Alabama LLC, you cannot be held responsible on a personal level for the debts and liabilities of your LLC. This is one of the main reasons that small business owners choose LLCs over another type of business structure like a corporation (S corp or C corp), and it’s easy to see why.
Let’s say your Alabama business falls victim to some sort of calamity like lawsuits or bankruptcy. In these or other scenarios, if you’ve formed a Limited Liability Company (LLC), then your Alabama LLC’s creditors can’t list your personal assets (like your car, house, personal finances or any other personal assets you’ve acquired) as financial compensation for the debt owed to them by your LLC.
The past two years have really been horrible for Americans (and really the whole world), and if there’s anything that has been made apparent from all of the stressful events we’ve endured, it’s that even the biggest, most prepared businesses can be toppled overnight by an unexpected event or natural disaster (like a wildfire, hurricane, historic winter storm or a worldwide pandemic). Having the extra protection that comes from forming an Alabama LLC is enough to bring peace of mind to many small business owners.
If you encounter some financial or legal problems with your company and have to go out of business, of course, you’ll take a financial hit. But the good news is that if you form an LLC you won’t also lose your personal assets, so you won’t be homeless as well, for instance. Having the extra protection that comes from forming an LLC is enough to bring peace of mind to many small business owners.
When you form an LLC in Alabama there are options available to you to ensure that your personal information is protected, which is another reason that many small business owners choose to form Alabama LLCs.
You may wonder why your information would be at risk and why it’s such a big deal to protect it. It’s of vital importance because cybercrime is more commonplace in our technology-based world than in previous years. Cyber criminals are so adept at what they do that they can steal your identity with the smallest bits of information that most people would consider insignificant (like your name and address) and use it to accrue thousands of dollars of debt under your name. And the scariest part is that they can do it so quickly you may not even notice until it’s too late.
By choosing a business structure like a sole proprietorship, C corp or S corp or a partnership, you forfeit your ability to secure your personal information. Owners of these business structures are required by law to register their names and addresses with the Alabama Secretary of State. The Alabama Secretary of State then lists the information on their website and makes them available on the public record. Anyone with access to the internet can find the information by searching the website of the Secretary of State. This means that cyber criminals can easily access your personal information and your desire to keep it from them is irrelevant.
When you form an LLC, you’ve got the option to keep your information off the public record and protect it by hiring an LLC formation service.
LLC formation services are a type of professional service, part of whose job is to provide their information to the Alabama Secretary of State instead of yours, among other services that help you form and establish your Alabama LLC. As the owner of the LLC, you’re allowed to maintain ownership of your Limited Liability Company and keep your information off the public record this way, which is a win-win situation for you.
Another reason that small business owners’ decisions are swayed towards forming an LLC in Alabama is the federal tax benefits that Alabama LLCs receive.
If you choose to form a corporation instead of forming an LLC, you’re going to quickly learn about a thing called “double taxation”.
Here is a brief description of “double taxation”. Corporate profits are all charged a corporate income tax. Then the profits, which have already been taxed, are distributed to the corporate shareholders as dividends. Dividends are taxed as well. So the corporate profits are taxed twice before shareholders even receive them, thus the term “double taxation”.
If you form an Alabama LLC then you won’t have to worry about “double taxation”.
The income of your LLC in Alabama will be taxed at company rates and can then be distributed to LLC members in the form of personal income. Of course, personal income is taxed, but the taxes are not automatically deducted from this income upon receiving it. LLCs typically don’t pay federal taxes initially.
The only additional tax on your Alabama LLC comes in the form of a Business Privilege Tax. The Business Privilege Tax is based on the amount of money that is dispersed to the members of your LLC in Alabama (rather than taxes based on profits of the company), with a minimum charge of $100.
There’s one more tax benefit your LLC will enjoy.
When the Tax Cuts and Jobs Act was introduced in 2017, it established something called the “Qualified Business Income Deduction” or QBID. QBID gives LLCs a 20% tax discount. This discount is exclusive to LLCs, which is an excellent reason to form an LLC.
How To Start An LLC In Alabama
You now have a good understanding of what a Limited Liability Company is, as well as the reasons a small business owner would choose to form an LLC in Alabama. Now I can explain how to form an Alabama LLC if you’re still confident that an Alabama LLC is the right fit for your Alabama business. Here are the five steps to forming an LLC in Alabama.
*IMPORTANT* If you’d like to skip a lot of the work involved with forming an LLC, or you’d like someone to guide you through the red tape, form filing, and legal jargon, there is a type of professional service for just that. They’re called an LLC formation service and they can help you get through the process of establishing your LLC smoothly.
Many formation services are inexpensive and charge fees as low as $0 plus the state filing fee. They will help you submit applications and pay the filing fees necessary to establish your business in Alabama. (However, my favorite LLC formation service is ZenBusiness and they charge $49 plus the state filing fee.)
For additional guidance on selecting the best LLC formation service for your Alabama LLC today, check out my guide on the Best LLC Formation Service here.
1. Obtain Certificate of Formation Form
The first step you’ll need to complete on your quest to form an Alabama LLC is to get your hands on a Certificate of Formation form. In Alabama, this Certificate must be filed with the Office of the Judge Probate, not the Secretary of State. You must file the Certificate by mail to the Office of the Judge Probate in the same county as the initial registered office for your LLC. The court will proceed to send the Certificate, along with your $100 filing fee, to the Secretary of State. You will also be required to pay a filing fee to the County Probate Court, which varies by county but is typically no less than $50.
You’ll also need to ensure that a copy of your Name Reservation Certificate is attached to your Certificate of Formation when you file them.
This is a PDF version of the Certificate of Formation form and it’s the primary form that you’ll need to file with the Office of the Judge Probate to form your Alabama LLC.
The following steps will refer back to the Certificate of Formation form.
2. Choose Your Business Name
The next thing you’ll need, to begin forming an LLC, is a Name Reservation Certificate.
Alabama requires all LLCs to reserve their names before filing any of their LLC formation documents. You can do this online via the Alabama Secretary of State’s website for a $28 fee, and you’ll receive the reservation immediately once you finish the process. You can also use a Name Reservation Request Form for Domestic Entities, which you can file by mail for a fee of $10. You should still check the Secretary of State’s website for name availability using the business name database before submitting this form.
Before deciding on a name, it’s important to know that the Alabama Secretary of State requires all businesses and LLCs in the state to have unique names. This means LLC names that are already in use won’t be available to you, similar to creating a screen name for an online account. You can check the business name database on the Alabama Secretary of State website here to find out whether the name you want to use for your business in Alabama is available.
Under Alabama state law, LLCs are required to have the words Limited Liability Company or the abbreviation LLC or L.L.C. in their name. Your LLC’s name may not include language that implies that it was organized for reasons not outlined in your Certificate of Formation.
If the name you’ve had to register wasn’t to your liking, you can use a Doing Business As (DBA) name, also known as a fictitious name or a trade name.
A trade name or fictitious name is the name that you’ll use for all of your LLC’s advertisements and signage. To do this in Alabama, no registration is required. You can simply use the trade name you have in mind. However, you can register your LLC’s trade name with the Alabama Secretary of State in order to let other businesses know the name is in use in Alabama.
Here’s the Application to Register Trade Name in Alabama that you’ll need to file. The state filing fee is $30, and you must file it by mail.
3. Choose An Alabama Registered Agent
The next step you’ll need to take on the path to LLC formation is to appoint an Alabama registered agent. This process is important because your registered agent’s name and address are required information for your Certificate of Formation.
Finding a registered agent in Alabama isn’t difficult, as the Secretary of State's website provides a list of several registered agents authorized to provide business services in Alabama.
There are several services that an Alabama registered agent must provide as a professional service, such as becoming the point of contact for your business during normal business hours to accept mail and service of process from the Alabama Secretary of State, the Alabama Department of Revenue, and other official state offices and providing your LLC with a registered office address in the state of Alabama.
There are professional registered agent services that will fulfill the legal requirements of your LLC. These registered agent services will guarantee that you receive service of process, mail, and legal documents and protect your personal information. Registered Agent Services cost anywhere from $99-$299 per year.
If you choose to perform the registered agent duties for your LLC yourself, you should know that you’re taking a lot of risks. Because you must provide the name and address of your registered agent to the Secretary of State, if you’re the registered agent your information will be listed on public record as the registered agent for your business. This leaves you vulnerable to cybercrime.
You could also miss service of process or other important mail which could mean that you’re not only unable to defend against legal actions taken against your business, but you could lose your business if the Secretary of State finds that you’re not complying with registered agent requirements because you simply didn’t receive the important mail or documents. Because of this, I always suggest the use of a registered agent service for new LLCs.
If you want to use a registered agent service to keep your personal information off the public record and give you peace of mind, you can read my guide on the best Alabama registered agent service.
4. Choose Your LLC Address
Another bit of important information you’ll need to include on your Certificate of Formation form for your LLC is the address. The street address you list on your LLC’s Certificate of Formation form will be the one registered with the Alabama Secretary of State, much like the LLC name you list. This means that your LLC’s address will be listed on public record on the website of the Secretary of State. The address you list will become the registered office address for your business and it will be the location that important legal documents and mail from offices like the Secretary of State are sent for your company.
You can use the physical street address of your business, but if it doesn’t have one, you’ll have to use your own home address or office address. But no matter which address you choose to use, it’s worth noting that you can’t use a PO Box address.
The last few things you’ll need to make sure that you list on your Certificate of Formation are:
- The name and signature of the person organizing your LLC,
- The name and address of the LLC’s registered agent,
- Your LLC name, and
- The Name Reservation Certificate of your LLC.
5. Sign And File Your Certificate of Formation
The last step to forming your Alabama LLC is to double-check your documents for accuracy and then sign and file the certificate along with the documents.
Make sure when filing that you have obtained the required Name Reservation Certificate, as you’ll need to attach that with your Certificate of Formation. As previously mentioned, the LLC Name Reservation Certificate is a prerequisite to filing LLC formation documents in Alabama.
Once you’ve obtained the copy of your Name Reservation Certificate, you’ll need to make sure that your Certificate of Formation also includes the name and address of your Alabama registered agent. Your LLC’s registered agent must have a registered office in Alabama.
If your LLC won’t begin operation until a specific date, you’ll need to list an “Effective Date” on your Certificate. The effective date of your LLC is the date when your business will begin operating, so it’s a pretty important bit of information along with your LLC name and address.
Lastly, your LLC’s Certificate of Formation must include either your signature or the signature of an attorney-in-fact. Once all of these documents have been signed, their accuracy verified, and all the other steps have been completed, you’re ready to sign and file them. You file your Certificate of Formation with the Probate Court in the county of your LLC’s establishment and they then forward it to the Secretary of State. Here’s a list of Probate Judges in Alabama.
The fee for filing is $100 plus a County Probate Court fee, which varies by county but is usually a minimum of $50.
Other LLC Activities
Filing your Certificate of Formation for your company won’t be your last official act as an LLC owner. You’ll need to participate in several other business-related activities to keep your Alabama LLC in good standing with the Secretary of State.
You will likely need to obtain some business licenses for your LLC to operate in Alabama, depending on the type of business you will be conducting. You’ll have to check with the county probate office or licensing commission for any local business licenses you may need.
LLCs in Alabama also have to register with the Alabama Department of Revenue if they collect sales tax on goods or services. You can register online at the Alabama Department of Revenue’s e-services website.
If you are operating outside of the State of Alabama, you will need to follow the process for establishing a foreign LLC, which is similar to the process described in this article for forming a domestic LLC. The main differences are that when appointing a registered or statutory agent, a foreign LLC must use a registered or statutory agent physically located within the state of Alabama and you must register with the Alabama Secretary of State Business Entities Division.
A foreign LLC will also still have to complete a Certificate of Name Reservation just like a domestic LLC and you can file online or by mail. You can register by postal mail here by submitting two signed original copies of a Foreign Limited Liability Company Application for Registration. The fees for this are $260 if filed online (link here) or $150 if filed by mail.
If you choose to file by mail, send the application form along with your Name Reservation Certificate to:
Alabama Secretary of State
Business Entities Division
P.O. Box 5616
Montgomery, AL 36103
It’s also important to ensure that you pay your taxes and obtain a Certificate of Good Standing. If you forget or neglect any of these activities, it could result in your business not being legally allowed to continue conducting business in the state of Alabama.
This seems like a lot of paperwork to file, and there’s a good reason for that – it is. If you’d prefer help filing these documents, you should consider hiring an Alabama PEO service and subscribing to their online legal services. This should cut back on your document filing workload.
Alabama LLC Fee Summary
How much does it cost to form an LLC in Alabama? Whether you’ve chosen to start your LLC on your own or decided to hire an LLC formation service, there are several filing fees and taxes LLC in Alabama will be charged. Here’s a list of some of the taxes and filing fees you can expect to pay for your LLC.
Certificate of Formation: $100 plus $50+ county probate court filing fee
Name Reservation Certificate: $28 online, $10 by mail
Registered Agent Fee: $99-$299
Annual Report/Business Privilege Tax: Minimum $100
State Personal Income Tax: 2-5%
State Corporate Income Tax: 6.5%
After Starting Your Alabama LLC
Starting your LLC is only the first step on the path to business success. It’s important that you celebrate this business victory, so do something memorable and enjoyable! But you can’t relax for too long because there’s still work to be done after your LLC is formed.
In Alabama, LLCs are required to file a Business Privilege Tax Return along with their annual report. The Business Privilege Tax Return includes your LLC’s annual report, and both the tax return and the annual report must be filed within three and a half months from the beginning of your LLC’s tax year.
The Business Privilege Tax is a tax levied on all money disbursed to the members of your LLC. Normally, LLCs are considered a pass-through entity. This means that the responsibility of federal tax filing is transferred to the LLC members. Typically, LLCs don’t pay a federal tax on their income.
However, Alabama imposes a tax on the LLC members for the money they receive from the LLC operations. This amount is, of course, based on how much income the LLC passes through to its members, with the minimum amount you can be charged set at $100. All LLCs in Alabama are required to file business privilege tax returns along with their annual report, with the first one being due two and a half months after your LLC is up and running, or the effective date of your LLC, whichever is applicable. To learn about online filing requirements click here.
Here are the three other important steps you’ll need to complete after filing your Certificate of Formation.
Step 1. Create An Operating Agreement
Alabama LLCs aren’t under any obligation from the State to draft Operating Agreements, but it’s still in your business’s best interest to do so. Without an operating agreement, your LLC’s operations will be governed by Alabama LLC laws and regulations, which may not be ideal for your company.
Think of your business entity like a computer. The LLC functions similarly to the case, protecting the important parts. The LLC Operating Agreement would function as its operating system by establishing procedures for the software (members and/or managers) and hardware (employees) and how they respond to input.
An Operating Agreement serves as both a contract between LLC members and a list of precise instructions regarding business operations. The Operating Agreement should list every LLC member, before proceeding to establish all of the managerial, financial, structural, and operational procedures of your business, along with the effective date of your LLC.
*IMPORTANT* Before drafting the Operating Agreement for your business, decide on whether your business entity will use a single-member or a multi-member managerial system. It’s important to have a guide for the delegation of responsibilities and to whom those responsibilities should be delegated. In a multi-member managerial system, the managers vote on important business decisions.
An Operating Agreement typically begins with a list of each LLC member. It will then proceed to clarify which members will make high-level business decisions and proceed to list the percentages of ownership, profits, and losses of each member. Your agreement should thoroughly explain the duties of each LLC member as well as their interactions and relationship with each other and each department. Drafting your Operating Agreement in this manner ensures that the LLC members know their roles, which members or departments they should be interacting with, who the managers and superiors are, and the tasks assigned to each of your LLC’s departments in order to reduce internal conflict.
A well-written Operating Agreement should also include procedures to handle an LLC member leaving or a new LLC member joining the business. Many first-time business owners leave this out of their Agreements, but if you add it in then your business will have a clearly-written set of instructions about how to proceed if there is a falling out between LLC members. Having clearly-written procedures available for these situations is extremely helpful during difficult times or periods of unexpected growth.
The importance of a well-written Operating Agreement becomes clear during the beginning stages of your LLC. It explains the duties of each LLC member, their pay, and provides detailed business operation procedures.
To clarify: Operating Agreements list the specifications for the operation of your business and your business is required to operate according to the guidelines established in your Agreement, so a poorly-written Agreement means your business may not experience the kind of growth you anticipated. It’s easy to forget to leave room in the Operating Agreement for things like business growth, change, or innovation. Well-written Operating Agreements enable you to sit back and watch as your business thrives without being confined by vague or confusing instructions, but poorly-written Operating Agreements can hold your business back and stifle your growth.
If you haven’t written an operating agreement before, there are services that can help you.
You can get a free template for an operating agreement from Northwest Registered Agent’s website. If you need help with the wording of the document, many formation services will draft your LLC Operating Agreement as part of their service package. If you would rather draft the LLC Operating Agreement yourself, consider contracting some online legal services to assist in doing it right the first time.
Step 2. Apply For An Employer Identification Number
Alabama LLCs with multiple members or that plan to hire employees or open a bank account that is solely for your LLC need an EIN, or an Employer Identification Number. You can obtain an EIN from the IRS, which qualifies your business for certain permits and licenses. Small businesses aren't required to hire employees to get an EIN from the IRS. The EIN is simply an identification number for businesses, much like a Social Security Number or Serial Number.
An EIN is a number used to identify businesses in a similar way that a Social Security Number is used to identify individuals. You can obtain an EIN from the IRS through the Internal Revenue Service (IRS). Applying for an EIN is also surprisingly simple to do as well.
Many LLC formation services found in the State of Alabama will apply for an EIN for your LLC on your behalf as part of their services, which streamlines the entire process. You can also obtain an EIN yourself without the help of an LLC formation service. This can be done by going to the IRS website Monday-Friday between the hours of 7:00 am and 10:00 pm, fill out and submit the EIN application
Step 3. Open A Business Bank Account
The last step you need to take to ensure that your business will succeed is to open a bank account dedicated to business transactions.
Small business owners often overlook this step and will run both business and personal transactions through the same account. They assume that having one bank account will somehow save them trouble, but there are two good reasons you shouldn’t do this.
Firstly, it can be very helpful with tax filing to open a dedicated business bank account. A lot of the small business owners who also use their personal accounts for business purposes mistakenly think they will be able to remember which of their transactions were for personal reasons when it’s time to file federal tax returns. It’s easier when you have a separate bank account for your business because you get a statement that lists all of your business transactions on one account.
Secondly, having a dedicated business bank account maintains your personal liability and asset protection. Running business transactions through your personal account means your personal information and your personal funds in the account can be vulnerable if you are sued. This completely negates the asset protection you receive when you form an LLC.
So opening a bank account dedicated to your LLC will make filing tax returns each year much easier and also maintains your personal asset protection.
You’ll need to obtain a “bank kit” to open a bank account for your LLC. This kit contains certified copies of many of the formation documents you’ve been obtaining so far, such as your Certificate of Formation, EIN, Operating Agreement, and initial resolution.
A lot of LLC formation services in Alabama will create a bank kit for your company as part of their business services, which can save you the trouble of collating these documents yourself.
Congratulations on your decision to form an LLC in Alabama! This decision was truly a huge step towards business independence.
If you’ve decided to skip using an LLC formation service (which can charge fees as little as $0 plus state filing fees), here are the five steps you’ll need to take to form an LLC in Alabama:
- Obtain the Certificate of Formation form
- Name your LLC
- Choose your Registered Agent
- Choose your LLC address
- Sign and file your Certificate of Formation
The excessive amount of red tape, stacks of forms to file, applications to fill out and submit (some of which you can file online or by mail), legal jargon, and filing fees necessary to start an Alabama LLC can all feel very overwhelming. But completing this massive workload on your own can leave you with a feeling of accomplishment. This feeling of elation makes it worth all of your time and hard work!
Congratulations on your new Alabama LLC and good luck on your business journey!