Starting a Limited Liability Company, or LLC, in this era of never-ending market competition and stringent regulations, is the first step towards growing your business in Alabama.
Forming an LLC opens the door for tax savings, limited liability, and security to personal assets. However, the procedure may seem daunting and highly confusing. This article will act as your detailed yet straightforward guide and walk you through the different steps involved in forming an LLC in Alabama.
Forming an LLC in Alabama was traditionally a lengthy process. This was true before 2021, but not anymore. Several procedures of forming an LLC have been amended by the introduction of ‘Act 2020 – 73’, which has brought numerous changes to the Alabama Business & Non-profit Entities Code. This amendment has made the entire process a lot easier. We will let you know the changes made through this Act throughout this article, wherever relevant; to avoid confusion, the procedure before and after the amendment has been outlined throughout the article.
Name your Alabama LLC
It is important to decide on a name as the first step to forming your LLC. Your LLC needs an identity in the market and in the eyes of the law to create trust, reliability, and goodwill among your consumer base and legitimize your LLC’s establishment.
With innumerable establishments coming into the market, it becomes extremely important to be distinguished and remembered; to help your LLC’s growth and survival and to build brand value.
Your LLC’s name appears in all the documents related to your LLC, and quite a significant amount of information regarding the formation of your LLC stays in the public domain. Thus, the name you choose should be unique and creative.
Your LLC’s name should be distinguished from every other company. Keep in mind that plurals, prepositions, capitalizations, and other designators do not make your LLC’s name different from the existing names in the public domain.
You might want to consider a trademark and social media search before finalizing your LLC’s name and registering it because a business running with a trademark or social media with the same name as your LLC doesn’t automatically disqualify it.
Your LLC’s name must include “limited liability company”, or an abbreviation of this phrase, like “LLC” or “L.L.C”. This is a requirement as per Section 10A-1-5.12 of the Alabama Code.
The LLC’s name shouldn’t cause confusion by being similar to any government agency’s name (FBI, CIA, Department of Justice). Neither can it include restricted words or abbreviations without prior permission from the respective branch the word is associated with (Banking, Trust, Insurance).
Your LLC’s name cannot include any professional designation without a prior license. For example, Doctor, Attorney, etc. Usage of these words requires a copy of the license to be submitted while reserving the name.
Does Your Business Require a DBA?
A Doing Business As Certificate, or DBA, is a document you can obtain if you want to operate your business under a different name after your LLC has been registered. If your LLC chooses to enter a new market or change its marketing strategy, your LLC’s registered name may no longer be appropriate.
Option 1: Apply for a DBA OnlineApply Online – OR –
Option 2: Apply for a DBA by MailDownload Form
State of Alabama
Office of the Secretary of State
PO Box 5616
Montgomery, Alabama 36103-5616
State of Alabama
Office of the Secretary of State
11 South Union St., Suite 224
Montgomery, Alabama 36103-5616
Doing a Name Search and Name Reservation
You ensure that your LLC’s name is unique from others by running a search on Business Entity Search by Entity Name.
If you see “No matches found” appear after you type in your desired LLC’s name, then you’re good to go!
The state of Alabama mandates that you obtain a Certificate of Name Reservation before you file for the formation of your LLC.
You have to consider if you’re ready to form an LLC or you need extra time because both these involve different procedures. If you’re ready to form your LLC, you’ll be able to file your Name Reservation Certificate along with your Certificate of Formation. But if you’re not ready to form your LLC yet, and a unique name has struck you, you can reserve your LLC’s name.
Registering Your Business Domain
Having a domain name registered will help your business when it decides to move online. Given the world’s rapid shift towards the digital space, it is imperative that your business have an online presence to cater to a wider audience. You can have a look at the domain names available currently, and register one today, even if you plan on going online at a later stage.
Choose a Resident Agent in Alabama
Let’s take the example of our fictitious friend, Sandra. She wants to form her LLC in Alabama, which provides services for food delivery. However, Sandra often stays very busy handling the business requirements and travels to meet investors and search suppliers. With such a busy schedule, how will Sandra look after all the paperwork and legal issues by herself? Here is where a registered agent comes into play.
A registered agent is like a liaison through which you stay prompt with your LLC’s paperwork required by the law. This agent will submit and receive documents on your behalf at his registered address and make sure the document requirements are met within the specified time. The registered agent you choose will have to consent to perform such functions because they will fill their name and address in the Certificate of Formation available in the public domain. In Alabama, through Section 10A-1-5.31 of the Alabama State Code, it is mandatory to appoint a registered agent for your LLC.
Who Can Be a Resident Agent?
A registered agent for your LLC would have to meet the following requirements:
- Above 18 years of age
- Has a street address in Alabama
- Listed with name and address in the Certificate of Formation
- Available during normal business hours
You yourself, other members of your LLC, or even your friends, or family, could be your LLC’s registered agent as long as they meet the aforementioned requirements.
If you feel the above two options are something you aren’t sure about, you can always elect a commercial registered agent through various online and offline services. They’d carry out all communications between the state and your LLC using their street address.
Individual Registered Agent vs Commercial Registered Agent
There are advantages to hiring a commercial registered agent over appointing yourself or someone you know. You can concentrate on the core functions of your LLC, freeing yourself from having to deal with communications from the state.
The registered agent also comes in handy when you’re out of town or on vacation. If any documents are to be sent for your LLC, the registered agent will always be available to receive them on your behalf. This will ensure that your LLC is up to date with the paperwork, and avoid any unnecessary legal liabilities/costs. Your LLC would be caught up with its tax filings, replies to notices, etc.
The registered agent will store and maintain all your essential documents in an online format to provide easy and instant access to them whenever needed. This helps organize your work better and comes in handy in case of any subpoenas, or other legal requirements.
You will elect your registered agent by providing their name and address in the Certificate of Formation.
A few changes brought in from 2021 are worth mentioning here to avoid any confusion if you end up reading other resources that aren’t updated yet. Previously, the election process of registered agents could be done through the mail by downloading the Certificate of Formation form from the Secretary of State’s website and mailing it to the specified address. However, there was also a requirement to submit two copies of this form along with a stamped envelope to the Probate Judge’s Office. This has been done away with the 2021 amendments. You can directly elect a registered agent by filing the Certificate of Formation form online.
File the Certificate of Formation with Alabama
You have to officially register your LLC with Alabama by filing the Certification of Formation. The Certificate of Formation establishes your LLC in the state records and gives it a legal presence.
Previously, you had to follow a two-step procedure where you first had to get your LLC Name Reservation and then file it with your Certificate of Formation at the Probate Judge’s office. Now, this has become a one-step procedure where you can file your LLC Name Reservation and Certificate of Formation together at the Secretary of State’s website.
Your Certificate of Formation would require general information regarding your LLC:
- Your LLC’s name
- The type of LLC you’re looking to form
- The LLC’s registered agent’s name, address and contact details
- Information regarding your LLC’s Organizer, the person who will file the Certificate of Formation with the state
- Information regarding your LLC’s members
- Information regarding your LLC’s planned date of formation
Currently, Alabama does not have any provisions for expedited processing of your Certificate of Formation.
Public Notice of Formation
The state of Alabama does not mandate a public notice of formation for your LLC.
Create an Operating Agreement for your Alabama LLC
Let us retake the example of Sandra. Sandra decides to include Michael and Steve as the members of her LLC. They conduct meetings to finalize the same but are unsure about their rights and responsibilities. What can they do in such a case? An Operating Agreement is a solution to this problem.
An Operating Agreement consists of the terms agreed between the members of the LLC and acts as a core document for the clear, smooth and effective functioning of the LLC. Although it is not mandatory in Alabama to form an Operating Agreement, it could help ensure that there is no confusion regarding your LLC’s operations.
Some of the important and commonly included terms in the Operating Agreement are as follows:
- Date of formation of the LLC.
- Name of the LLC.
- Domicile of the LLC.
- Name, address and contact details of the members.
- Purpose of the LLC (It is desirable to mention a general purpose to ensure that your functioning isn’t restricted).
- Duration of the membership.
- Capital contribution by each member.
- Interests of each member.
- Responsibilities and other liabilities of each member.
- The profit-sharing ratio between the members.
- Terms regarding transfer and withdrawal of power.
- Terms for Dissolution of the LLC.
- Miscellaneous/General terms.
These are just a few examples. The sky’s the limit. Choose your terms wisely and preferably with the consultation of a professional. Most commercial registered agents offer this service as well.
Limits of Operating Agreement
There is no fixed format for this agreement. You have all the freedom to include the terms of agreement you feel are necessary for your LLC. However, the terms are limited to the law. You cannot include something prohibited by the laws of Alabama.
Obtaining an EIN For Your Alabama LLC
An Employer Identification Number (EIN), or Federal Tax Identification Number (FTIN), is used primarily for tax administration purposes by the IRS. Other than tax filing purposes, it can be used for opening a business bank account in your LLC’s name, applying for certain business loans, obtaining licenses, and managing employee-related matters.
If you do not have a Tax Identification Number such as the SSN or if you’re a foreigner wanting to open an LLC in Alabama, you cannot obtain an EIN online. Instead, you will have to fill out the SS-4 form and send your application to fax number (855) 641-6935 or mail it to;
File Annual Reports in Alabama
This annual report along with the Business Privilege Tax Return has to be filed every year on the 15th of April. The first time you’ve to file this tax return after your LLC’s formation is the 15th of April next year.
The form to file this tax return is known as Form PPT. The minimum amount payable is $100, and it may vary according to your federal taxable income and net worth multiplied by 0.00025% – 0.00175%. This tax return must be filed by attaching a few other documents such as the Schedule BPT-NWI, Form BPT-V, and Federal Tax Return. You can access all these forms in one place, make sure you double-check to see that you are using the correct one.
Tax Liability For Your Alabama LLC
The way your LLC will be taxed depends upon the number of members in your LLC. There are four ways in which LLC will be taxed:
- Sole-proprietorship: a business owned by single person
- Partnership: a business owned by multiple people
- C – Corporation: income is split, or segregated, for taxation
- S – Corporation: tax liability is split between the business and its owners
Federal Tax Liability
If you’re a single-member LLC, your default taxation type will be that of a sole proprietor or ‘disregarded entity’. The LLC has to report its activities under Schedule C, Schedule E and/or Schedule F of Form 1040.
If your LLC has more than one member, it will be taxed as a ‘partnership’ by default. In this case, apart from filing Form 1040, you’ll have to file your partnership return in Form 1065 and provide information in K-1 of each partner.
State Tax Liability
The Initial Business Privilege Tax is a one-time payable tax that is paid within 2.5 months of the formation of the LLC (Available at the end of the Certificate of Formation). This is paid as a privilege tax for operating business in Alabama legitimately. The minimum amount payable is $100, which may vary according to your federal taxable income and net worth. The form to file this tax return is known as Form BPT-IN. Other than this, you have to pay the recurring yearly Business Privilege Tax Return as mentioned earlier in the article.
Miscellaneous Tax Liability
Sales Tax, or Sales and Use Tax, is payable if your LLC is involved in selling physical products. For this, you’ll first have to register for a seller’s permit. Once you finish the registration process, you’ll receive a certificate that will permit you to collect this tax directly from your customers.
Employer Taxes will be payable if you’ve employees in your LLC. The two most essential employer taxes are Unemployment Insurance Tax and Employee Withholding Tax.
For more information regarding tax liabilities, visit the Alabama Department of Revenue’s website.
Permits & Licenses
It is crucial to determine what licenses and permits are required for your LLC to operate legitimately in Alabama. Failing to do so might cost you your LLC as Alabama is very stringent about its laws.
The foremost license to be obtained is the ‘Business Privilege License’, which every business operating in Alabama has to obtain. This license has to be obtained in every county your business will be operating in and is issued by the Probate Judge’s Office in the county.
Detailed information about the licenses and permits to be required are given on the Alabama Department of Revenue’s website. Below are a few examples of permits:
- Sales tax permits.
- Business operation license.
- Building permit.
- Signage permit.
- Withholding taxes.
- Health permit.
- Seller/reseller permit.
- Zoning and land use permit.
For more detailed information, visit the Alabama Department of Revenue website.
For information regarding;
Local permits and licenses differ from county to county. Make sure to contact the local clerk to know more about the required licenses.
Business Bank Account & Phone Number
Consider opening a separate business bank account, email address, and phone number for your LLC. This ensures that your assets do not get attached to your business and frees them from any risk in case of insolvency or legal suits. It also ensures privacy and organized functioning of your LLC as mixing personal with business details might create confusion. You can obtain several loans, permits, licenses, and goodwill in the eyes of investors if you treat your LLC as a separate entity.
With this last step, you’ll complete all the procedures and requirements for forming an LLC in Alabama. Double-check all the documents and information under different heads as mentioned above, as prevention is always better than the cure. Enjoy your new LLC!