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If you plan to start a business in Alabama, it’s probably a smart move since it can help you protect yourself from personal liability for business debts by forming an LLC. Alabama offers additional advantages for LLCs, including low tax rates and a wide variety of tax credits and tax abatements for businesses. Alabama also makes it easy to form an LLC by offering online filing and low filing fees.
You will need to follow these six steps to create your LLC in Alabama:
Let’s dive in and explore each step in-depth:
You can name your LLC almost anything you want in Alabama. The state’s only specific requirement is that the name includes “Limited Liability Company,” “LLC,” or “L.L.C.”
Alabama allows business owners to perform many functions online at the Alabama Secretary of State (SOS) website for a small additional fee. The SOS offers subscriber accounts to both individuals and businesses, including discounts on online fees and access to online databases and records. You are not required to have a subscriber account, but as you will see, it offers some advantages.
You can check to see if a business name is available by visiting the SOS’s website. If you click on “Business Services” menu on the main page, it will take you to a page with multiple search options. You want the link labeled “Business Entity and Name Search.” This will let you search to see if any other business in the state is using the name you want.
Before forming an LLC in Alabama, you must reserve the business name. You can do this online or by mailing in a form. The base filing fee for this is $25, not counting online fees.
To reserve your business name by mail, you must fill out a Name Reservation Request Form for Domestic Entities. You may pay the filing fee by credit card, check, or money order. You can mail the form to the Alabama Secretary of State, P.O. Box 5616, Montgomery, AL 36103
To reserve your business name online, go back to the “Business Services” page on the Secretary of State’s website. Look for the “Name Reservation Menu” link. The SOS adds an extra $2-3 for online filing. If you are a subscriber, the total fee will be $27. If you are a non-subscriber, it will be $28.
If you have already been operating a business under the name you’d like to use for your LLC, you might consider filing a DBA (“doing business as”), also known as a “trade name.” You must already be using the name to register it as a trade name.
Registering a DBA will not give you any liability protection, but it will safeguard the use of the business name if you are not quite ready to set up your LLC. The SOS registers trade names the same way it registers trademarks.
You can register the name of your business as a trademark once you have begun using it for business operations. A trademark is a name, logo, or slogan that you use to identify a business, service, or product. By registering your business name as a trademark, you can prevent others from using it in ways that could hurt your business.
The SOS registers trademarks and trade names at the state level. You can also register trademarks with the U.S. Patent and Trademark Office (USPTO) if you want to protect the name nationwide. Both offices require you to submit an application, which you may do online, along with two “specimens” of the mark that shows it being used in commerce. For example, you could submit a business card, letterhead, advertisement, or product packaging with your company’s name.
Registering your business name as a trade name with the state is much less expensive than registering it with the USPTO. The total fee for state registration is $31.20. The USPTO’s fee begins at $325.
You can begin the state registration process on the SOS website, once again under the “Business Services” link. From there, you will find a “Trademark Application” link.
Federal registration takes place on the USPTO website. You can search for existing trademarks using the federal database known as TESS (Trademark Electronic Search System), and you can file an online trademark application through TEAS (Trademark Electronic Application System).
Now that you have decided on a name for your business and reserved with the state, you are ready to file the documents that will officially create your LLC. In Alabama, the main document that creates an LLC is known as the “Certificate of Formation.”
The person filing the Certificate of Formation is the “organizer.” This person could be an owner of the business, officially known as a “member” of the LLC, or an authorized representative.
If you are forming a new LLC, the Alabama SOS charges a $200 filing fee for a document known as the Certificate of Formation. Online filing includes an additional $8 fee, for a total of $208.
You may include additional information about your business in an attachment to the Certificate of Formation, although this is not required. For example, you can state how you will handle the management of your new company. Under Alabama law, the members of an LLC are in charge of managing the business unless they decide otherwise. They may decide to appoint managers to run the business instead. A Certificate of Formation can state whether the company will be managed by members or managers.
You may file the Certificate of Formation online or by mail. To file online, go to the “Business Services” section of the SOS website and click the “Domestic Formation” link. This will take you to the online submission page, where you can input the required information, upload documents like the Name Reservation Certificate, and pay the filing fee.
You can submit the Certificate of Formation by mail to the following address: Alabama Secretary of State, Business Services, P.O. Box 5616, Montgomery, AL 36103. You can pay the filing fee by check, money order, or credit card. In addition to the original Certificate of Formation, you should include a copy of the Certificate and a stamped, self-addressed envelope. The SOS will return the file-stamped copy and a receipt to you.
Once the SOS has processed your Certificate of Formation, it will issue an Entity ID Number for your LLC. This number will help identify your business in SOS records. Note that this number is different from the Employer ID Number (EIN) issued by the IRS.
Every business entity organized in Alabama must designate an individual or business to serve as their registered agent in this state. A registered agent’s main job is to receive service of process and other notices for the business. The registered agent’s location is known as their registered office. If someone sues your business, for example, the process server will deliver the papers to your registered agent.
A registered agent must be:
The registered office must be a street address in Alabama — not a P.O. box or other mailbox service — where the registered agent is available to receive service of process and other paperwork. It does not have to be a location where your LLC does business.
You or another member may serve as the registered agent of your LLC. You may use your business address or your personal address as the registered office. Keep in mind that the registered office is part of the public record.
Many companies use third-party businesses as their registered agents. Some attorneys will act as registered agents for their business clients. Many companies act as registered agents for a fee of around $50 to $250 per year.
Once you have formed your LLC, you can change your registered agent by filing a “Change of Registered Agent or Registered Office by Entity” notice with the SOS. This notice must include your Entity ID Number and business name, the name and address of the current registered agent, and the name and address of the new registered agent. The new registered agent must sign the form to indicate that they consent to their appointment as a registered agent. The filing fee for this form is $100.
A registered agent may also notify the SOS that they have changed their name or their registered address. The filing fee for this document is $100, paid by the registered agent.
The next step in forming your LLC is to create an operating agreement. Alabama’s LLC statute refers to this as a “company agreement.” This is a contract between the LLC members that establishes rules and procedures governing how your business operates at the highest level. In a corporation, the equivalent document would be the bylaws.
The company agreement can set procedures for how the members make decisions, when and how often they should meet to discuss the business, and what to do if a dispute arises. Even if you are the only member of your LLC, you should create a company agreement so that you can have consistent procedures for making and documenting your decisions. If you add more members in the future, such as by bringing in investors, the company agreement will help ease the transition from having one person in charge to having multiple people involved in the business.
Other issues that a company agreement can address might include:
Alabama does not require LLCs to have written company agreements. State law establishes procedures for various matters involving the internal management of the company. These provisions only apply to areas not covered by a company agreement. For example, state law provides that a company agreement cannot be amended without the consent of all members. If a company agreement states that amending the agreement only requires a majority vote of the members, that provision of state law does not apply to that company.
This does not mean, however, that an LLC does not have to have a company agreement at all. Even if you never intentionally created a company agreement, the way you run your business could create procedures that you will be obligated to follow if you have a dispute with other members. Alabama’s LLC law specifically states that a company agreement may be “written, oral or implied.” An implied agreement can be established by past actions and decisions.
Suppose, for example, that an LLC has four members and no written or oral company agreement. At the end of each year, the members take one-third of the profit for that year and reinvest it into the company. They pay the rest of the profit to themselves in equal shares. One year, some of the members want to do something different with the shares, and the other members disagree. The fact that they have done the same thing with their profits every year for multiple years could be evidence that this practice is part of an implied company agreement.
An implied or oral agreement can be just as enforceable as a written contract. In that sense, while Alabama law does not require you to have a written company agreement, it might be a good idea to put various important issues into writing at the start of the business.
Alabama does not set any specific requirements for a company agreement. As mentioned above, the company agreement does not even have to be written down.
State law sets certain limits on what a company agreement can do, including:
The IRS issues Employer Identification Number (EIN) to businesses and other organizations. Please note that this is different from the Entity ID Number issued by the Alabama SOS for your LLC.
An EIN serves many of the same purposes as a Social Security number. Both have nine digits, although the formatting is different:
The IRS states that you must have an EIN if your LLC meets certain criteria, including if you have employees or if you operate your business as a corporation or partnership. Every LLC with more than one member will operate similar to a corporation or partnership, as discussed further below.
Single-member LLCs should also consider getting an EIN because you will need it for functions like opening a business bank account. Without an EIN, you would have to use your own Social Security Number to open the account.
You can a do it yourself online or by submitting Form SS-4 to the IRS by mail or fax. Doing it online is the most straightforward—and fastest—way of doing it. The online interface can walk you through the complicated areas. If you prefer to fill out a form and send it in, more explanation is in order.
Form SS-4 asks for the name and address of the LLC and the name of the “responsible party,” an officer or member of the company who will be the IRS’s point of contact. The responsible party must be an individual, not a business, and they must be authorized to act on behalf of the company.
Line 8a of the form asks if you are organized as an LLC. Line 9a then asks about the type of entity, but does not include LLC as an option. What you should put on line 9a depends on the number of members in the LLC and the type of tax treatment you plan on choosing.
The treatment for your LLC for tax purposes is addressed in more detail in Step 6 below. For now, you have at least three options for what to put on line 9a under “Other”:
The form also asks why you are applying for an EIN. You may choose “started new business.” It will also ask about the principal activity of your business. If you want to designate a third party to receive the EIN and communicate with the IRS on your behalf, such as a lawyer or accountant, you may do so at the bottom of the form.
From Alabama, you can mail the Form SS-4 to the following address: Internal Revenue Service, Attn: EIN Operation, Cincinnati, OH 45999. You may also fax it to (855) 641-6935.
The final step in forming your LLC is to make sure you are set up for all of your tax obligations. In Alabama, your LLC will pay taxes at the state and federal level. Tax issues can become very complicated, so it is highly recommended that you speak with a tax professional if you have any questions or concerns.
How the IRS will view your LLC for tax purposes depends on two factors: the number of members in the LLC, and the choice you make for how you want the company to be taxed.
If you are the only member in the LLC, the IRS will treat the company as a “disregarded entity” for tax purposes. You will not have to file a separate tax return for the company. Instead, you will report business income and deductions on a Schedule C attached to your personal income tax return. You will pay self-employment tax on your business income.
If your LLC has multiple members, the IRS will treat it like a partnership for tax purposes unless you tell it otherwise. Form 8832 lets the IRS know that you want the LLC to be taxed as a corporation instead of a partnership.
Businesses in Alabama pay state income tax at a rate of 6.5%. State income taxes follow the same basic procedures as federal income taxes. If, for example, you have elected to have your LLC subjected to “pass-through” taxation like a partnership for federal income tax purposes, the same will apply for state income taxes. Additional information is available from the Alabama Department of Revenue.
You will be required to collect sales tax from customers if you sell taxable goods or provide taxable services. The sales tax rate for consumer goods and services in Alabama is 4%. Lower rates may apply for certain services or rentals.
Employers withhold at least three types of taxes from their employees’ paychecks: federal income tax, Social Security tax, and Medicare tax. The purpose of self-employment tax is to cover the amounts that you, as a self-employed individual, are not paying through payroll taxes. The federal self-employment tax rate is 15.3%, which consists of:
If you have employees, your LLC will be responsible for withholding half of the payroll tax amount from their paychecks and paying the other half. The amounts withheld from each paycheck are:
Note that these percentages are exactly half of the percentages used to calculate self-employment tax. This is because the employer is responsible for matching the amount withheld from employee paychecks.
The amounts that you withhold from employee paychecks for payroll and income taxes are known as “trust funds” because you are holding those amounts in trust for your employees. The IRS takes these funds very seriously. Your LLC should set up an account where you can hold these funds until you send them to the IRS to ensure that they are not lost or commingled with other funds.
You may also be required to pay Federal Unemployment Tax (FUTA) for your employees. This amount is not withheld from employee paychecks. The amount of the tax is 6% of the first $7,000 paid in wages to each employee. The maximum amount you would pay annually in FUTA for each employee would therefore be $420.
Businesses registered in Alabama must pay a business privilege tax regardless of how much business they actually do in the state. The amount of the tax is based on a company’s net worth. The minimum amount of tax due annually is typically $100.
In addition to FUTA, LLCs with employees must pay state unemployment tax to the Alabama Department of Labor. The tax rate starts at 1.15% of employee wages, but may go up if a former employer files an unemployment claim.
One of the main purposes for creating an LLC is to help shield yourself (as best as possible) from personal liability for business debts. To aid in doing so, it’s recommended to keep business assets completely separate from your personal assets. Opening a bank account in the LLC’s name is a great place to start. The bank will most likely need the LLC’s EIN to open an account.
All business income should go into the LLC’s bank account. All payments for business expenses, such as rent, office supplies, legal and accounting fees, and registered agent fees, should come from this account.
The only time you or another member should take money out of this account for yourselves is when you are disbursing money to the members in accordance with your company agreement. All money disbursed to members should be included in 1099 forms sent to each member at the end of the year for them to include with their personal tax returns.
Your LLC will be responsible for filing an annual business privilege tax return, along with the business privilege tax payment. The initial return will be due to the Alabama Department of Revenue two-and-a-half months after the date your business was formed. Each return after that will be due at the same time as federal tax returns.
Maintaining an LLC requires you to keep up with various financial reporting requirements. These requirements can feel overwhelming, but they are critically important to make sure your business remains in good standing with both the state and the IRS.
The best way to handle these responsibilities is to consult with a professional, such as a tax advisor or lawyer, who can help you understand your obligations and keep you on schedule. You may want to hire an accountant to prepare necessary documents on your behalf and to help you get the most tax benefits possible.
Your local jurisdiction will almost certainly have ordinances and regulations that will affect your business. These may include:
You must investigate the specific requirements in your area, possibly including both city and county laws. The Alabama Department of Revenue provides a guide to help you find the requirements that affect you.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.