How to form your LLC in Alabama?

LLC in Alabama

The state of Alabama has one of the rapidly growing economies with the real gross domestic product being $213.26 billion in 2022. The state is home to over four hundred thousand businesses. Small business owners and first time entrepreneurs prefer to form an LLC in Alabama as the state provides important knowledge and resources required by such startups to achieve maximum growth while minimizing expenses. The state is also home to diverse industries right from aerospace manufacturing and aviation to the thriving bioscience sector (780 companies), cutting-edge research and technology sectors, metals manufacturing, and a strong automotive manufacturing sector.

What is an Alabama LLC?

A limited liability company (LLC) is a specific form of private limited company that has an extremely flexible business structure. This type of entity follows pass-through taxation and is also known as a hybrid legal entity. The hybrid status is due to the fact that as an LLC, it has specific characteristics of a traditional C Corporation as well as a partnership company. You can form an Alabama LLC online with ease and there are different types of limited liability company structures that you can choose from. They are:

• Single-Member LLC like Sole Proprietorships
• A series LLC
• Multi member managed LLC
• Manager-Managed LLC
• Foreign limited liability company

Benefits of forming an LLC in Alabama

There are several reasons why entrepreneurs prefer to register an Alabama LLC and one of the primary reasons is the various advantages this type of structure has over other business entities. Some of the advantages of a limited liability company are:

• Taxation – When you form an LLC in Alabama online, you will get to elect the type of taxation it follows. A limited-liability company can elect to be taxed as a C Corporation, partnership, sole proprietorship, or even an S corporation. This ability to elect taxation status provides a lot of flexibility.
• Liability protection – One of the most important benefits of forming an LLC is limited liability protection. This simply means that assets attributed to members or owners of this type of entity, cannot be seized for repayment of debt obligations.
• Flexibility of Ownership – One of the salient aspects of forming a limited liability company is that there are no restrictions on the type and number of owners that such an entity can have unlike in an S Corporation.
• Flexible profit distribution – If you form Alabama LLC online then this is another advantage you can enjoy. There is a flexibility in the way profits are distributed to the owners i.e., it need not be distributed equally.

Forming an LLC in Alabama

Alabama is a popular destination for first time business owners due to its favorable business and tax climate. The state has a reliable transportation infrastructure, dedicated and skilled workforce, and pro-business regulations. If you are planning to form an Alabama LLC then there are several processes involved for registration and operation of the said business. The processes mentioned below are not only relevant but will also help you to fulfill all state filing requirements including obtaining a business privilege license in Alabama.

1. Choose the Alabama LLC name

The first step towards forming a limited liability company in the state is identifying a name for your company and conducting an Alabama LLC name search. Choosing an LLC name is not an easy process even though you can use business name generator tools for this. It is important to ensure compliance with LLC naming requirements as governed by 2020 Code of Alabama
Title 10A – Alabama Business and Nonprofit Entities Code, Chapter 1 – General Provisions, Article 5 – Names of Entities; Registered Agents and Registered Officers. The naming guidelines in the state are:

• In order to form an Alabama LLC online, the chosen name should contain “limited liability company”, “limited company” or abbreviations like L.L.C or LLC pursuant to 2021 Code of Alabama – AL Code § 10A-1-5.06 (2014).
• The business name should be distinguishable from the names of any other business entity that exists in the records of the Secretary of State including foreign limited liability companies and corporations. This is possible through conducting an Alabama LLC name search also known as name availability search.
• It is important to note that reservation of certain names are prohibited pursuant to AL Code § 10A-1-5.12 (2021)

2. Choose Alabama registered agent

There is a specific process to form an LLC in Alabama and this includes filing of different types of documents. You will need to ensure correct information in the forms submitted for LLC registration. Simultaneously, you will also need to maintain compliance with all state laws. As a first time business owner or an entrepreneur, this process may look complicated and this is where a reputable Alabama LLC registered agent like IncParadise can provide meaningful assistance.

3. File Certificate of Formation

Once you have reserved a name after conducting an Alabama LLC name search, the next most important step is to register your company. You will be required to prepare and then submit a Certificate of Formation pursuant to AL Code § 10A-5A-2.01 (2022). You can choose to form an Alabama LLC online or the articles can be mailed to the office of the Alabama Secretary of State. The filing fee is $200. It is important to ensure proper information is provided in the registration document and is compliant with the state regulations and laws.

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4. Prepare the Alabama LLC operating agreement

One of the most important documents that needs to be created before or after you form an Alabama LLC is the operating agreement. It is a type of document where the terms of your limited liability company will be customized in accordance with the specific needs of each member. The operating agreement also outlines the functional and financial decision-making aspect within a structure. Whether you are planning to form an Alabama LLC online or offline, this form of legal document will help members of the said LLC in laying down the standard operating procedures. This document is not legally required or doesn’t have to be submitted with the state but it can play an important role in protecting the overall business operations. The LLC operating agreement should address key areas like:

• Organization and ownership
• Management and voting
• Profit and loss distribution
• Capital contribution
• Dissolution
• Future changes to the membership structure

5. Obtain EIN for your Alabama LLC

When planning to register an Alabama LLC, the most important aspect to consider is the tax structure. The filing of taxes is dependent on the type of business structure. The type of tax will also determine whether you need a Social Security number (SSN) to file taxes or an Employer Identification Number (EIN). The latter is also known as the Federal Employer Identification Number (FEIN) and is applicable for most businesses including a limited liability company. The EIN is a unique nine-digit number, which is assigned by the Internal Revenue Service (IRS) to different forms of businesses. You can apply for this number before or after filing registration papers of an LLC and a good Alabama LLC registered agent like IncParadise can assist you with the process.

6. Obtain necessary business licenses and permits

Alabama offers several benefits and advantages if you form an LLC in Alabama and this can vary from a low-tax environment to favorable business regulations and policies. Once you have registered your business the next step is to apply for business licenses and permits as they will help your company to become operational. Your company may require multiple licenses depending on your business activity. For example, Delicatessen shops may need to apply for a business privilege license in Alabama as well as a Food Service License. Let’s take a look at the various licenses and permits applicable in this state:

• Business Privilege License – This is a privilege license and is required by individuals, a company, shops, or a firm that is engaged in any business, profession, or occupation as mentioned in Title 40, Chapter 12, Code of Alabama 1975. The business privilege license in Alabama is normally issued by the License Commissioner or the county Probate Judge in the city or county where your LLC is located. The fee for this type of license will vary according to business activity and has to be renewed each year by October 31.
• Municipal Business License – If you form an Alabama LLC in a municipality that has passed a business license ordinance then you will need to check with the said municipality regarding the requirement of a license. The license would depend on your occupation and will be valid for operations within the city limits and its police jurisdiction. The issuance of this license is governed by the Municipal Business License Reform Act of 2006.
• Local Licensing – Apart from the business privilege license in Alabama, you may also need to apply for separate local licenses depending on the county or city your business is based in and the activity. If you want to start a food service establishment in a specific city or county like Baldwin then the Bureau of Environmental Services will be responsible for providing the permits or licenses post inspection of such establishments.

7. Open a business account for your Alabama LLC

Once you register an Alabama LLC, it becomes important to open and maintain a business account as it helps in keeping individual and business transactions and funds separate. There are several other benefits of opening a business checking account like providing additional protection and making bookkeeping manageable. A business account also makes it easier to navigate through the tax season by ensuring all your business transactions remain in one place.

8. File state tax return/Annual Report

Once you form an Alabama LLC online and obtain the necessary business licenses and permits, the next step is to ensure all annual state compliances are met. There are primarily two important annual requirements and they are:

• Annual Report – Alabama is one of the few states in the USA where a limited liability company is not required to file an annual report.
• LLC Taxes – Once you form an Alabama LLC, you may be required to file different types of taxes depending on the type of business or business activity. The most common is the Business Privilege Tax Return by March 15, each year. An LLC is a pass-through tax entity and hence personal income tax would be filed by owner or members. Apart from these, you may also be required to file sales and use tax with the Alabama Department of Revenue (ALDOR).

Know more about starting an Alabama LLC!

There is a process to form an LLC in Alabama and this consists of different documentation. You may have several questions pertaining to various aspects of the new LLC formation. Hence, we have created a special section of “Frequently Asked Questions” for addressing some of the queries that you may have as a first time entrepreneur.

Is Alabama a good state to form an LLC?

If you are thinking of establishing a startup in Alabama then it is a great decision. There are many reasons for choosing to form Alabama LLC online including the pro-business environment. Some of the reasons why it is beneficial to form a limited-liability company in this state are:

• The state has very competitive tax structures, which play a key role in decreasing the overall tax burden of LLC’s
• The transportation infrastructure is quite strong and includes a network of roads, airports, and inland waterways.
• The average cost of living in Alabama is much lower than some of the top states in the USA like New York, Florida, and California
• In terms of advanced business facilities, Alabama is ranked 14th in the nation
• There are good workforce development programs in the state that helps in building a pool of skilled workers
• A vibrant tech and innovation ecosystem exists in this state

How do I know if my Alabama LLC name is available?

A business name is extremely crucial for any new or existing company. Once you have chosen a name, it is essential to conduct an Alabama LLC name search. This process of checking name availability will help you to identify if the chosen name is already being used by any other company in the state. If your chosen name is available then you can reserve it and if it is not available then you will have to think of a new name and conduct the name search again.

How much does an LLC cost in Alabama?

The formation of an LLC in the state of Alabama will be governed by the 2020 Code of Alabama, Title 10 – Corporations, Partnerships, and Associations, Chapter 12 – Limited Liability Company Act. The initial cost to file an LLC in Alabama is $200. You will also need to draft an Alabama LLC operating agreement although it is not required to be submitted with the state. Apart from the initial cost, there will be costs attached to business licenses, name reservation, and hiring a registered agent among others.

Do I need a business license for my Alabama LLC?

Yes. If you are planning to transact in the state of Alabama then you will have to apply for single or multiple business licenses and permits. One of the important licenses required by domestic and foreign LLC’s is the business privilege license in Alabama. Apart from this, you may also need municipal licenses, and other permits based on location and activity. You can subscribe to our Business License Research Report service as it provides detailed information on several aspects of licensing in the state.

What is a business privilege license in Alabama?

The business privilege license in Alabama is one of the most important licenses that most companies transacting in the state require. This license is issued by the License Commission in the city or county and some companies may not require it depending on the business activity, vocation or occupation. For example: if you form an LLC in Alabama that sells tangible personal property through retail or wholesale then you will be required to apply for and obtain this license.

What taxes does an LLC pay in Alabama?

Once you form an online Alabama LLC, depending on the tax status you choose, you will be required to file business taxes in the state. Some of the applicable taxes are:

• Personal income tax for a pass-through entity
• Annual business privilege tax
• Alabama Sales and Use Tax
• LLC Payroll Taxes or Withholding tax
• Other miscellaneous taxes according to business activity like Oil & Gas Production Tax

Can I register a foreign LLC in Alabama?

Yes. The formation of a foreign limited liability company will be governed by the 2020 Code of Alabama, Title 10 – Corporations, Partnerships, and Associations, Chapter 12 – Limited Liability Company Act, Article 9 – Foreign Limited Liability Companies. You will be required to file the Application for Registration of foreign LLC along with a fee of $150. This process is known as the “Foreign LLC Qualification” and you will not be allowed to conduct business in the state without this registration.

How do I dissolve my Alabama LLC?

After you form an Alabama LLC online, there can be several reasons to discontinue the business. According to state laws, AL Code § 10-12-42 (2020), you will be required to file Articles of Dissolution if you want to wind up your business in this state. The fee for processing a dissolution is $100.

Ready to form an Alabama LLC?

There are different types of business structures that you can choose to form in the state of Alabama although one of the most popular structures is that of a limited liability company. An LLC has several advantages over other business structures and also provides tax benefits. If you want to form an Alabama LLC then IncParadise can assist you with the process of registration of your new business in the state.