How To Start An LLC In Alabama
Setting up an LLC in Alabama is quite like setting one up in any other state, but there are a few exceptions. Regardless, Alabama is still among the states that are quite popular among new businesses and entrepreneurs due to the incentives provided by the state that help accelerate business growth.
What is an LLC?
A limited liability company, or LLC, is a type of business initiative in the US that can be owned and run by one or more people, called simply the owners or the members of the LLC. This type of business model is increasingly becoming popular because of one vital benefit: it protects its members from accountability for any debts or liabilities related to the business. Such companies are hybrid in structure, meaning they combine the qualities of a corporation with those of a partnership or a sole proprietorship.
In Alabama, an LLC counts as a single type of business structure, but one that comes with several benefits, like significantly less paperwork during the registration process and numerous tax breaks. Members will also have to decide on one type of service their LLC will be providing, and all members should be appropriately licensed to provide these services in Alabama.
Advantages Of an LLC In Alabama
Every state offers its own benefits when it comes to setting up an LLC there, and so does Alabama. But perhaps one of the most compelling reasons attracting entrepreneurs to start an LLC in this state is the flexible taxing policies and regulations offered.
Abatement of use and sales tax
Businesses in Alabama, especially small and medium-sized ones, can apply for tax abatement depending on their eligibility. There is also a special incentive for new start-up companies that, after acquiring the necessary qualifications, they get an abatement on the 4% general state sales tax and the 1 and 0.5% state manufacturing machinery and equipment tax.
Furthermore, if the members of a business invest personal property in their company, as is often the case in LLCs, they can also achieve an abatement on property tax. The even better news is that this abatement can last up to 20 years.
Enterprise Zone Program
Alabama has designated zones reserved for industrial and enterprise activity, known as Enterprise Zones. Suppose you set up your LLC within one of these zones and continue to operate and expand it within that region. In that case, your company may be eligible for several tax benefits and incentives. Given your expansion in the Enterprise Zone, these advantages are applicable not only on the state level; your company may also qualify for local and non-tax incentives. Examples of such Enterprise Zones in Alabama are Greene, Winston, Monroe, and more.
If you are planning to set up your LLC in Alabama, you should look into the numerous tax benefits offered by the state. For example, if your company has 75 employees or less, you may be eligible to receive $1500 in Income Tax Credit. Similarly, suppose your business is working on certain specific approved projects that help in creating more employment opportunities in the state. In that case, you may receive 1.5% of the relevant investment as Tax Credit per year.
Formation benefits and ease of application
One of the benefits of forming an LLC in Alabama is that the names of the members are not required to file for the certificate of formation. One can simply apply for the certificate with their county’s probate judge without having to give details of their personal identification. The only requirement is that the applying entity file for the certificate in the county where the initial office of the applying LLC is physically located.
Any person, business entity, or legal body can carry out the filing process. This means that the members of an LLC can file their application for the certificate via any third-party body without having to come forward or even be physically present for the process.
The state of Alabama gives a lot of freedom to the owners of an LLC to decide how they wish to divide the company’s revenues among each other. They can choose how they want to customize their financial contributions in the LLC and how the profits, losses, and all income streams will be shared between them.
This way, each of the members has the flexibility to decide how they wish to mold their streams of income from the LLC and manage the risks of potential losses. All these decisions and choices can be easily listed in Alabama LLC’s operating agreement.
No unwanted partnerships
While forming an LLC in Alabama, the LLC members can safeguard their rights as owners by prohibiting other members from giving up shares to third parties. Even if such a prohibition is not listed in the operating agreement, and a member assigns their share to an external party, this neither means the dissolution of the LLC nor that the new shareholder will become a member of the company.
The new assignee will only be eligible for the financial share they now possess and can only become a member if all other members give written consent. Additionally, the assigner will no longer be a member of the LLC unless other members give written consent in certain cases, such as if they assigned their shares for creditor benefit or filed for bankruptcy.
Disadvantages Of an LLC In Alabama
The best part about forming an LLC in Alabama is that there are little to no downsides. Granted, there are disadvantages to setting up an LLC in any state, but in Alabama, the advantages far outweigh the disadvantages of the process. There is, however, a risk of the dissolution of the LLC in case one of the members passes away or the company declares bankruptcy.
Regardless of the numerous advantages of setting up an LLC in Alabama, there are certain general disadvantages that come with forming an LLC that one must always consider, such as formation and maintenance costs and dependence of all members for transfer or alteration of ownership of shares.
Business privilege tax
Alabama levies a business privilege tax on LLCs, which is based on your company’s net worth. The tax rates can range from $100 to $15,000, depending on the size of your business. This tax is unique to Alabama and can be a disadvantage if you’re comparing it to other states that don’t have such a tax.
Limited personal asset protection
While an LLC does offer personal asset protection for its members, it’s not absolute. There are situations in which a court can “pierce the corporate veil” and hold members personally liable for the LLC’s debts or actions. This risk can be minimized with proper documentation and by following all required formalities, but it’s still a potential downside to consider.
Complexity of regulations
Navigating the various rules and regulations around running an LLC can be challenging, especially for first-time business owners. You may need to consult with a lawyer or accountant to ensure you’re meeting all legal and tax requirements, which can be an additional cost.
How To Form An LLC In Alabama
The process of forming an LLC in Alabama is fairly easy to understand, albeit slightly lengthy. However, if all steps are followed correctly, it may be quite simple, and you may get through it without complications. Therefore, seeking legal help during the filing and registration procedures is also suggested to avoid confusion and mishaps. Below is the detailed procedure for applying to form an LLC in Alabama.
- Choose a unique name for your business
- Working with a Registered Agent
- File the Certificate of Formation
- Draft the Operating Agreement
- File the annual report and the state’s tax returns
- Meet other regulations and requirements
Choose a unique name for your business
This is the first and perhaps the most important step in your LLC’s formation. You need to select a unique business name for your company that is not used by any other company or organization, big or small, within the state. This research and the subsequent name reservation process need to be carried out before filing the formation application. Therefore, you should start working on it at least a month or two before the application process because you may not necessarily be able to use the first name you select for your LLC, and it may be rejected.
You can reserve a name for your LLC by sending a name reservation proposal to the Secretary of State. When this is done, the relevant authorities go through their databases to check the validity of your chosen name. You can carry out this process online or by filling out and sending the name reservation form to the Secretary’s office. To prevent any problems in the reservation process, it is better to search through available databases to check whether your choice is available for use.
The state requires you to use the words Limited Liability Company, LLC, or L.L.C. in your company’s name and that no words in the name should indicate a service or purpose for which your LLC is not registered.
You can also utilize a “trade name” in Alabama, which is different from the legal name your LLC is registered under. This means you can use this trade name, or DBA, which is short for “doing business as”, in your business dealings and other matters. You can do so by filling out the trade name registration form of the state. Although registration is not compulsory and has no legal rights benefits, it indicates to other parties that this name is in use in the state.
Work with a Registered Agent
Having a registered agent is mandatory for an LLC or other business initiative planning to set up in Alabama. This agent is responsible for helping with legal matters like accepting legal documents on behalf of the LLC in case the company is sued. This registered agent could be an individual resident of Alabama, a business entity located in the state, or a business entity not physically located in Alabama but having an office in the state. You can easily find an official list of approved registered agents on the internet.
File the Certificate of Formation
Also called the certificate of incorporation, this is the official application/filing process for an LLC that provides all significant information about your company and yourself to the relevant authorities. You can file for the certificate of formation for your LLC with the office of the Judge of Probate located in the county where the initial registered office of your LLC is situated. From the court, the application is forwarded to the Secretary of State.
Simultaneously, the filer is also provided an attested copy of the application. You can easily find the Probate Judge of your county on various authentic websites.
When filling out the application form, make sure to correctly include the following information: the name of the LLC, the name and address of the registered agent of your LLC, your choice of what type of LLC you are forming, e.g., series, professional, etc., the exact expected date when the LLC will become fully operational, along with a signature from the organizer or attorney. Along with the form, you will also have to submit a copy of the name reservation certificate obtained from the Secretary of State.
Draft the Operating Agreement
The operating document is essentially the constitution of an LLC since this is the contract drafted and signed by all members. This document consists of the laws and conditions governing the company. Operating agreements are not mandatory in Alabama, however. Still, it is highly recommended to formulate this document with your fellow members as it helps decide how the LLC will be run in the future.
The operating document lists the roles and responsibilities of all members, along with rules and articles regarding the management of the LLC. It also deals with financial matters like stakes, division of revenues, etc. If you and other members decide not to draft an operating agreement, then your LLC will be run according to the governing principles of the state laws regarding LLCs.
File the annual report and the state’s tax returns
The limited liability companies in Alabama are required to file the annual report combined with the Business Privilege Tax Return. Additionally, all LLCs need to pay a fixed tax of at least $100 each year. If your LLC participates in sell-and-purchase activities or provides employment to people, you will also have to register with the state’s Department of Revenue.
Meet other regulations and requirements
Once your application for the certificate of formation has been accepted, and your LLC is official, you just have to comply with the state laws surrounding businesses and corporations and tax rules and regulations.
If your LLC consists of more than one member, you will have to obtain an Employer Identification Number from the IRS. In the case of a single-member LLC that is required to file a distinctive tax return, you will also have to obtain the Employer Identification Number (EIN). The application for filing for the EIN is free, simple to follow, and can easily be completed online.
Your LLC may also have to obtain a business license depending on the type of business you are and where in the state you are located. In some cases, you may also have to obtain certain local business licenses. Whether you need to take these steps or not, and to understand how to carry them out, it is best to consult your county’s probate office or licensing authorities.
Maintaining detailed and accurate records of your LLC in Alabama is also crucial. These records should be stored in the primary office of the LLC and must always be available for all members to view. These records include the full names and addresses of all the members and even the managers, the state, federal, and local income tax return statements of the LLC for the past three years, multiple copies of the original operating agreement, along with any alterations and amendments made in it, multiple copies of all financial statements and documents of the LLC for the past three or more years, and copies of any powers of attorney, et cetera.
Types of LLC
Which type of LLC is ideal for me?
In Alabama, there are a few different types of LLCs you can form, depending on your needs and preferences. Here’s a quick rundown of your options:
- Single-Member LLC: This is a popular choice for solo entrepreneurs, as it allows you to run your business without any additional partners or members. With a single-member LLC, you’ll be the only person responsible for making decisions and managing the company. This structure provides personal asset protection and simplified tax filing, as you can report your income and expenses on your individual tax return.
- Multi-Member LLC: If you plan on having multiple owners (members) in your business, a multi-member LLC is the way to go. This structure allows for more flexibility in terms of management and decision-making. You’ll need to draft an operating agreement outlining how the LLC will be managed and how profits and losses will be distributed among the members. Keep in mind that each member will be responsible for paying taxes on their share of the profits.
- Manager-Managed LLC: In this type of LLC, the members appoint one or more managers to handle the day-to-day operations and decision-making for the business. The managers can be members themselves or external hires. This structure can be helpful if the members want to be more hands-off or if the business requires specialized knowledge or experience to manage.
- Member-Managed LLC: Unlike the manager-managed LLC, a member-managed LLC involves all members actively participating in the daily operations and decision-making of the company. This can be a suitable option if you want a more collaborative approach to running your business.
- Series LLC: A series LLC is a unique structure that allows you to create separate “series” or divisions within the LLC, each with its own assets, liabilities, and operations. This can be beneficial if you want to operate multiple businesses under one umbrella or segregate different aspects of your business for liability protection. However, it’s worth noting that not all states recognize series LLCs, which could cause complications if you plan to do business outside of Alabama.
When choosing the right type of LLC for your business, consider factors like the size of your operation, the number of members involved, and your desired level of management involvement. It’s always a good idea to consult with legal and financial professionals to help you make the best decision for your specific situation.
Applicable LLC Taxes In Alabama
Your LLC will have to file the annual report for taxing purposes in Alabama with the Department of Revenue. This report will cost $10 to file for domestic and international LLCs registered in the state. You will have to pay the annual Business Franchise Tax (BFT), which can range anywhere from $0.25 to $1.75 for every $1000 of your LLC’s net worth in that taxing year.
The minimum BFT to be paid by any business is $100, which can go as high as $3 million per year for larger institutions. Furthermore, you will also have to pay income, privileges, and sales taxes, but the percentages of these taxes vary yearly.
Costs Of Forming an LLC In Alabama
When filing for an LLC in Alabama, you may have to deal with various costs for various steps in the process. Therefore, it is better to set aside a budget for the registration procedure and keep track of your finances efficiently. It also helps to research these costs beforehand to avoid unwanted surprises when the process is underway.
The following are the costs you will have to pay to form an LLC in Alabama:
Alabama LLC formation fee
Name reservation fee (optional)
Registered agent fee (annual)
Alabama annual report fee
Business privilege tax (annual, min)
Professional service fees
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