Key Takeaways

  • An LLC in Alabama provides limited liability protection while allowing pass-through taxation.
  • Business owners must reserve a name with the Secretary of State before filing formation documents.
  • Alabama requires filing a Certificate of Formation and paying a Business Privilege Tax each year.
  • You must appoint an Alabama registered agent for service of process.
  • LLCs should also obtain an EIN, draft an operating agreement, and comply with state tax obligations.
  • Foreign LLCs doing business in Alabama must register with the Secretary of State before operating.

When running an LLC, Alabama has certain procedures that must be followed. Here are the steps to follow to successfully create and run an LLC.

Preparing to Create Your Alabama LLC

A limited liability company, also known as an LLC, is a type of business that reduces the owners' financial liability. The owners of the LLC, also known as members, won't be personally liable for any debts or lawsuits that the company incurs. If you want to form an LLC, it's smart to talk with a tax professional to make sure the proper steps are followed.

An LLC has certain tax considerations. The owners will report any income from the LLC on their own tax returns and will need to pay self-employment taxes. A tax professional can tell a company if an LLC is the best option for them.

Single-member LLCs will put any profits and losses on the Schedule C, and income will be reported on Form 1040. If there are multiple members in an LLC, income will be split between all members on IRS Form 1065. This will be reported on Form 1040 as individual income.

Taxes will not be automatically be deducted from a member's paycheck. Cash draws can be taken from the business or employees pay themselves wages, but self-employment taxes will need to be calculated and paid separately. Self-employment taxes will be reported on IRS Schedule SE. It's smart to budget approximately 15 percent of the wages employees pay to themselves as their self-employment tax.

It's required that every employee pays their self-employment taxes to contribute to disability and Social Security. If the employee has not paid enough in self-employment taxes and he or she gets injured, they might not be eligible for Social Security Disability insurance.

File Your Alabama Certificate of Formation

Once your business name is reserved, you must file a Certificate of Formation with the Alabama Secretary of State to legally create your LLC. The filing can be completed online through the Secretary of State’s website or by mail.

Key details included in the Certificate of Formation are:

  • The LLC’s official name (matching the reserved name)
  • The principal business address
  • The registered agent’s name and street address in Alabama
  • Whether the LLC is member-managed or manager-managed
  • The effective date of formation (if not immediate)

The filing fee is typically $200 for online submissions or $100–$150 by mail, depending on the county probate office. After approval, your LLC officially exists under Alabama law.

You should also keep a stamped copy of your Certificate of Formation for your records and for opening a business bank account.

Name Your Company

LLC naming requirements can be confusing. The easiest way to make sure your LLC name will be approved is to make it stand out from other local businesses and have certain required words. In addition, certain words are restricted without extra paperwork, such as attorney, bank, and university. In order to use these words, a licensed professional, such as a lawyer or doctor, must be a member of the LLC. Some words are strictly prohibited, such as secret service, FBI, and treasury. This is because they would cause the public to confuse the LLC with a state or federal agency.

Once a name has been selected, it must be reserved by filling out the name reservation request through the mail or online with the Alabama Secretary of State.

The steps to complete the name reservation request are as follows:

  • Select "name reservation."
  • Choose "non-subscriber" in the middle of the page to finish the form.
  • Pay the fee of $28.

To mail the form, download the form in PDF version and follow the listed instructions. It costs $10 to mail in the name reservation form in Alabama. The company should verify that the name of the LLC that they want is available so they can reserve it. Even if they don't plan to make their website soon, they should buy a domain name now so no one else can get it.

Register for an Alabama Business Privilege Tax

Every Alabama LLC must pay the Business Privilege Tax (BPT) annually. This tax is based on the company’s net worth and must be filed with the Alabama Department of Revenue within 2.5 months of formation and by April 15 each year thereafter.

The initial return is known as the Business Privilege Tax Return and Annual Report (Form PPT). Failing to pay this tax or file on time can result in penalties and loss of good standing with the state.

In addition to the BPT, Alabama LLCs may need to register for state sales tax, employer withholding, or business licenses depending on their operations.

Identify the LLC Members

One person can be a member of the limited liability company. It's not necessary to have a partner to set up an LLC in Alabama. However, if there are multiple partners, they need to agree on how the expenses and profits will be split, what the percentage of ownership will be, and other applicable duties.

Every member will need to be responsible for the income from the LLC on their taxes. No one should be made a "ceremonial" member. The only members are those who have a direct claim in the business.

Create an Alabama LLC Operating Agreement

While not required by Alabama law, drafting an Operating Agreement is strongly recommended. This internal document outlines the rights, duties, and ownership structure of each member.

A well-drafted Operating Agreement should include:

  • Ownership percentages and capital contributions
  • Voting rights and management structure
  • Procedures for adding or removing members
  • Profit and loss distribution
  • Steps for dissolution or sale of the business

Having a written Operating Agreement helps prevent disputes and reinforces your LLC’s limited liability status if legal issues arise.

Choose a Registered Agent

A registered agent is defined as a business or person who will send out and receive any legal papers on the LLC's behalf. These papers include state filings and service of process of legal action in the event that the LLC is sued. The registered agent needs to be a resident of a corporation who has been authorized to do business in Alabama or a resident of Alabama.

Obtain an EIN and Open a Business Bank Account

After forming your LLC Alabama requires, you must obtain an Employer Identification Number (EIN) from the IRS. This nine-digit number is used for federal tax filing, hiring employees, and opening a business bank account.

Opening a dedicated business bank account helps keep personal and business finances separate—an essential step to maintain limited liability protection. Most banks will require your EIN, Certificate of Formation, and Operating Agreement before opening the account.

You should also keep accurate accounting records and consider consulting a tax professional for guidance on Alabama’s business filing requirements.

Maintain Your Alabama LLC

To keep your LLC in good standing, you must meet several ongoing requirements:

  • Annual Business Privilege Tax: File and pay yearly with the Alabama Department of Revenue.
  • Registered Agent: Maintain a valid registered agent in the state.
  • Business Licenses: Renew any required state or local permits.
  • Good Standing Certificate: You may need to request a Certificate of Compliance when applying for financing or expanding your business.

Failure to meet these obligations could result in administrative dissolution or loss of limited liability protections.

Frequently Asked Questions

1. How much does it cost to start an LLC in Alabama?

It typically costs $200 to file online or around $150 by mail, depending on the county. You must also pay a $28 name reservation fee before filing.

2. Is an operating agreement required in Alabama?

No, Alabama law does not require one, but it’s strongly recommended to prevent member disputes and clarify ownership rights.

3. How long does it take to form an LLC in Alabama?

Online filings are usually approved within a few business days, while mailed filings can take one to two weeks, depending on the county office.

4. What is the Alabama Business Privilege Tax?

It’s an annual state tax based on the LLC’s net worth, due within 2.5 months of formation and by April 15 each subsequent year.

5. Can a non-resident form an LLC in Alabama?

Yes, but non-residents must appoint a registered agent who resides in Alabama or is authorized to do business there.

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