How to Start an LLC in Alabama

These six steps will show you how to start an LLC in Alabama and are integral to registering your LLC with the Yellowhammer State. This means filing the right documents with the Alabama Secretary of State’s office, in addition to having the right tools to keep your business running smoothly.

1. Name your Alabama LLC
2. Appoint a registered agent in Alabama
3. File an Alabama Certificate of Formation
4. Create an Alabama operating agreement
5. Apply for an EIN
6. Get the licenses and permits your business needs

An Alabama LLC needs to adhere to the following requirements:

• Your name must include the words “Limited Liability Company” or the abbreviations “LLC” or “L.L.C.”
• Your name must not be in use by another business in the state of Alabama.
• Some words require special permission to use (for example, “insurance” or “engineer” would require proof of specific licenses).

How can you tell if the name you’d like to use for your LLC is already taken? To find out, search for your preferred name using the Secretary of State’s Business Entity Search tool.

Submit a Name Reservation Request Form for your LLC in Alabama

Unlike other states, Alabama requires you to submit a “Name Reservation Request Form for Domestic Entities” with your Certificate of Formation, the official paperwork that creates your LLC in AL. The Name Reservation Request Form must include:

• The name and address of the applicant
• The name it wants to reserve for its exclusive use
• A signature of the applicant or their agent
• A filing fee payment

You can file this application by hand delivery, by mail, or online.

If you’ve found the right name but aren’t quite ready to officially form your Alabama LLC, you can go ahead and submit that name reservation form prior to filing the Certificate of Formation. This will reserve the name with the state for up to a year.

Previously, Alabama forced new businesses to file this name reservation form with the state a few weeks before even forming their business. However, as of 2021, this form can be submitted along with your Certificate of Formation instead of submitting it ahead of time.

Naming an Alabama Professional LLC (PLLC)

In Alabama, licensed professionals like doctors or lawyers can organize as a PLLC, an LLC that provides professional services while still enjoying liability protections and complying with licensing requirements. Most of the process for starting a PLLC looks very similar to a regular LLC; that said, there are a couple nuances to address. The business name for the PLLC is one of them.

For starters, you can choose to use the designator “PLLC” or “professional limited liability company if you wish, but you aren’t required to. The more important consideration is ensuring that you’re complying with any naming requirements enacted by your industry’s regulatory board. These requirements can vary, so please consult with your licensing agency to ensure that your PLLC name complies with all regulations for your industry.

Filing a DBA in Alabama

If the name you pick for your LLC doesn’t always convey the vision you have for your business, you can file an Alabama DBA, or “doing business as” name application with the state. This allows you to operate your business under a name other than the LLC’s official name, all while filing state formation and compliance documents under the official registered LLC name.

If you’re starting a business for the first time, you may not be familiar with the term “registered agent.” The state of Alabama requires appointing and maintaining a registered agent, who can be a person or business entity that accepts service of process on behalf of your Alabama limited liability company.

Because of the nature of their role, registered agents need a physical address in the state of Alabama (a P.O. box won’t work). This location is referred to as your “registered office.” Additionally, your Alabama registered agent must be available to receive official paperwork at that address during standard business hours (Monday to Friday, 9 a.m. to 5 p.m.).

Why is a registered agent so important?

The registered agent role is crucial because the agent is the one who will accept service of process (notice about a lawsuit) and some other state communications on your business’s behalf. By requiring every business to have a registered agent, the state guarantees that they have a reliable person to deliver mail to when they need to. 

The registered agent requirement also helps protect business owners, helping ensure that owners always know if there’s a case against them. This gives them the opportunity to defend themselves in court and get the most favorable settlement they can (or potentially even settle out of court, depending on the circumstances).

Being your own registered agent

Many business owners assume they will serve as their own registered agent, using their business location as the registered address. Unfortunately, there are several reasons this choice might not prove advantageous in the long run:

• If you’re sued, you’ll be served paperwork at your place of business or your house. This could create embarrassment in front of your employees and customers.
• You’ll be required to stay at your registered office during standard business hours. This can be a tricky requirement if you plan to travel for work, let alone take a long vacation at any time in the future. Even the occasional sick day could cause a problem.

When forming an LLC in Alabama, one document makes your business official, a Certificate of Formation. Of all the red tape you’ll have to overcome, this is the paperwork that matters most.

Your Certificate of Formation needs to include the following:

• Name of your new LLC (be sure to attach the Name Reservation Certificate we discussed in Step 1).
• The name and address of your registered agent.
• Certify that your LLC has at least one member. Owners of LLCs are called members. Your LLC has to have at least one member when you form it, and you have to certify on your LLC’s Certificate of Formation that there is at least one member.
• Select the type of LLC you’re forming. There are standard LLCs, and there are special categories of LLCs, such as professional LLCs (for members who want to provide professional services through their business venture); series LLCs (for LLCs that own multiple business assets and don’t want liabilities connected to one group of assets under the LLC to affect other groups of assets under the LLC); and non-profit LLCs. Forming one of these LLCs usually requires additional paperwork and compliance with additional rules.
• Choose a filing date. By default, the effective date of your LLC is whatever day you file the Certificate of Formation. If that’s too soon, you can delay your LLC’s effective date by up to 90 days after filing. You must include the delayed effective/filing date and time that you want on the Certificate of Formation.
• Give the name of the person who prepared the form (either your name or someone else on your behalf).
• Attach any needed Alabama statements. Forming non-profit, professional, and series LLCs often requires you to adhere to additional rules and submit additional paperwork with a Certificate of Formation. For instance, members of a series LLC must submit a Statement of Limitation on Liabilities of Series with its Certificate of Formation. It’s best to consult with a legal professional regarding what additional paperwork you might need to file to start the kind of LLC you want.

In the past, starting an Alabama LLC required you to send a copy of your application to both the business entities division and your county probate judge. That requirement no longer exists.

What is the processing time to form my Alabama LLC?

The state completely revamped it’s business entity submission and approval process a few years ago with the goal of reducing its seven-month processing timeline. Now, you can expect your filings to be approved or rejected in a few business days. The state also allows expedited filing if you’re in a time crunch.

An operating agreement can be critical in helping LLCs succeed, both in the early stages of the business and throughout its existence. In basic terms, this document lays out the rules by which the company will operate, including LLC members, management procedures, and the roles and responsibilities of specific members.

Alabama does not ask new LLCs to submit their operating agreements to the state. But having a comprehensive operating agreement for your Alabama LLC can be extremely helpful, especially when changes and challenges arise.

This is true even if you’re the only member of the LLC, positioning your new business for sustained success. Here are just a few ways that an operating agreement can help you and your new business:

• Help substantiate your LLC as separate from your personal assets. This could come in handy if your business incurs debt or legal liabilities.
• Prevent and resolve conflict among LLC members by clearly specifying how decisions will be reached in the event of disagreement. In the absence of these clear rules, arguments can drag on destructively.
• Set clear protocols for adding or removing members. If someone wants to leave the business or a new partner wants in, you’ll have a fair process in place.
• Designate specific roles and ownership privileges and outline specific ownership stakes. Without one, all members are assumed to have equal ownership by default.

How to Write an Operating Agreement

While every company’s operating agreement (and how it’s written) will look different, here are some of the essentials you may want to include: 

• The management structure: member-managed vs. manager-managed
• How major decisions will be made (multi-member LLCs)
• Distribution of profits (how and when)
• Procedure to add or remove members
• How dissolution could occur

Of course, this isn’t an exhaustive list. Your operating agreement should fit the needs of your unique LLC.

While you’ve filled out plenty of paperwork for Alabama’s government, you’ll probably still need to register your business with the federal government. The Internal Revenue Service (IRS) has a numeric system for tracking business entities, creating ID numbers for companies to use for tax purposes.

This nine-digit number is called an Employer Identification Number (EIN), and you’ll more than likely need one, even if your LLC is single-member. But if you have other members (owners) in your LLC or hope to employ anyone, you’ll need to get an EIN as soon as possible.

Even if you don’t technically need an EIN to meet your tax obligations, it could be a good idea to get one for the following reasons:

• You may need one to do business banking: Most financial institutions will require an EIN if you intend to open a bank account connected with your LLC.
• You may need one to obtain financing: If you ever need a business loan or hope to take on outside investment, you’ll have to have an EIN to receive any capital.
• EINs can help prevent identity theft: If you don’t have an EIN for your business, you’ll need to provide your own Social Security number instead. Putting your Social Security number on a ton of forms could prove problematic.

You can get your Alabama LLC’s EIN through the Internal Revenue Service website, by mail, or by fax.

Your LLC will need at least one license to operate compliantly, but it could need even more. Unfortunately, this step isn’t quite as simple as saying, “File this form with the Alabama Secretary of State.” For this step, you’ll need to dig in and do some research.

For starters, some LLCs need to get federal licenses. For example, suppose you want to craft the perfect vodka and rum for a Yellowhammer cocktail. In that case, you’d need to get a license from the Alcohol and Tobacco Tax and Trade Bureau since you’d be manufacturing and selling alcohol. Meanwhile, aviation businesses would need to get a license from the Federal Aviation Administration. If your LLC involves a heavily regulated activity, there’s a good chance you’ll need a federal license, but it’s your responsibility to research and know for sure. 

Next, you’ll have to check state-level licenses. Alabama requires all businesses to get a business privilege license. This is a state-level license, but you’ll actually apply for it with the probate judge in your county. You’ll also likely need to get a tax account number from the Department of Revenue so you can collect and pay sales taxes compliantly. 

Local licenses are another important category to cover. Alabama municipalities are allowed to add their own licensing requirements, including general licenses and industry-specific ones. For example, Birmingham requires licenses for street vendors, dance halls, and even special events like craft fairs. Meanwhile, Montgomery offers two types of city business licenses: one for businesses with a commercial address and another for businesses without a physical location (including home-based businesses). There’s a good chance your city or county (or both) will have similar requirements.

You may also need to get zoning permits for your location. Similarly, if you’re working out of your home, you may be required to get a home occupation permit. Ultimately, it’s your responsibility to research your local requirements.

Last but not least, you’ll need to research licenses related to your industry or profession. A wide variety of professions need to get licenses from their industry’s regulatory board in Alabama. For example, dentists need to get a license from the Board of Dental Examiners. Engineers need a license from the Board for Engineers and Land Surveyors. Contractors need a license from the General Contractors Board. Restaurants need to get health department permits, state licenses for serving alcohol, and more. And the list could go on. 

Long story short: you’ll need to do plenty of research to ensure you get all of the licenses that apply to your business — your unique industry, services, and business location. 

Licensing as a Professional LLC

Licensing is extremely important for a PLLC in Alabama. It’s your responsibility to ensure that everyone who offers your company’s professional service is appropriately licensed at all times. But remember that these professional licensing requirements don’t overwrite your other state and local licensing requirements. You’ll still need to get those licenses, too. 

After forming your LLC in Alabama, your work isn’t quite finished. There are a few additional steps to complete to help ensure your business is fully operational and compliant. These steps are crucial to help set up your business for success today and into the future.

Opening a Business Bank Account

Every LLC needs its own bank account to help keep business assets separate from personal assets. Applying for an account is usually relatively straightforward. But be prepared to provide specific documentation requested by your bank, such as your EIN, your Certificate of Formation, your operating agreement, or even a copy of your business plan.

Setting Up an Accounting System

Implementing a robust accounting system is key to managing your finances effectively, preparing for tax season, and making informed business decisions. There are a variety of tools available to you, from a simple spreadsheet to bookkeeping software or a streamlined app. 

Filing Your Annual Report

It’s not uncommon for states to require LLCs to file an annual report, and Alabama is no exception. But in Alabama, the “annual report” is actually the annual Business Privilege Tax (BPT) return. To stay in good standing, you’ll need to file this tax return every year. The BPT due date matches your federal returns, so you can handle it at tax time. The rate ranges between $0.25 to $1.75 per $1,000 of net worth for your business, with a minimum tax of $50.

Staying Informed About Ongoing Legal and Tax Requirements

Regularly updating yourself on legal and tax obligations is vital to ensure your LLC remains compliant with state and federal laws. State laws and tax policies can change over time, and it’s your responsibility to stay informed and adapt. 

For this reason, many small business owners choose to consult with a state business attorney or CPA regularly to get customized, updated guidance for their LLC’s unique circumstances. 

In Alabama, all business entities (including LLCs) are subject to the business privilege tax mentioned above. The rate you pay is determined by your business’s net worth as computed using the state’s formula, with a minimum payment of $100 and a maximum of $15,000 (except for certain financial institutions). The tax structure you choose won’t affect how much this tax will cost you.

Additionally, because Alabama recognizes the federal S corporation designation, your LLC will not have to pay state corporate taxes if you’re designated as an LLC or S corporation with the IRS. Instead, only individual members will pay income tax on the money earned from the business. If you decide to have your LLC taxed as a C corporation, your LLC would have to pay Alabama’s corporate tax, however.

Accordingly, the question of whether to file as an LLC or S corporation or C corporation really depends on which will reduce your federal tax burden. While the default designation with the IRS would be a disregarded entity or partnership (depending on whether you have more than one member), filing as an S corporation or C corporation could have tax benefits.

You have some decisions to make about how the federal government will tax your LLC. If you’re the only member of the LLC, its default tax status with the IRS will be a “disregarded entity,” meaning you’ll pay personal income tax on the money you earn. If you have partners, your LLC will be regarded as a “partnership” by default: each member will pay income tax on their share of the profits. In both cases, the business itself doesn’t pay federal income tax.

However, you could also elect to file your company’s taxes as a corporation. Some owners of larger LLCs choose an S corp or C corp tax classification for their companies, for example, because doing so could allow them to save money on self-employment taxes or provide a wider range of deductions. A tax professional can help you determine what’s best for your LLC.

Your LLC will also likely need to address employment taxes, self-employment taxes, and more. Then, on the state level, you’ll need to pay the Alabama business privilege tax, sales tax, local business taxes, and more. Taxes can be pretty complicated, so we highly recommend consulting with a state tax attorney.

Before starting the dissolution process, the members of an LLC should consult the dissolution process laid out in the operating agreement. For the subsequent steps, please refer to our Alabama business dissolution guide.

An Alabama LLC is a popular business entity choice for many small business owners because the structure presents many advantages. But there are disadvantages, too. Let’s discuss the pros and cons of an LLC in Alabama. 

Advantages

An Alabama LLC presents a lot of advantages. 

Limited Liability Protection

An LLC is a separate legal entity that’s distinct from its owners. Thanks to that separation, your personal assets (like your home, car, and savings) are usually shielded from business debts and liabilities. In case of business troubles, your personal property usually remains protected. 

Tax Flexibility

LLCs in Alabama can choose how they are taxed, potentially lowering tax burdens. By default, they’re subject to pass-through taxation, avoiding the double taxation faced by corporations. They can also elect C corporation or S corporation tax status, which (in certain cases) can also lead to tax savings. With an LLC, you have a choice. 

Beyond that, Alabama also has a pretty favorable tax climate. The business privilege taxes are pretty manageable, and the personal tax rates and corporate income tax rates aren’t bad, either. Even property taxes are some of the lowest in the country. 

Operational Flexibility

LLCs have fewer formalities and compliance requirements than corporations, making them easier to manage and operate. For example, an LLC isn’t required to draft and adhere to bylaws, hold shareholder meetings and a meeting for the board of directors, or publish annual reports for its shareholders. 

There is a requirement to file an annual BPT (your annual report), maintain your licenses, and pay other taxes. But compared to the annual requirements for corporations, these are quite simple.

Disadvantages

An LLC isn’t without its drawbacks, however. 

Compliance Costs and Complexities

Maintaining an LLC in Alabama is easier than maintaining a corporation, but it’s more complicated than a sole proprietorship or general partnership. Initial registration can be expensive for entrepreneurs on a budget. There are also annual requirements like the business privilege tax.

Challenges for Raising Capital

LLCs might find it harder to raise capital as they cannot issue stock like corporations. Investors and venture capitalists also tend to be more hesitant to invest in LLCs. There are still options like grants and loans, but for some entrepreneurs, these capital challenges can be a significant drawback.

Risk of Piercing the Corporate Veil

The personal asset protection of an LLC is a significant advantage, but it isn’t all-powerful. If an LLC fails to maintain proper formalities, its liability protection can be compromised, exposing the owners’ personal assets to risk.

The state fees for forming an Alabama LLC can range from around $200 to $225, depending on a variety of factors. Note that fees change over time, so check the Alabama Secretary of State website for the most recent fee schedule. Every business will have different costs and filing fees, but here are the most common ones you can expect:

• Certificate of Formation: $200
• BPT: minimum of $50, typically maxes at $15,000 for most business entities
• Business Name Reservation: $25
• Business licenses and permits: varies depending on industry

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.

ZenBusiness is a financial technology company and is not an FDIC-insured bank. Banking services provided by Thread Bank, Member FDIC. FDIC deposit insurance covers the failure of an insured bank. The ZenBusiness Visa (or Mastercard) debit card is issued by Thread Bank, Member FDIC, pursuant to a license from Visa U.S.A. Inc. (or Mastercard U.S.A. Inc.) and may be used anywhere Visa (or Mastercard) cards are accepted. Certain conditions must be satisfied for pass-through deposit insurance coverage to apply.

Your deposits qualify for up to $3,000,000 in FDIC insurance coverage when placed at program banks in the Thread Bank deposit sweep program. Your deposits at each program bank become eligible for FDIC insurance up to $250,000, inclusive of any other deposits you may already hold at the bank in the same ownership capacity. You can access the terms and conditions of the sweep program at https://thread.bank/sweep-disclosure/ and a list of program banks at https://thread.bank/program-banks/. Please contact customerservice@thread.bank with questions on the sweep program. Pass-through insurance coverage is subject to conditions.