If you’re planning to launch a business in Alabama, congratulations! You’re anticipating the excitement of crafting a business strategy, creating a brand, and finding your first customers. On the other hand, there are probably certain steps you’re not so enthusiastic about — like filling out official forms and figuring out your taxes.
At ZenBusiness. we understand this part of forming your business can be confusing. But until you put the paperwork behind you, you won’t be able to build the business of your dreams. For most new business owners, this means forming an Alabama limited liability company.
At ZenBusiness, we can make the process smoother and let you focus on what’s important — growing your business. Let’s take a closer look at forming an Alabama LLC and how we can help.
To show you how an Alabama LLC is created, we’ve broken down the formation process into five steps.
These steps are integral to registering your business with the state of Alabama. This means filing the right documents with the Secretary of State’s office, and also having the right tools to keep your business running smoothly.
There’s no need to feel overwhelmed by these requirements. At ZenBusiness, we offer a variety of formation and compliance services to help take some of the stress of forming a new business off of your plate.
Step 1: Name Your Alabama LLC
If you’ve already been brainstorming the perfect name for your business, there are a few things to keep in mind. First, you’ll need to comply with the state’s naming requirements. They are:
- 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 (e.g., “insurance” or “engineer” would require proof of specific licenses).
How can you tell if the name you’d like to use is already taken? To find out, search for your preferred name using the Secretary of State’s Business Entity Search tool. If you’re unfamiliar with these systems, never fear. Take a look at our guide to Alabama business entity searches and we’ll walk you through the process.
If you’ve found the right name but aren’t quite ready to officially form your Alabama LLC, you can reserve the name with the state for up to a year. If you need help, we have a business name reservation service that can handle it for you. As part of the service, we also check to see if your desired name is available.
When you’re pondering the right business name, it’s a good idea to to consider whether you can secure a matching domain name. We have a tool to help you do a preliminary domain name search, and our domain name registration service can help you secure the online name that will best serve your Alabama LLC.
If the name you pick for your LLC doesn’t quite convey the vision you have for your business, you can file a DBA, or “Doing Business As” application with the state. This allows you to operate your business under a name that more closely reflects the goals you have for your Alabama LLC, all while filing state formation and compliance documents under the official registered LLC name. This is another task we can take care of for you, through our Alabama DBA registration service.
Step 2: Appoint a Registered Agent in Alabama
If you’re starting a business for the first time, you may not be familiar with the term. 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 LLC.
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.). 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.
Thankfully, there’s an easy and affordable solution: You can hire a commercial registered agent service to perform this role for your LLC. ZenBusiness offers registered agent services in Alabama, offering the consistency and accountability you need. We’ll receive any documents on your behalf and scan them to our online portal, where you can review and respond to them instantly. Forget worrying about always being available: Let us take on that responsibility, allowing you to focus on growing your business.
Step 3: File an Alabama Certificate of Formation
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.
- The name of your new LLC as you reserved it (you’ll need to attach a copy of your Name Reservation Certificate).
- The name and address of your registered agent.
- The name of the person who prepared the form (either your name or someone else on your behalf).
In the past, starting an Alabama LLC required sending a copy of your applicated for a Certificate of Formation with the probate judge in the county where you’re starting your business. Thankfully, this requirement is now officially gone from Alabama law with the passage of Act 2020-73, which went into effect January 1st, 2021.
Filing official government documents like this can be intimidating and/or complicated for many people, which is why we’re here. With our business formation plans, our professionals handle the filing for you to make sure it’s done quickly and correctly the first time. If you do take advantage of our services, all of your LLC’s documents will be uploaded to your ZenBusiness dashboard, where you can keep it and other important paperwork digitally organized.
In addition, our business kits offer you an organized platform to make sure your operating agreement, member certificates, contracts, compliance checklists, transfer ledger, and other important documents are safely stored.
Finally, you need to supply an address for your new business. That can be unsettling for some business owners, especially those running their business from home. In instances where you’re not required to give the registered agent address or official principal address for your business, a virtual business address can come in handy. With our virtual business address service, we supply you with a physical street address where you can have your mail sent without divulging your real address to more people than necessary.
Step 4: Create an Alabama Operating Agreement
An operating agreements can be critical in helping LLCs succeed, both in the early stages of the business and throughout the company’s existence. In basic terms, this document lays out the rules by which the company will operate, including 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 an 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 agreements can help you and your new business:
- Operating agreements help substantiate your LLC as separate from your personal assets. This could come in handy if your business incurs debt or legal liabilities.
- Operating agreements can 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.
- Operating agreements can 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.
- Operating agreements can designate specific roles and ownership privileges and outline specific ownership stakes. Without one, all members are assumed to have equal ownership by default.
Moreover, without an operating agreement in place, your LLCs will be governed by the state’s default rules. These default rules may not reflect the reality of your business. If you’re unsure as to how to start creating an operating agreement for your Alabama LLC, we offer a customizable template to help get you started.
Step 5: Apply for an EIN
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 business partners or hope to employ anyone, you’ll need to get an EIN as soon as possible. And 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’ll need one to do business banking: Virtually any financial institution will require an EIN if you intend to open a bank account connected with your LLC.
- You’ll 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 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 IRS website, by mail, or by fax, but if you’re unfond of dealing with that particular government agency, we can get it for you. Our EIN service is quick and eliminates the hassle.
Once you’ve secured your tax ID numver, you’ll be able to open a business bank account. Having separate accounts for your business and your personal banking is critical not only for taxes, but for liability purposes. Mixing the two can not only make your taxes more difficult, but it could also be used against you if someone takes you to court to challenge whether you and your LLC are truly separate entities.
The good news is that we offer a discounted bank account for new businesses! It allows unlimited transactions, online banking, a debit card, and more. When you want to authorize others in your business to use the account, we offer a banking resolution template to simplify the process. And for further help managing your new business’s finances, try the ZenBusiness Money App. It can help you create invoices, receive payments, transfer money, and manage clients all in one place.
What are the benefits of an LLC in Alabama?
If you’re reading this guide, you may already be familiar with the benefits of the LLC business structure. But if you’re still learning various kinds of business entities, you might want to know more about LLCs’ advantages, both in Alabama and nationwide.
There’s a reason that roughly 90% of our customers decide to form LLCs: They offer an attractive mix of simplicity and protection. Whereas corporations are subject to many regulations, LLCs provide a more streamlined approach to being in business. At the same time, LLCs provide important legal separations between businesses and their owners.
Here are some key benefits that LLCs offer:
- Your personal assets are separate from your business: If your business incurs a debt, your personal wealth will be shielded from creditors.
- Your business’s legal liability is distinct from your personal liability: If your LLC is sued, you won’t personally be the target of a lawsuit or accountable for any judgment awarded
- You won’t be exposed to double taxation: Unlike corporations, LLCs typically don’t owe federal taxes as entities. Their members pay income tax on money earned from the business. Accordingly, LLC earnings are typically taxed just once at the federal level, rather than twice. That being said, Alabama LLCs do have to pay a business privilege tax to the state (more on that below).
- You’ll have far fewer management obligations: Corporations have to elect a board of directors, appoint officers, and comply with other regulations concerning how the business is run. LLCs are free to choose any management structure that suits them.
- You don’t have to do so much paperwork: Compared to corporations, LLCs have very minimal reporting and filing requirements. You can forget about complex bookkeeping and focus on more appealing aspects of your business.
As you can see, an LLC is a great business structure for many kinds of ventures.
How is an LLC taxed in Alabama?
As in any other state, Alabama businesses are subject to taxes at the federal, state, and local levels. First, 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.
However, you could also elect to file your company’s taxes as a corporation. Some business owners choose an S corp or C corp tax classification for their companies, for example, because doing so allows them to save money on self-employment taxes. However you choose to be taxed at the federal level, your business will likely need to pay taxes on more than just your income. Employment taxes are an important source of revenue for the federal government, and you’ll need to withhold money from employee paychecks to pay them. If you work for yourself, on the other hand, you have the self-employment tax to look forward to.
At the state level, Alabama LLCs are subject to something called the Alabama business privilege tax. Calculating your true tax burden can be difficult because the business privilege tax rate varies depending on your business’s “net worth.” Net worth represents a mix of assets, income, and liabilities and is calculated by completing this form, submitted annually. Newly launched LLCs must also complete an initial privilege tax return within two and a half months of being formed to indicate the entity’s initial assets.
Plus, your business’s nature may demand additional state taxation, such as a sales and use tax for retail companies. On top of that, cities and counties may charge you for doing business within their borders. If you’re unsure of what to pick, you can sign up for a free accounting consultation when you choose us for formation and compliance.
Alabama LLC FAQs
- What is the processing time to form my Alabama LLC?
Do I need to file my operating agreement with the state of Alabama?
Alabama does not require LLCs to file their operating agreements with the state.
What tax structure should I choose for my Alabama LLC?
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 Corp designation, your LLC will not have to pay state corporate taxes if you’re designated as an LLC or S Corp with the IRS. Instead, individual members will pay income tax on the money earned from the business. If you decide to have your LLC taxed as a C Corp, you would have to pay Alabama’s corporate tax, however.
Accordingly, the question of whether to file as an LLC or S corp or C corp 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 Corp or C corp could have tax benefits.
Which licenses and insurance are required for an LLC in Alabama?
The state of Alabama requires LLCs to procure business licenses, permits, and insurance before beginning operations. You can find specific licenses needed via the Alabama Department of Revenue’s site.
How do I transfer ownership of an LLC in Alabama?
The process of transferring ownership of your LLC should be clearly specified in the operating agreement you develop for your business. Protocols for adding and removing members and selling or transferring ownership can be articulated in this document, preventing conflict and unforeseen consequences.