Do you want to form a limited partnership (LP) in Alabama, but you’re not familiar with the formation process?
A limited partnership can be a great alternative to a general partnership, but the LP is definitely more difficult to form compared to the more casual nature of the general partnership. In this guide, we’ll discuss all the crucial details of forming this business type in Alabama.
There are several significant differences between the general partnership and the limited partnership (LP), starting with the roles of the partners themselves. With a general partnership, the partners split profits evenly and take equal responsibility when it comes to liability ― general partners are personally liable for the company’s debts and settlements.
With a limited partnership (not to be confused with the LLC), there is at least one general partner and one limited partner, which is the term for a partner that does not have managerial responsibilities, and their liability is limited to the amount of money they invested in the partnership.
Sometimes, you’ll hear limited partners referred to as “silent partners” due to their lack of direct involvement in the day-to-day operations of the company.
Another major difference is that the general partnership is not a formal business structure, which means you don’t even need to file formation documents with the state of Alabama, or pay any sort of formation fee. The general partnership is simply formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the Alabama state government, and there is also a formation fee involved.
Whereas the state of Alabama allows general partnerships to operate under the individual names of the partners, that is not the case for limited partnerships, which must have a distinct business name.
Your limited partnership’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
The state of Alabama requires that all limited partnerships include the phrase “Limited Partnership,” the word “limited,” or the abbreviations “LP,” “L.P.,” or “Ltd.” in their official business name. In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a realtor, put the phrase “real estate” in your LP name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your limited partnership’s name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LP is to not get too attached to any one business name until you have either reserved the name with the state of Alabama, or you’ve officially formed your business.
Alabama’s name registration process is rather straightforward. To begin, you can use the Secretary of State’s website to run a business name availability search, which will allow you to determine whether your desired business name is available. Then, if you are ready to form your LP, you can file under your desired name, but if you’re not ready to file, then you can reserve your desired name for a year through the Secretary of State’s office.
Every limited partnership in Alabama is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Alabama Secretary of State,
A registered agent is an agent of the entity on which may be served any process, notice, or demand required or permitted by law to be served on the entity. A registered agent may be an individual who is a resident of this state; or a domestic entity or a foreign entity that is registered to do business in this state; and must maintain a business office at the same address as the entity’s registered office.”
Without a registered agent in Alabama, you could lose your good standing and the state also has the right to dissolve your LP if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
At the end of the day, we recommend designating a registered agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record.
At this point, it’s time to legally form your new limited partnership.
To begin this process, you will need to file a Certificate of Limited Partnership with the Alabama Secretary of State’s office, which officially creates your LP. The form contains the following information:
You may file a Certificate of Limited Partnership by printing and filling out a PDF version. Be sure to include two copies when you send your completed form to the the Probate County Judge.
Cost to Form an LP: The state of Alabama charges a filing fee of $100 (along with any county probate fees) to form a limited partnership.
Processing Time: After you file your Certificate of Limited Partnership, it will be processed within 10 business days by the County Probate Judge and the Alabama Secretary of State’s office.
While not legally required by the state of Alabama, a limited partnership agreement outlines some of the key operating principles of the business. Even though you don’t have to submit it to the state to form your LP, it’s still a vital document that describes the exact nature of the agreement between the general partners and limited partners.
The information included in a limited partnership agreement does vary depending on the nature of your business, the size of your company, and some other variables. In general, it’s good to get the following information down in writing:
Limited partnerships require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LP functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LP for free through the IRS.
Alabama does not require LPs to pay corporate income tax, but it does levy a business privilege tax on LPs.
Along with paying business privilege taxes, Alabama LPs will also need to register for taxes specific to their business. LPs with employees, for instance, must pay employer withholding tax, and LPs that sell or rent goods must pay sales and use tax. Depending on the nature of your business, you may also need to file for industry-specific taxes such as property rental taxes or mobile communications services taxes.
Because determining the exact taxes that your LP must pay can be difficult, the Alabama Department of Revenue created My Alabama Taxes. Through this online portal, you can fill out forms to determine which taxes you are liable for and automatically register your business to pay them.
Depending on where in Alabama your business is located, you may also need to pay local taxes.
Major cities, such as Birmingham, Montgomery, and Mobile, all have their own business tax and licensing requirements, so you should check with your local government to ensure that you are in compliance with all local laws.
The State of Alabama does not require most business entities, including LPs, to obtain a general business license.
Depending on your industry, however, you may need a business privilege license or other industry-specific licenses or permits. Hundreds of these licenses exist in Alabama, so you will likely need at least one type of license for your business.
If you are unsure of which licenses or permits you need for your LP, you should consult the Alabama Department of Revenue’s resources on business permitting and licensing. For information on local licensing requirements, you should consult your County Probate Office.
If you would rather have a professional take care of your formation paperwork for you, you have a couple of options. The less expensive choice is to hire a business formation service to create your limited partnership.
While some service providers stick to less complicated business entities like limited liability companies, some also provide LP formations ― namely, LegalZoom and BizFilings. Currently ZenBusiness does not have this offering but does have regular LLC formation and business incorporation.
If you want the maximum possible degree of expertise, you should also consider hiring a business attorney to form your limited partnership. This is certainly a more expensive route, but if you want the peace of mind that every step is completed correctly ― and that all of your options have been thoroughly explored ― hiring a lawyer is a great option.
We highly recommend that you establish a business bank account so that your business and personal finances are maintained separately. This is important because it helps protect your personal assets, and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
If your Alabama LP hires employees, then you must have workers’ compensation and unemployment insurance. Your unemployment insurance is paid through state and federal taxes whereas you must usually obtain private workers’ compensation insurance. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Limited partnerships do not file business tax returns. Instead, the income is passed through the business entity to the partners, who then claim their share of profits or losses on their personal tax returns. Still, LPs do need to file an annual information return with the IRS, in which you report your business income, deductions, gains, and losses for the year.
The State of Alabama does not have any annual filing requirements for Limited Partnerships. However, you may need to file an annual report to renew certain business licenses.
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.
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