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Entrepreneur’s Guide to Setting Up an Alabama LLC

Entrepreneur’s Guide to Setting Up an Alabama LLC

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Entrepreneur’s Guide to Setting Up an Alabama LLC

Before you can start a business, you need to decide on a business structure, which is how a business is organized to operate. This choice impacts the legal and operational framework of a company, including how it is organized, managed, and taxed.

One option is the Alabama LLC, which is a business structure that is created under state law. They provide their owners with personal liability protection and the potential to save money on taxes. With our guide, you can learn how to form an LLC in Alabama without an attorney.

Related: Guide to starting a business in Alabama

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Steps To Form An Alabama LLC

Step 1: Name Your LLC

The first step to forming an Alabama Limited Liability Company is choosing and reserving a unique name that isn’t already registered by another registered entity in the state. The Alabama Secretary of State has a handy online database where you can do an Alabama LLC name search and quickly find out if your name is available to use.

In addition to having a unique name, are are a few other naming requirements to be aware of. These include:

  • The business name must be different from any other name that is registered with the Secretary of State’s office.
  • The company name must not imply a business purpose that is different from what the business does.
  • The business name must contain the words Limited Liability Company or the abbreviation L.L.C. or LLC.
  • Unless the business is licensed by the state, words such as bank, insurance, attorney, etc., can’t be used.

Step 2: Appoint an Alabama Registered Agent

To have an LLC in Alabama, a registered agent must be appointed. A registered agent is a person or entity with a physical street address in Alabama (PO Boxes aren’t allowed) who is available during normal business hours for service of process. The agent will be the central point of contact for receiving important legal documents, tax notices, summons, subpoenas, etc., on behalf of the LLC.

While many LLC owners opt to fulfill this role themselves, some owners choose to hire registered agent services like Northwest Registered Agent. Utilizing a registered agent service ensures that your LLC adheres to state requirements while offering an added layer of convenience and confidentiality since the owner’s personal address isn’t disclosed in public records.

Related: What is an Alabama registered agent?

Step 3: File the Alabama Certificate of Formation

The paperwork to create an LLC in Alabama is the Certificate of Formation (called the Articles of Organization in many states).

In Alabama, you have the option of downloading and mailing the Certificate of Formation or filing online.

Expect the LLC approval process to take around one week when filing by mail or immediately online. 

Related: How to fill out the Alabama Certificate of Formation

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What To Do After Setting Up Your Alabama LLC?

Once the LLC has been formed, there are a few additional steps to take care of. Below is a list of the most common tasks.

File the Initial Report and Initial Privilege Tax Return

The Alabama Initial Report and Initial Business Privilege Tax Return (Form BPT-IN) must be filed within 2.5 months of registering an LLC. The Privilege Tax is assessed on businesses for the “privilege” of operating in the state of Alabama. Learn more about the Business Privilege Tax from the Alabama Department of Revenue.

Prepare an Alabama Operating Agreement

The operating agreement is a document that governs the framework of an LLC. It covers items like ownership rights, member responsibilities, how profits and losses are distributed, and more.

Most states, including Alabama, do not require an LLC to have an operating agreement, but it is still worth considering. Without an operating agreement:

  • The LLC could be subject to generic state rules that may be detrimental in the event of a lawsuit.
  • Member’s personal liability protection may be diminished.
  • Members may not fully understand their roles and responsibilities, which could lead to costly disputes in the future.

Related: Alabama LLC operating agreement template

Obtain an EIN

If the LLC will hire employees or is owned by more than one member, an EIN is required. 

The EIN or Employer Identification Number (also referred to as a Federal Employer Identification Number, FEIN, or Federal Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes.

Related: How to register for an EIN in Alabama

Open an LLC Bank Account

Opening a bank account for your LLC is important for liability protection as the account separates the business’s funds from the member’s personal funds.

Several documents will be needed to open a business bank account, such as:

  • A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
  • Copies of the original formation paperwork from the state showing the creation of the LLC.
  • Driver’s licenses of the members.
  • Depending on the LLC’s age, an Alabama Certificate of Compliance may be needed to prove the LLC is active and in good standing with the state.

Apply for Business Licenses and Permits

Depending on what your business does and where it is located, there will likely be various business licenses and permits needed before starting. Some common registrations include:

  • Business privilege license: Every business is required to obtain a business privilege license from the Alabama Department of Revenue.
  • Business license: In addition to the state of Alabama business privilege license, many cities also require businesses to obtain licensing before they can start.
  • Professional license: In Alabama, certain types of businesses, such as beauty shops, photographers, restaurants, and others, require professional licensing.
  • Sales tax license: A sales tax license from the Alabama Department of Revenue is necessary to sell products and certain services in the state.

Related: What business licenses are needed in Alabama?

File Alabama LLC Annual Reports

Each year, Alabama LLCs must file Form PPT, the Alabama LLC Annual Report, and the Alabama Business Privilege Tax Return and pay the privilege tax to the Alabama Department of Revenue. The tax is based on the LLC’s net worth, with an annual minimum tax of $100.

Related: How to file an Alabama LLC Annual Report

File the Beneficial Owner Information Report

Beginning in 2024, any individual who owns at least 25% or has “substantial control” of an LLC or corporation in Alabama or any other state must file the Beneficial Ownership Information (BOI) form with the Financial Crimes Enforcement Network (FinCEN). BOI reports are filed electronically through FinCEN’s website.

Alabama LLC FAQs

How much does an Alabama LLC cost?

The cost to form an LLC in Alabama includes the Certificate of Formation state fee of $200, plus the name reservation filing fee of $28.

Is there a yearly fee for an LLC in Alabama?

Yes – Each year, the Alabama Business Privilege Tax is due and will cost $100 at a minimum.

How long does it take to start an LLC in Alabama?

It normally takes 7-10 business days for an LLC to be approved in Alabama, though for an additional fee, one business day processing is available.

Is the LLC the best type of business structure?

Choosing the right business structure is important, and the LLC is popular as it offers a blend of flexibility and liability protection. Unlike a sole proprietorship or general partnership, where personal and business assets are intertwined, an LLC provides a shield for your personal assets against business debts and lawsuits. This means if your business runs into trouble, your personal savings, house, and car are safer.

For those thinking about a corporation, the LLC offers a simpler structure, with fewer formalities like board meetings or annual reports. Plus, the tax setup can be more favorable since LLCs enjoy pass-through taxation, avoiding the potential double taxation corporations can face, where both the company’s profits and the owner’s earnings are taxed.

However, the best choice depends on your situation. If you’re going solo with minimal risk, a sole proprietorship is the easiest route and least expensive route. A general partnership works similarly but for two or more people. Corporations, though more complex, might suit those looking to raise significant capital.

Entrepreneur’s Guide to Setting Up an Alabama LLC

Entrepreneur’s Guide to Setting Up an Alabama LLC

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