Starting a Limited Liability Company (LLC) can be an exciting first step for entrepreneurs in Alabama. This guide covers the key steps involved in starting an LLC, from choosing a business name to weighing the costs and benefits. Whether you're an experienced business owner or just starting out, understanding how to establish an LLC is important. When exploring the logistics of starting a business, keep in mind that an LLC is more than just legal filings and paperwork. The goal is to build a sustainable and profitable business.
How to start an LLC in Alabama in 7 steps
01. Pick your business name
When starting a business in Alabama the first thing you need to do is choose a name for your LLC. This is not just a creative process, but a legal one as well. You need a unique business name that is not the same as, or too close to, other names on record with the Alabama Secretary of State. Your chosen name must end with "LLC," "L.L.C.," or "Limited Liability Company" in order to meet state requirements.
Follow these recommendations to develop a business name that stands out and meets legal criteria:
Check for availability: Use the Alabama Secretary of State's online database to search for existing business names.
Follow naming guidelines: Avoid restricted words that could confuse your LLC with a government agency (e.g., FBI, Treasury).
Consider your online presence: Search a domain finder if you plan to also focus on building a website, which can be easily done through platforms like Wix.
Tip: If you're having trouble coming up with a unique name for your business, consider using a business name generator.
02. Choose your registered agent
Every LLC in Alabama must have a registered agent, an individual or company that agrees to accept legal papers on behalf of your LLC. Your registered agent must be available during regular business hours and have a physical address in Alabama.
To choose the right registered agent, consider the following factors:
Reliability: Ensure they are dependable and can handle confidential documents.
Availability: They should be consistently available at the listed address during business hours.
Compliance: Verify that they meet all legal requirements set by the state of Alabama.
Need help setting up your LLC? Wix has partnered with LegalZoom, the No. 1 choice for online business formation to help you start, run and grow your business.
03. Obtain state business permits
Depending on the nature of your business, you may need specific permits or licenses to operate legally in Alabama. These could range from general business licenses to industry-specific permits.
To obtain the necessary permits in order to register your business, follow these steps:
Identify requirements: Check with local and state agencies to determine what permits you need.
Complete the applications: Fill out all required paperwork accurately and submit them to the appropriate authorities.
Pay any fees: Be prepared to pay any associated fees for obtaining your permits.
Let’s say you want to start a gym business in the state. First, you’ll need a permit to operate. Alabama requires a variety of permits depending on the type of business, including but not limited to: sales tax permit, state identification number and professional licenses (such as for personal trainers or physical therapists). You may also need to obtain zoning approval from your local government.
Learn more: How to get a business license
04. File a Certificate of Formation
The Certificate of Formation is a critical document that officially creates your LLC in Alabama. You'll file this with the Alabama Secretary of State, either online or by mail, along with the required filing fee.
Filing involves several key actions:
Gathering your business information: You'll need details like your LLC's name, registered agent information and management structure.
Filling out the form: This is the specific form used for filing an LLC's Certificate of Formation in Alabama.
Submitting and pay fees: Complete the submission process by paying the necessary fee. This is $208 to file an LLC online or $200 by mail.
05. Draft your LLC operating agreement
Although not legally required in Alabama, creating an operating agreement is highly recommended for any LLC. This internal document outlines ownership structures, member roles and operational procedures for your type of business.
Here’s why an operating agreement is important:
It clarifies business rules and guidelines: It sets clear expectations for members regarding operations and conflict resolution.
Protects LLC status: Helps maintain limited liability status by proving that your LLC is a separate business entity.
Prevents misunderstandings: Reduces potential disputes among members by detailing policies and procedures for how the business should be run.
06. Apply for an EIN and pay relevant taxes
An Employer Identification Number (EIN) is like a social security number for your LLC. It’s necessary for hiring employees, opening bank accounts and filing taxes.
Securing an EIN involves:
Applying online or via mail: The IRS provides free EIN registration through their website or via mail submission.
Understanding your business tax obligations: Learn about state-specific taxes that apply to your LLC, such as franchise tax or sales tax. In Alabama for an LLC owner this includes a 15.3% self-employed tax (12.4% social security, 2.9% Medicare). For more information, visit the Alabama Department of Revenue website.
07. Organize annual reports
In some states, annual reports are mandatory filings that keep your company's information up-to-date with the state government. However, Alabama does not require annual reports for LLC but does require an annual business privilege tax report.
To ensure you’re compliant with this make sure to:
Know due dates: Mark your calendar for April 15th each year when tax reports are due.
Maintain proper records: Keep accurate records throughout the year to simplify report preparation when due dates approach.
How much does it cost to start an LLC in Alabama
Starting an LLC in Alabama involves various costs, which are essential to budget for when planning your business. Here's a detailed breakdown of the expenses you can expect:
Certificate of Formation filing fee: This is the mandatory fee paid to the Alabama Secretary of State to officially register your LLC. This is a one-time cost that is mandatory for all new LLCs. For an LLC it costs $200.
Registered agent fee: If you decide to use a professional registered agent service, they will charge an annual fee for their services.
Business licenses and permits: The cost for these will vary depending on the type and scope of your business and the specific regulations in your industry.
Operating agreement: If you hire a lawyer or professional service to help draft your operating agreement, this will incur additional costs.
Employer Identification Number (EIN): Obtaining an EIN from the IRS is free of charge.
State taxes: Depending on your business structure and operations, there may be state taxes applicable to your LLC.
Learn more: Cost to start an LLC
Additional costs may include:
Legal or financial consulting fees: If you seek professional advice during the formation process, these services will add to your startup costs.
Domain registration and website creation: Costs include domain registration and potentially hiring a web designer or using a website builder like Wix.
Business insurance: Depending on your industry, you might need various types of insurance to protect your LLC.
Who can start an LLC in Alabama
To form an LLC in Alabama, there are specific eligibility criteria that need to be met. It's crucial to understand who can start an LLC in the state before you begin the process.
Age requirement
You must be at least 18 years old to form an LLC in Alabama.
Residency
There is no residency requirement to start an LLC in Alabama. You don't have to live in the state or even in the United States to form an LLC here.
Legal status
You must have the legal capacity to enter into contracts. This means that individuals who are not barred by law due to any reason can start an LLC.
Business type
Almost any type of business can be an LLC, except for businesses that require a different structure, like banks and insurance companies.
Benefits of starting an LLC in Alabama
Forming an LLC in Alabama provides business owners with a variety of advantages that are highly appealing. These include legal protections and tax benefits, making it a favored choice among entrepreneurs.
Limited liability protection
Members of an LLC are protected from personal liability for business debts and claims. This means your personal assets are typically safe if your business faces a lawsuit or bankruptcy.
Shylene D’Addario, VP and associate general counsel at LegalZoom, sheds some light on defining this popular business structure.
“A limited liability company—or LLC—is a type of business entity that offers some of the benefits of a corporation with less formality. One key benefit of an LLC is that it can protect a small business owner’s personal assets—like homes, cars and personal bank accounts—from lawsuits against the business.”
Pass-through taxation
LLCs often benefit from pass-through taxation where the business itself is not taxed. Instead, profits and losses pass through to the members' personal tax returns.
Flexibility in management
Unlike corporations, LLCs have fewer formalities and can be managed by the members or appointed managers, providing flexibility in how the business is run.
Ease of formation and compliance
Compared to other business entities, forming an LLC in Alabama is relatively straightforward, with fewer formalities and compliance requirements.
Credibility with customers and partners
Having 'LLC' after your business name can enhance your credibility with potential customers, suppliers and financial institutions. You can then choose an .llc domain for your website to reinforce this credibility.
Disadvantages of starting an LLC in Alabama
When thinking about setting up an LLC in Alabama, it's important to weigh the pros and cons. Knowing these downsides will help you decide if an LLC is the right fit for your business. Here are some challenges you might encounter with an LLC in Alabama:
Self-employment taxes
Members of an LLC may be subject to self-employment taxes on their share of the profits.
Annual business privilege tax report filing
Alabama requires LLCs to file annual business privilege tax report. along with a fee, which is an additional compliance task and expense.
Capped growth potential
If you plan on raising capital through the sale of stock, an LLC might not be the best choice as it does not allow for the issuance of shares.
Transferability of ownership
Transferring ownership interests in an LLC can be more complex than with a corporation.
Why start an LLC over another business entity in Alabama?
Choosing the right business structure is crucial for entrepreneurs. In Alabama, forming an LLC is often preferred due to its unique advantages. But it's important to compare it with other types of business structures to understand why an LLC might be the best choice for your situation.
Here's how an LLC stacks up against other business entities:
Sole proprietorship: Unlike a sole proprietorship, an LLC provides personal asset protection, separating your personal liabilities from those of your business.
Partnership: An LLC offers more protection for each member compared to a partnership, where each partner can be personally liable for the debts of the business.
Corporation: While corporations also provide limited liability protection, they’re also subject to double taxation (taxes on both corporate profits and shareholder dividends). An LLC avoids this with pass-through taxation.
LLCs also offer these unique advantages:
Operational flexibility: Corporations are required to have a formal structure with directors and officers, while an LLC can be managed by its members or managers, providing greater operational flexibility.
Fewer record-keeping requirements: An LLC has less stringent requirements for record-keeping and reporting compared to a corporation.
Profit distribution flexibility: Profits in an LLC can be distributed in any manner agreed upon by the members, unlike corporations that distribute profits according to the number and type of shares held.
You've formed your LLC in Alabama, now what?
After successfully forming your LLC in Alabama, the journey to building and growing your business is just beginning. Here are the next steps to ensure your LLC is well-managed and poised for success:
Open a business bank account: To keep your personal and business finances separate, open a bank account solely for your LLC. This will simplify accounting and tax filing and help maintain your liability protection.
Obtain business insurance: Protect your LLC with the right insurance policies. Depending on your business type, you may need general liability insurance, professional liability insurance, or property insurance.
Stay compliant with state laws: Ensure that you file any required annual reports with the state of Alabama and renew any permits or licenses as needed.
Keep accurate records: Maintain detailed records of all business transactions, contracts, and decisions made by the members or managers of the LLC.
Understand your tax obligations: Work with an accountant to understand and fulfill your federal, state, and local tax obligations. This includes income taxes, employment taxes if you have employees, and any other applicable taxes.
Develop a strong business plan: A well-thought-out business plan is crucial for guiding your company's growth. It should outline your business goals, strategies for achieving them, and financial projections.
Looking to start an LLC in a different state?
How to start an LLC in Alabama FAQ
How long does it take to form an LLC in Alabama?
The time it takes can vary. Once the Certificate of Formation is filed with the Secretary of State, it typically takes a few days to a few weeks for the LLC to be officially formed.