Alabama is home to more than 5 million people and refers to a strong and economically important state. It has big cities, rural communities, dynamic and thriving college towns.
Therefore, opening your own business here can be a very good decision. And establishing an LLC in Alabama is one of the most favorable options for startups and aspiring entrepreneurs.
But registering a business is not the easiest task. You can find a lot of information online, including the Secretary of State website. If you are going to find out everything on your own, it might be very difficult. We have tried to collect all the relevant information and present it in a simple and clear language so that you can learn step by step how to proceed correctly.
The most important points about starting an Alabama LLC that we will cover:
Table of Content
First, you need to come up with a unique LLC name. State regulations and laws regarding this can be found in Alabama Code section 10A-1.
The first thing you should consider when choosing a company name is that it has to contain the abbreviation "LLC" or the full name "Limited Liability Company". The second important rule is that it should be clearly distinguishable from other firms' names, and you need to use several words for that.
Section 10A-1-5.03 explains precisely which words will make the name distinct and which will not.
For example, let's say you start a men's clothing store. You like the name "Montgomery Bow Tie, LLC". But a search of existing companies shows you that there is a corporation named "Montgomery Bow Tie, Inc".
Under Alabama law, having the abbreviation "LLC" does not make your name different from that one of that venture. You have to add more words, such as "Montgomery Bow Tie and Tux, LLC." Then it becomes unique.
Alabama state law includes a list of words that are prohibited from being used in business names. According to Alabama Code section 10A-1-5.02, it is illegal to misinform people by adding words that do not match the actual activities of your organization. That is, if you are opening a beauty salon, you cannot choose a name like "Grocery Delivery, LLC."
Unless you get special permission from the office of the Alabama Banking Commissioner, you also cannot include words in your name implying that you are engaged in banking activities. The situation is similar to the insurance business, where you need permission from the Alabama Insurance Commissioner.
Finally, there is a similar prohibition for any enterprise that requires a license. At least one of the founders of an LLC should have a proper license. For instance, if you want to do landscaping, you will need a letter from the appropriate state agency. Otherwise, the company can neither operate in this field nor include the words "landscape design" or something similar in its name.
The basic rule is: If you need a license for your venture in Alabama, you should double-check with the Secretary of State and the state board regulating it to make sure that your chosen name is acceptable. Do this before you apply.
So, you have selected a good LLC name that complies with state law. Now, you need to check its availability. To do this, there is a free business entity search on the Secretary of State website. You can find the right company here using various methods but to check the name, choose the "Entity Name" function.
To be sure the name is free, try searching several times using words that are slightly different from your name. If it is free, and there aren't any very similar ones, you can proceed with the LLC registration. Otherwise, you will have to look for some other solution.
Alabama law requires you to submit an LLC name reservation form before you apply for new company incorporation. The cost of this service is $25.
It will be disappointing if you choose a good LLC name, and then, it turns out to be not free. Another big disadvantage will be if customers start to confuse you with one of your competitors. In such cases, the LLC name remains the official one, and a trademark, also known as the "doing business as" name (DBA), is used for branding.
DBA rules are described in Alabama Code section 8-12-7. Here are the most important regulations about what not to use for your DBA:
If you come up with a DBA for your business that meets state law, you will need to file an application to register it with the Secretary of State. It should contain this mandatory information:
The DBA name application form can be found on the Secretary of State’s website. Its registration will cost you $30.
Alabama Code section 10A-1-5.31 requires every LLC to have a registered agent. They will receive official correspondence, and their office has to be in the state.
Service of process is a legal term for all business and legal documents. In this way, your agent will communicate with the state, other organizations, and the public.
Registered agent service will be especially useful if there is a lawsuit against your organization. Your agent will receive a notice and inform you in a timely manner when the lawsuit begins. If the person suing you fails to find your registered agent's contacts, you may not receive the documents on time or at all. And that will be a big problem for you in court.
At worst, the court will make a decision without your participation, in absentia, and it will not be in your favor. Therefore, it is extremely important to have reliable public relations available to all.
Under the law, any Alabama resident or company established here can be your registered agent. Often, first-time entrepreneurs conclude that they can be their own registered agents for their firms. This allows them not to pay for other people's services, and the businessman will receive all correspondence personally. However, such an option is not the most reasonable one.
Experienced business people usually hire specialized agencies that provide registered agent services. In this case, you will use the address of such a firm as your official address for correspondence. All legal documents, as well as other papers, will go to your registered agent, then they will be processed, and only after that, they will be forwarded to you.
Why is it so tempting to be your own agent?
Basically, that's the way it is. And in some cases, such a solution is optimal. However, we should also not forget about the drawbacks:
Using a registered agent is a simple and convenient solution to avoid these problems. Moreover, these services are inexpensive, most often about $100 per year. It is not your name and address that will be listed on the Internet but the firm of your choice. A good agent will not miss anything and will help you do your business.
If you want to cooperate with a professional agent, check out our rating of the best providers, as well as the recommendations on how to choose the best one.
It will also be very handy to use a registered agent if your business operates in more than one state as each of them needs a separate agent. You can find a provider that has offices in the states you need.
Once you have a good business name and a registered agent, now it's time to take care of the legal incorporation of the venture. The Alabama Code section 10A-5A-2.01 states that you need to file the Certificate of Formation with the Secretary of State.
This step is not complicated but is very important. Until you have the Certificate, you cannot work because your LLC does not legally exist. Once you have the documents, you can work, enter into contracts, open a bank account, and expand your business.
If you don't want to register your business on your own or have difficulties in this matter, you can order a professional LLC creation service. The best agencies in this field are available in our article on the best LLC formation companies. There are also some of our offers and recommendations there.
You are required to include some specific information that is governed by Section 10A-5A-2.01:
A Series LLC is a company that includes several businesses where each is referred to as a "series" but with common management of all the entities. The bottom line is that all the resources belong to one LLC but are divided into "series". And if one company is sued, it will be impossible to obtain the assets of the other.
This type of LLC is sometimes used to optimize business and costs, it is not the most popular way but sometimes, this path helps. If you think that Series LLC is right for you, discuss all the nuances with Alabama lawyers and accountants beforehand.
You can fill out the Certificate of Formation form on the Secretary of State's website, which is the easiest solution. It is also possible to send documents by regular mail, but this method will take much longer.
The Secretary of State charges a $200 application fee. If it is submitted online, there will be an additional service fee of $8. Keep in mind that you should also pay the $25 fee on time for the name reservation request form that you should have submitted earlier.
If you send your documents for the Certificate by regular mail, the processing time will take a week. If you submit your application online, you will be approved almost instantly. Because the online procedure in Alabama is so fast, there are no additional fees to speed up the process.
An Operating Agreement is a basic paper that governs the functioning of an LLC and the relationship between its members.
Under Alabama law, an LLC Operating Agreement is not mandatory. But it is crucial for the companies themselves. The contract establishes the ground rules for operations, development, changes, profit sharing, and more.
During the process, new members may join, the old ones sometimes leave, and various complex situations arise. If you want your organization to run smoothly without disputes between the founders in the courts, an Operating Agreement can help.
What an Operating Agreement should be is described in Alabama Code section 10A-5A-1.08. The rules require that the fundamental company policies be set out first, as well as each member's responsibilities. It outlines exactly what each person will do, and what obligations each member has.
It is a very flexible document, and each organization uses a different form of it. We have compiled the most typical clauses and methods of using this document below:
It is also worth understanding that if a company does not have an Operating Agreement, it will be fully regulated by state law. You may not like the results of court decisions. And such agreements protect the entity and help avoid unpleasant proceedings.
Another thing that you should keep in mind. Unlike the Articles of Organization, an Operating Agreement is a private contract. It does not need to be registered with the state authorities, and changes can be made at the request of the LLC members.
As an individual, you file a tax return every year, and you use your personal Social Security number for that. This is how the state identifies you. Legal entities do not have an SSN, so they require an analog of this unique identifier, which is an EIN (Employer Identification Number).
Generally speaking, the LLC owner does not need to register this number. According to the law, you can list your income on your personal income tax return. Why and who needs an EIN, let's figure it out.
Here are the three most important questions you should ask yourself:
If you answered "Yes" to at least one of these questions, then you need an EIN. Bear in mind that many banks also require an EIN when you open a business checking account.
Getting this number is very easy, you can manage it without the help of specialists. Go to the IRS website, find the EIN section, and apply. It takes up to 5 minutes to fill out the forms. If you find it inconvenient to send the document online, the IRS form SS-4 can be submitted by regular mail or fax.
As you see, it is very easy to get this code. Therefore, it only makes sense to order this service when it is included in the LLC registration fee by default.
You may learn more about how to get an EIN in Alabama in a special article.
For your business to be successful, right after setting up, there are some other crucial tasks that you need to take care of. Let's talk about them.
We think it's very essential for your LLC to open a separate bank account. Here are the main reasons why it's beneficial:
The benefits of separating personal and corporate funds are obvious. You may accurately assess your income and losses. Different bank accounts will help with this. Why should you waste time and effort trying to figure out how much has been spent and what is the result? It is much more convenient to take bank statements listing your activities.
Loans are also important in business. Of course, many first-time entrepreneurs don't think about them at the very beginning, especially if there is sufficient start-up capital. But as time passes, you will want more. Perhaps there won't be enough profit for everything you need. And then, you may think about a loan. It is essential to take funds and sign contracts not for yourself personally, these funds should be borrowed by an LLC.
Above all, the protection of your funds is critical. With a company corporate account, your personal savings will be hidden from creditors in the event of bankruptcy or if you are sued. This is called a corporate veil. And for your peace of mind, this approach makes sense.
If your and corporate funds are not segregated, the veil will be pierced. Thus, your personal and LLC assets are mixed up. Therefore, if you start using company funds, for example, to pay for your child's education or utilities, you will lose a key benefit of an LLC.
Get a bank account as soon as possible, protect your savings and assets, and grow your business with the awareness that regardless of the situation, your "financial safety cushion" is protected.
You insure your life, health, home, and your car for obvious reasons. Likewise, your company needs insurance. There are many different insurance policies, and we have decided to highlight the most important ones that might be relevant to you:
If you have taken all the steps described above, your company will be ready for operation. But you need to understand that your LLC has legal obligations to federal and local authorities. This is what you should pay attention to on time to avoid being among the unfair organizations and paying fines.
Any business is required to have a business license from the Probate Judge or License Commissioner in Alabama. Be sure to check Alabama’s Handbook on these matters and all the nuances with your county government office for the full picture of the requirements for licensing.
Remember that many businesses also have to be licensed. Make sure your enterprise meets all the requirements of the governing body and the state.
Entities under the LLC type of ownership are considered "pass-through" units from a taxation standpoint. This means that LLC members pay tax on their personal income, based on what they receive as income from the firm. Nonetheless, Alabama imposes a business privilege tax on ventures that do business in the state.
This tax is at least $100 and is based on the income the LLC generates. The Alabama Department of Revenue can provide you with instructions and forms to help you understand this tax and pay it correctly.
You should also remember that if an LLC hires employees, you have to be registered as an employer and withhold taxes. Likewise, if you sell goods or render services, you are to collect and pay sales taxes.
Since an LLC has pass-through taxation in terms of federal laws, don't forget to indicate company profits on your personal income tax return. These are listed on Schedule C along with your own income tax return.
A limited liability company is a welcoming legal structure for many businesses. Start an LLC is easy. Select your state to start.