Steps to Forming an LLC
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How to Form an LLC in Alabama
Forming an LLC in Alabama will help protect your personal assets from lawsuits and judgments against your business. An LLC is a legal structure that separates your business and personal assets. By not having your business in a separate legal structure, you can be held personally liable for certain debts and lawsuits incurred by the company. Forming an Alabama Limited Liability Company does not require an attorney and you can save a lot of money if you do it yourself with the six simple steps below.
Before getting into the six steps here are a few things to know about forming an Alabama LLC.
How Much Does It Cost to Get an LLC In Alabama?
Minimum of $150.
Alabama has a different filing fee structure from most other states. In most states, LLC formation is handled only at the state level by the Alabama Secretary of State or similar entity. In Alabama however, LLC formation is routed through the County Probate Judge (sometimes called the Judge of Probate) for the county in which the LLC’s registered agent is located in addition to the Alabama Secretary of State. The minimum probate judge filing fee is $50, but in some counties, it is higher. Here is the list of probate judges by county.
The county probate judge then forwards your Alabama Certificate of Formation to the Alabama Secretary of State.
The Secretary of State charges a $100 filing fee in addition to the probate judge fee to register an LLC. Expedited filing costs an additional $100. Payment may be made via credit card or money order.
Normal processing time for an LLC in the state of Alabama is around 10-14 days. Expedited processing is also available for an additional cost.
Alabama Annual Report and Annual Fees
Annually, Alabama requires an LLC to file an annual report, Alabama Business Privilege tax return (Form PPT), and renewal fee. The minimum tax is $100. The Business Privilege tax forms are available from the Alabama Department of Revenue.
- Minimum Number – one or more
- Members/Managers- at least one is required to be listed in the Certificate of Formation
- Residence Requirements – The Registered Agent must be located in Alabama. Members can reside anywhere.
- Age Requirements – At least 18 years old.
In addition to forming your Alabama LLC, you will need to check for business licenses and permits before starting your business in Alabama.
Steps to Forming an Alabama LLC
The steps to forming an LLC are based on the regular LLC. The steps for forming a series LLC or foreign LLC are slightly different.
Step 1. Naming Requirements
Alabama LLC Name Search
Before settling on a business name, you want to be sure nobody else is using it as each LLC must have a unique name. Here’s how to search available LLC names in Alabama. You can also visit our page to do a free LLC name search in Alabama.
If you have a name picked out that is available, but you aren’t ready to form the LLC, you are able to reserve the business name using a Name Reservation Certificate.
Your company name must end with the words Limited Liability Company or an abbreviation of these words (L.L.C. or LLC). Check out our article on naming your LLC for all the requirements you must follow when naming an LLC.
Also, there are some words that aren’t allowed to be used in the state, like those that could refer to a state agency or a business that requires licensing from the state.
An LLC in Alabama also has the ability to use a trade name in addition to their registered business name.
Step 2. Choosing a Registered Agent
What is a Registered Agent?
A registered agent is the central point of contact for the LLC, that can be either an individual or business entity, that receives important legal documents, tax notices or communications with the state.
Registered Agent Requirements
The registered agent must have a physical presence in Alabama and have a physical address and be available during normal business hours to accept delivery of documents. A Post Office Box or personal mailbox is not acceptable. The Alabama registered agent must have a physical street address in Alabama. If the registered office includes a suite number, it must be included in the registered office address.
Check out our article on LLC Registered Agents for more details.
Who can be a Registered Agent in Alabama?
A registered agent in Alabama can either be a resident of the state or a corporation authorized to do business in the state.
Provided you as the business owner have a physical presence in Colorado, you can be the registered agent however, there are some privacy benefits to having a third-party registered agent.
Check out our article on LLC Registered Agents for more details.
Step 3. Filing the Certificate of Formation
The Certificate of Formation (often referred to as the Articles of Organization in most states) is the paperwork used to form an LLC with the state. This is the most important step and many people believe that you need an attorney to file.
While we don’t discourage having an attorney, filing for an LLC can be done by most people, but you can save considerable money over an attorney and make sure everything is filed correctly by using a formation service such as LegalZoom.
Alabama does things a bit differently than many other states. Instead of registering your Alabama LLC Certificate of Formation at the state level (with the Secretary of State), you need to register your LLC at the county level (with the Probate Judge).
You’ll need to send 2 separate checks (or money orders). One to the Secretary of State for $100. And one to the Probate Judge. The fees vary among the Probate Judges (there are 67 of them but the average is $50) – County Probate Contact Information
Step 4. Creating an Operating Agreement
An operating agreement is not required in Alabama but is typically a good idea, especially for an LLC owned by multiple people. The primary function of an LLC operating agreement is to govern the relationship between the owners of the business, but also outlines who makes what decisions, how profits or losses are distributed and the operating procedures of the LLC.
Step 5. Obtain an EIN
What is an EIN?
The Employer Identification Number (EIN), or Federal Employer Identification Number (FEIN), is used to identify a business entity. It is essentially a social security number for the company.
In addition to the EIN being an identifying number for the LLC it serves a few other purposes such as:
- Opening a business bank account
- Federal and State tax purposes
- The business account to pay payroll taxes for employees paid by the company
How to Register an EIN for an Alabama LLC
To file an EIN for your LLC, visit the Internal Revenue Service (IRS) or obtain the SS-4 form. They show the steps on how to apply, but here is a video on how to apply for an EIN for more details. In about five minutes, you will have your number free of charge. Be sure to wait until your LLC is approved before applying for your EIN as the name that is registered for the LLC must be the same as the EIN.
Step 6. Selecting the Tax Status of the LLC
One of the advantages of an LLC is the flexibility in taxation as there are four ways an LLC can be taxed, compared with two ways for a corporation.
- Single Member LLC- An LLC with one member automatically becomes a single-member LLC with the IRS. The owner simply files their Schedule C with their 1040 at the end of the year. Filing as a single-member LLC means the entity does not pay sales tax and goes to the owner which is called pass-through taxation. The owner pays self-employment tax on the net profit of the LLC, which while simpler to handle taxes, may be more costly.
- Partnership LLC – An LLC with two or more LLC members is automatically considered a Partnership with the IRS and will file Form 1065. Like the sole-proprietorship as a pass-through entity, the LLC taxed as a Partnership pays no income tax and profit and losses flow to each member’s Form 1040s via Schedule K-1 of Form1065.
- C Corporation LLC – An LLC can elect to be taxed as a C Corporation by filing IRS Form 8832. The major difference as an LLC that is taxed as a C corporation is that now the LLC pays tax on the profits and losses and are not directly passed down to the members. Most, but not all will find filing as a C Corporation as more costly as now the LLC has double taxation where there is a tax on the profits and dividends.
- S Corporation LLC – To get S Corporation status, you will file Form 2553 with the IRS. What makes the S Corporation attractive unlike the sole proprietorship or partnership is that you can potentially shield some of the profits from being subject to self-employment taxes. Dividends aren’t typically subject to self-employment taxes which is a large potential savings. There will be more work in accounting an LLC that elected S Corporation status.
Each of the four ways for an LLC to be taxed in Alabama can have a major impact on the taxes that are charged depending on the business and the member’s personal finances. It’s a very good idea to work with an accounting professional or professional service to see which one is most efficient for the business and members.
Don’t want to go it alone but don’t want the expense of an attorney? Another alternative is to use an LLC formation service that will do the formation at a low cost. Take a look at our comparison page of popular LLC formation services.
IncFile has a special offer right now to form an LLC for only the cost of the state fees and a free registered agent for the first three months.
Step 7. Open a bank account for your business
Opening a separate LLC bank account is important as it establishes a clear division between your personal and business finances. Should the LLC be sued and you are using a personal bank account for your LLC’s finances, that would be considered a commingling of funds, which may make it difficult to maintain the liability protection of the LLC.
To open a bank account for your LLC, you will need to bring the following with you to the bank:
- Form of identification for each member, such as a driver’s license
- Copy of the Certificate of Formation
- LLC operating agreement
- Employer Identification Number – If you are a single-member LLC with no employees, you can simply use your Social Security Number
A bank resolution may be needed depending on the bank and the tax election of the LLC. A banking resolution is a formal document that provides authorization for who has access to the LLC bank account.
Learn more about opening a bank account for an LLC
Step 8. Obtain a sales tax permit (optional)
If your business sells a taxable product or service you will also need to apply for Alabama Sales Tax Permit. This can be obtained through the Alabama Department of Revenue. There is no cost for a sales tax permit.