Alabama is an important part of the Deep South that is home to over 5 million people. With its mix of big cities, thriving college towns, and rural communities, it presents lots of options for new businesses to thrive. And forming an LLC is a great way to start your own business.
Putting together an LLC, though, can be a daunting task. There’s a ton of information online, and the best way forward isn’t always clear. We’ve done the work and reviewed the information to show you the best way forward in simple, easy-to-follow steps.
In this article, you’ll find all the tools you need to start an LLC in Alabama, including:
- Tips on drafting and filing the legal documents you need for your Alabama LLC formation
- Guidelines for staying within state and federal law
- The actual laws and rules you need to follow
Step 1: Name your Alabama LLC
The first thing you have to do is think of a good name for your LLC. Naming laws can be found in Alabama Code section 10A-1.
Words You Have to Use
First, your company name must contain the words “limited liability company” or the abbreviation “LLC.” Second, an LLC must have enough words in its name to be distinguishable from the names of other entities doing business in the state. Section 10A-1-5.03 clarifies which words can and can’t make your name distinguishable.
Let’s say you want to open a menswear shop called “Montgomery Bow Tie, LLC.” A search of business names, though, reveals that there is an existing corporation known as “Montgomery Bow Tie, Inc.”
Alabama law doesn't consider the abbreviation “LLC” to make your name distinguishable. In this case, then, you’ll need to add something like “Montgomery Bow Tie and Tux, LLC” to make your name okay under the statute.
Words You Can’t Use
Alabama has a few rules about words you can’t use in your company name. First, Alabama Code section 10A-1-5.02 prevents you from using words that imply your company is engaged in business it can’t legally do. In other words, you couldn’t name a food truck business “Tuscaloosa Heart Surgery Center, LLC.”
You can’t have any words in your LLC name indicating that it is a banking company without permission from the office of the Alabama Banking Commissioner. Similarly, you can’t work in the insurance business (or have a name that implies you do) without permission from the Alabama Insurance Commissioner.
Finally, keep in mind that if you name your business anything that would require any kind of a professional license, at least one of your members (and possibly more) must have a license to practice that business. Some trades (like landscapers and engineers) will also need a letter from the appropriate state board.
The big rule is this: if you need a license to do your job, double-check with the Secretary of State and the appropriate state board to make sure your company name complies with the law.
Research the LLC Name You Want
Once you’ve thought of a good name, you need to make sure that it is available. To do this, use the Secretary of State’s free Business Entity Search. You can search for a business in many ways using this site, but for naming purposes, stick with the “Entity Name” function.
To make sure your name is distinguishable, you’ll want to conduct several searches with different words from your LLC’s name. Once you have a good name that isn’t already used, you’re ready to move on to the next step.
Alabama law requires you to file a name reservation request form before you file your formation documents. The filing fee is $25.
Alabama DBA: Using a Fictitious Business Name
Once you commit to a good LLC name, it can be disappointing to find that the exact name you want is not available. Or, after you form, you might find that people confuse your shop with that of a competitor. In either of these cases, the remedy is to use a trade name, also known as a fictitious or “doing business as” name (DBA).
Alabama Code section 8-12-7 has a few rules to keep in mind about what you can’t do with a DBA:
- A DBA cannot be “immoral, deceptive, or scandalous.” Obscene and misleading DBAs will be rejected. This includes DBAs that will confuse the public about which company they are dealing with.
- A DBA cannot be disparaging. It can’t be used to say something negative about a person, belief, institution, or symbol.
- A DBA can’t include a state or national flag or any symbols designed to look like one. This includes the U.S. flag.
- A DBA can’t use the name of any living person without their consent.
- A DBA can’t just be a surname. Thus, “Carter” by itself wouldn’t be a good DBA.
Once you have a DBA that complies with those rules, you’ll need to apply with the Secretary of State. That application should have the following information:
- Your LLC’s name and address
- A description of your LLC’s business
- When the DBA was first used anywhere and the date it was first used in this state by your LLC
- A statement that your LLC owns the name and no one else in the state has a right to use it or a name that is close enough to it to mislead the public
Alabama’s form trade name application is on the Secretary of State’s website. The DBA filing fee is $30.
Step 2: Appoint a Registered Agent for your LLC
Alabama Code section 10A-1-5.31 requires your LLC to name a registered agent for mail and service of process, along with that agent’s business office.
Service of process is a legal term for business letters or legal papers. In other words, your agent is there for the state or the public to communicate with you.
Registered agents are most important if your LLC is sued. When that happens, the quickest way for you to find out is through your resident agent. If the person suing you can’t find your registered agent and serves your company some other way (by publication, for example), there might be a delay that could hurt you in court.
In the worst case, you could lose the lawsuit by default judgment for not timely responding to a lawsuit. Therefore, your LLC must have a solid, reliable point of contact with the public.
The law lets you name either an Alabama resident or a company as your agent. Many new business owners hear this and think they should be the registered agents for their LLCs, reasoning that they shouldn’t pay someone else to do the job. This is not always a wise choice, though.
Experienced business owners often hire registered agent companies. A company like this will allow you to use its address for your registered office and agent. That way, service of process and other correspondence will go to them before being redirected to you.
You may not be convinced that a company is the best way to go. Being your own agent can be tempting for a few reasons:
- It’s cheap: You’re not paying someone for something you can do yourself.
- It’s simple: The only address and contact information you have to keep current is your own.
- It’s reliable: You will receive all important papers personally.
All of those points are true. But you should also think about the cons of being your own registered agent:
- No privacy: Your name and address will be published on the Secretary of State’s website.
- Junk mail/spam: You will get a ton of junk mail in addition to a small amount of real mail and any service of process.
- No breaks: Agents must be open for service during all business hours. They don’t get time off.
- Business interruptions: If your agency address is the same as your business address, your clients may be interrupted by people serving lawsuits. That could be embarrassing or hurt your reputation.
- It’s your fault if you miss something: You always have to make sure your agency address is correct and up to date. If you make a mistake or miss something, that’s on you.
Registered agent companies are an easy way to avoid these issues. They aren’t pricey, either. They usually cost around $100 per year. Their name and address, not yours, are listed on the Internet. Depend on your agent to make sure you don’t miss anything. That way, you can focus on your business.
If you are looking for a professional registered agent service, take a look at our Best Registered Agent ranking for some of our recommendations.
A registered agent company can also help if your LLC will do business in multiple states and you need to register as a foreign LLC. Just find a company that does business in all those states, pay them a single fee for multiple agents and offices, then let them worry about the details.
Step 3: File Your Alabama LLC Certificate of Formation
Now that you’ve thought of a good name and picked out a resident agent, you need to legally form your company. Under Alabama Code section 10A-5A-2.01, you do this by filing your certificate of formation with the Secretary of State.
Though this is a small step, it is extremely important. Until you successfully file your certificate, your LLC does not legally exist. After the filing, it can sign contracts, get a bank account, and do business.
If you would like to avoid the hassle of handling your LLC filing yourself, you can also use a professional LLC formation service. Check out our Best LLC formation services article for some of our suggestions.
What to include in my Alabama Certificate of Formation?
Section 10A-5A-2.01 requires you to include the following in your certificate:
- Your LLC’s name
- The address of your LLC’s registered office (remember that this does not have to be the same as your business address)
- The name of the registered agent at your LLC’s registered office
- A statement that your LLC has at least one member
- If your LLC is a series LLC, a statement that the assets, liabilities, etc., of each series is separate from the others
- Any other legal information the members agree upon
What is a series LLC?
A series LLC is a company that holds separate businesses within it (called “series) and manages those businesses. The idea is that, while the series are under the same LLC, their resources are separate so that the vendors or customers of one business can’t come after the assets of another.
These types of LLCs may make sense to form from a business or cost perspective, but it is unusual that a new business owner would need to form one. If you think this option might be right for you, you should discuss it with an Alabama lawyer or accountant.
The Secretary of State offers a fill-in-the-blank form certificate of formation if you would like to keep things simple.
Alabama LLC Filing Fee
The Secretary of State’s fee schedule lists the filing fee as $200. If you file the certificate online, there will be an $8 service fee. Keep in mind that you will also have to pay $25 for the name reservation request form you filed earlier.
Alabama LLC Processing Time
If you file your certificate by mail, it will usually be processed within a week. If you file online, approval is virtually instant. Given the speed of the online procedure, Alabama does not offer further expedited service.
Step 4: Draft your Alabama LLC Operating Agreement
Operating agreements are contracts between you and the other members of your LLC.
Alabama law doesn’t require your LLC to have one of these contracts (which it also calls limited liability company agreements), but it is still important to have one. These contracts set down the rules for your company, as well as how it can grow and change.
If you have new members come in, old members leave, or there are other unexpected events, you’ll need the operating agreement to make sure everything happens in an orderly and fair way.
Operating agreements are discussed in Alabama Code section 10A-5A-1.08. Using this law, you first want to describe how your company works. Each member may have a different job in the company. The contract will tell each of you what is expected in those jobs and what duties you have to each other and the company.
Operating agreements are extremely flexible documents, and every LLC’s contract will be different. Here are some typical uses for them:
- They determine the rights and duties of LLC members. If one LLC member is responsible for running the business or managing the books, the operating agreement should say so.
- They say whether the LLC has a member or non-member manager and what the manager has the right to do. Managers also have special duties to the company and the members. The operating agreement should state these.
- They outline what the LLC is legally able to do. The operating agreement should also set down how the company is allowed to conduct its business from day to day.
- They say how new members can join the company. They also have rules about how exiting members can leave.
- They set down how and when profits are paid to members. They can also create different types of membership and payment schemes.
- They say whether members or managers are in charge. They also say how to hire and fire managers.
- They say how and under what circumstances the LLC should end. You might not want to dissolve your business now, but you might in the future. It’s best to think about it and plan before it becomes an issue.
- They say how to change the rules. You may need to amend your operating agreement in the future. The operating agreement should set down the rules for making changes.
It’s crucial to understand that if you don’t have an operating agreement, what happens to your company will be determined by state law. You may or may not like the result when that happens. Therefore, drafting one of these contracts helps protect you and your company from unexpected misfortune.
Here is one last thing to keep in mind. Unlike your articles of organization, the operating agreement is a private contract. It doesn’t need to be filed with the state, and it can be amended as you and the other members of your LLC like.
Step 5: Get an EIN (Employer Identification Number) for Your Alabama LLC
When you file your personal tax return, you use your social security number to identify yourself. Companies don’t have social security numbers because they’re not people, but it’s just as important that the government keeps track of them. The way it does that is by issuing EINs.
Not all LLCs need an EIN. To see whether your LLC needs an EIN, ask yourself these three questions:
Here are the most common times when you need an EIN:
- Does your LLC have more than one member?
- Does your LLC have any employees?
- Is your LLC taxed as a C corporation or S corporation?
If the answer to any of the above questions is yes, you will need an EIN. Also, note that most banks will need an EIN to open a bank account for your LLC.
The good news is that it’s not hard to get an EIN. The IRS has a detailed website on the topic and allows you to apply online. An application takes about five minutes. If you don’t want to go online, you can also file IRS form SS-4 via mail or fax.
Because it’s so simple, you should never pay anyone to get an EIN for you unless they are throwing it in as part of a bigger service package.
First Tasks After Registering your Alabama LLC
Once you’ve filed your formation documents, you still have a couple of key tasks to handle before you can start doing business.
Open a Business Bank Account
First, you need to get to the bank and open a new account for your LLC. There are three main reasons:
- Accounting: You’re in business to make money. You can’t tell if you’re making money unless you know how much your company spends and deposits every month.
- Credit: Even successful companies need to borrow money. You don’t want to use your personal credit, though, for a business expense. Keeping LLC money separate helps it build up credit that it can use for its own needs.
- Personal Asset Protection: Keeping your company’s money separate from your own is the whole point of even forming an LLC instead of operating as a sole proprietorship. Without a business bank account, you risk losing that protection.
The accounting purposes for separating money should be obvious. Running a business means keeping detailed financial records about expenses and income. You can’t do that if you don’t keep your business and personal finances separate. The easiest way to do that is to use different accounts.
Credit is one of those things you might not be thinking about now. But when you need it in the future, you’ll be glad you did. A few years down the road, you might need to make improvements, sign a new lease, or invest in new technology. In those cases, the LLC should do the borrowing, not you.
The liability protection of an LLC is perhaps the most important reason for separate bank accounts. If someone sues it, your own assets are not at risk, and you won’t be liable for business debts. This company/individual separation is called the corporate veil. (Even though an LLC is not a corporation, it’s still called a “corporate” veil.)
If you treat your company’s assets like your own, the veil can be pierced. That means you would lose all liability protection. So, for example, if you are taking the company’s money and using it to pay your household bills, you could lose a key benefit of your LLC!
We can’t stress this enough: don’t mix your personal assets with those of your company. Get an LLC bank account as soon as possible, and it will be one less thing you have to worry about.
Get Business Insurance For Your Alabama LLC
Just like your home, your car, and your health, your new company is a big part of your life. You thus need to protect it with insurance. There are more kinds of policies than you may have realized. Here are a few that you will likely want:
- General liability insurance: You’ll need this if there’s an injury on your property. It pays for damages and a lawyer if you need one.
- Commercial automobile insurance: This works like your own car insurance. It covers company drivers and vehicles.
- Workers compensation insurance: Alabama requires all employers with five or more employees to carry workers’ compensation insurance for on-the-job injuries. Note that LLC members do count as employees in Alabama.
- Commercial property insurance: This protects from losses due to property damage. Flood insurance is often a separate policy.
- Professional liability insurance: Lawyers, doctors, architects, and other professionals need this insurance. It provides coverage and legal defense in the event of a malpractice case.
- Business income insurance: If you have to close for some time, business income insurance can pay back the loss of income. Policies vary, though. Make sure that you know what kinds of losses will be covered.
Keep Your Alabama Company Compliant
Now that your company is all set up, you’re ready to do business. But keep in mind that your LLC will always have legal obligations to local, state, and federal governments. Here are a few to think about and review every once in a while.
Alabama Business Permits and Licenses
Every Alabama business must obtain a Business Privilege License from the Probate Judge or License Commissioner of the county where it is located. You should review Alabama’s Handbook on the subject and contact your county government for more information about their business license requirements.
Also, keep in mind that many types of businesses require professional licenses. You will have to ensure that your LLC meets all the requirements of your governing body in addition to any general requirements that your business has with the state.
Alabama Tax Requirements
LLCs are considered “pass-through” entities for tax purposes, meaning that tax is generally paid by members on income that is paid to them. Alabama, though, also imposes a Business Privilege Tax on companies formed or doing business in the state.
The Alabama business privilege tax has a minimum of $100 and is based on the income passed through to LLC members. The Alabama Department of Revenue has forms and instructions you can use to understand and pay this tax.
Federal LLC Tax Filing Requirements
Your LLC is considered a pass-through business entity for federal tax purposes. Profits or losses from your LLC should be on Schedule C of your personal income tax return.
Alabama Business Formation Quick Links
- Alabama Department of Insurance
- Alabama Department of Labor — Workers’ Compensation Insurance Requirement Information
- Alabama Department of Revenue — Business Privilege License
- Alabama Department of Revenue — Business Privilege Tax
- Alabama Department of Revenue — Business Privilege Tax Forms
- Alabama Department of Revenue — Handbook of Privilege and Store Licenses
- Alabama Department of Revenue — Sales and Use Tax
- Alabama Department of Revenue — Withholding Tax
- Alabama Secretary of State — Business Entity Search
- Alabama Secretary of State — Fee Schedule
- Alabama Secretary of State — Form LLC Certificate of Formation
- Alabama Secretary of State — Name Reservation Request Form
- Alabama Secretary of State — Online Filing System
- Alabama Secretary of State — Trade Name Application (DBA)
- Alabama State Banking Department
- Code of Alabama (state statutes)
- Internal Revenue Service — apply for an EIN online
- IRS information regarding the federal tax treatment of LLCs
Alabama LLC FAQs
How much does it cost to start an Alabama LLC?
The filing fee for a certificate of formation is $200. If you file online, there will be an $8 service fee. Also, keep in mind that, prior to filing your certificate, you will also have to file a name reservation request form for $25.
What is the processing time to form my Alabama LLC?
If you file by mail, within a week. If you file online, acceptance will be practically instant.
What are the benefits of an Alabama LLC?
An Alabama LLC protects your personal assets while giving you favorable tax treatment. You can also use an operating agreement to customize your business structure so it best serves the needs of you and the other LLC members.
Where do I check if my Alabama LLC name is available?
Use the Secretary of State’s free Business Entity Search.