Alabama is a diverse state with a unique culture. It presents lots of opportunities for savvy entrepreneurs. One of the easiest and quickest ways to get started on that path is to form an LLC, but you may not know exactly how much it costs to do that. As with all business matters, it pays to know what you are getting into before you start.
We’re here to help you figure out where you need to spend your money, as well as other purchases you’ll want to make that can make your life easier, both now and in the future.
This article will help you make a budget for starting an LLC in Alabama.
- The required costs for every LLC
- Extra costs we recommend you incur
- The different ways you can form your LLC, as well as the pros and cons of each
Total Alabama LLC Cost – $225 or $233
To form an LLC in Alabama, you will need to pay for a few things. These include:
- Filing a name reservation request form: $25
- Filing your LLC’s certification of formation: $200
- An online filing fee, if you use that system (recommended): $8
In Alabama, you must file these papers with the office of the Secretary of State, which provides an up-to-date fee schedule on its website.
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How Much it Costs to Start an Alabama LLC
Filling your certificate is the most important step in forming your Alabama LLC. But even after you have formed your LLC, you’re only getting started. There are many things you need to think about before you open your doors to the public. The best way to solve problems that come up is to anticipate the biggest ones and make plans to avoid them.
Name Reservation Request Form Filing Fee – $25
Alabama has a unique first step in forming its LLCs. You have to file a name reservation request form to “hold” your company’s business name while it is being formed. The $25 state fee includes a search of the state records to make sure that your desired LLC name isn’t already taken.
Alabama Certificate of Formation Filing Fee – $200
This is a short but vital document, like a birth certificate for a person. Without it, your LLC doesn’t exist. Once it has been filed with the Alabama Secretary of State’s office, your LLC can do business, pay taxes, and take any other legal action. Thus, you need to make sure the certificate is done first and done correctly.
The easiest way to file it is online, using the Secretary of State’s website. The state also offers an easy fill-in-the-blank form with all the key information to make the process as easy as it can be.
Online Filing Fee – $8
Though you can get away without paying this if you file in person or by mail, this fee is the quickest and more direct route to getting started. Thus, we’ve included it here as a basic startup cost.
Alabama LLCs – Other Costs to Consider
$233 may be all you need to get started, but your LLC may need a bit more to get off to the best start. Use the list of costs below as a checklist, and think about whether and when your LLC might need them.
Business License – Varies
Every Alabama business must obtain a Business Privilege License from the Probate Judge or License Commissioner of the county where it is located. Costs can range from $15 to hundreds of dollars, depending on your LLC. You should review Alabama’s Handbook on the subject and contact your county government for more information about its business license requirements.
Your LLC’s city may also charge a fee for a business license. The City of Mobile, for instance, has a detailed website that will examine the facts of your LLC, then tell you what kind of business license you need.
Also, keep in mind that many types of businesses need 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.
Registered Agent Fee – about $100 per year
When you start your LLC, you’ll have to name a registered agent so that the state and the public can get in touch with you. This is vital if someone sues your LLC. A lawsuit may not sound like fun, but you must know when it happens, or your business will be at risk.
Because your agent’s details are included in your certificate, you don’t pay an extra fee to the state to name your Alabama registered agent. Still, you should think about hiring a company to serve as your LLC’s agent.
Many owners are tempted to serve as their own agents, thinking they can save a couple of bucks. This is not a good idea because it involves making your address public and always being available just in case someone wants to sue your company.
It’s simpler to hire an Alabama registered agent service for your LLC. These registered agent companies usually charge $100 per year and cover all your agent needs. It’s money well spent.
Operating Agreement – Variable
An operating agreement is a contract that sets down the rules of your LLC. It says how the people in charge should do their jobs, when meetings must be held, how members can enter and exit the LLC, and almost any other matter that affects your business.
You don’t need to have an LLC operating agreement in Alabama, but we strongly recommend that you think about it. Without a written contract, you have much less control over what happens to your company. If someone leaves, dies, or joins the company as an LLC member, a contract is a way you can keep control of your business. Don’t leave that to chance.
If you have an agreement, you don’t have to file it with the state. You can write it yourself, but unless you are a lawyer or know exactly what it’s supposed to look like, we don’t recommend that option.
Having a lawyer draft it is costly. They would likely charge you an hourly rate. While a lawyer’s contract would be thorough, spending hundreds (or even thousands) on a contract for a small business is overkill. If you use an LLC formation service, you can have a good agreement drafted, though, for as little as $39.
DBA Filing Fee – $30
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).
Getting your DBA is as simple as filing Alabama’s form trade name application, which is on the Secretary of State’s website. The DBA filing fee is $30.
Domain Name – about $20 per year
In this day and age, small businesses need to be on the Internet. The first step in creating a good website is to get a good domain name. While this might have been pricey in the past, it is now quite affordable.
You should lock down your domain name as soon as possible, even if you don’t have plans for a website right now. If you don’t, a competitor could buy your ideal domain and similar-sounding domains to block you from using them. Domain squatters also sift through newly registered LLC names and will buy their domains only to relist them with huge markups.
In general, a domain ending in .com will be more expensive than a .net or .info domain, and some names will likely be taken, meaning you will have to do some searching (and maybe compromising).
A domain name from GoDaddy.com or a similar registrar may cost you between $20 and $50 per year, with regular specials and sales where you can get substantial discounts.
Register With the State Tax Office – Free
Though Alabama typically taxes LLCs as pass-through entities, you will still have to pay some other taxes. These include:
- business franchise tax
- payroll taxes
- unemployment taxes
- sales and use taxes
The best way to make sure you don’t miss paying taxes is to register with the Department of Revenue online. There’s not a separate fee for this, so it is worth taking the time to do it. It will help you make sure nothing falls through the cracks.
Getting a Federal Employer Identification Number (“EIN”) – Free
An EIN is a number created and assigned by the Internal Revenue Service to a business for paying taxes. (Think of an EIN as a social security number for a business.) Some LLCs need them and some don’t, but having one can make your life easier.
Regardless of whether the IRS says you need one, we recommend that you get an EIN. The Alabama Department of Revenue will need it when you register your LLC with them. Also, many banks won’t allow your company to have its own business bank account without one. Finally, having an EIN can make it easier to get credit.
You can apply online and get an EIN for free in minutes, or you can apply for one through the mail or fax. Whatever you do, don’t pay someone else to get an EIN for you. It’s too easy to pay someone else to do it unless it is part of a broader service package.
Foreign LLC Qualification Fees – about $100 per extra state
If your business takes off, you may want to expand to new places. If one of those is in another state, you’ll have to pay to do business there. You won’t have to re-form your company, but you will have to register as a foreign LLC with the Secretary of State there and pay extra fees.
The exact fees will depend on the state in which you are registering. As a rule of thumb, expect to pay about $100 in filing fees to register your Alabama limited liability company in another state.
Writing Formation Costs Off
Because it takes money to start your LLC, you can write off many, though not all, of your costs on your federal and state taxes for a deduction. The IRS has a lot of guidance on this matter, and you should compare your specific costs to the materials on the IRS website.
Keep in mind that, in most cases, a limited liability company is taxed by the IRS as a pass-through entity. Generally speaking, LLC owners can deduct up to $5,000 of their business startup expenses in the first year.
A review of Alabama tax regulations shows that the state does allow startup deductions in accordance with the federal statute used by the IRS. Thus, it appears you can write off these same costs on your state income tax as well, provided that you are an Alabama resident or the principal place of business is in the state.
Linda loves bar food but doesn’t drink alcohol for religious reasons. This gives her the idea to start her own tavern in Tuscaloosa that serves bar food but does not sell liquor. She wants her business to be called The Boozeless Tavern LLC. She pays for her name reservation and, since it is available, files her LLC’s certificate of formation online.
Once she’s gotten everything filed, she decides that she wants the name outside her tavern to be “Linda’s Boozeless Tavern.” She therefore has to file for a DBA.
Linda doesn’t have any service staff yet, and the bar only seats 25 people. She may get more partners and/or servers in a year or two, though, so she has an operating agreement drafted to make sure that when those things happen, she has planned properly.
Linda’s LLC formation costs are as follows:
- Alabama certificate of formation filing fee: $200
- Name reservation request: $25
- Online filing fee: $8
- Business Privilege License (state): $46
- Tuscaloosa Business License: $30
(Note: In reality, this number will have to be based on estimated gross receipts, so it will be different for every business.)
- Operating Agreement: $39
- Resident agent fees: $100
- DBA fee: $30
- Web domain costs: $50
Linda has elected to have her LLC taxed as a pass-through entity by the IRS and the state. This means that she will claim both her business income and deductions on her personal federal and state tax returns.
Linda’s startup costs, which will form her deduction, total $528. Her taxable income before the deduction was $35,000, which puts her in the 12% federal income tax bracket. With the deduction, Linda’s taxable income will be reduced to $34,472. That saves her $63.36 in federal taxes.
On her state taxes, Linda is in the 5% income tax bracket. There, her deductions will save her $26.40.
Keep in mind that if Linda had more than $5,000 in startup expenses, she would likely be able to claim those starting in the second year of her business.
Cheapest Way to Start an LLC in Alabama
Now that you know the kinds of costs that you might incur, it’s time to start shopping around for the best deal that will serve your LLC’s needs. Sometimes, this might mean you need to spend a bit more. Be alert and spend wisely.
Formation Service – $39 + state fees
A formation service is a popular and less pricey way for new LLC owners to get started.
These companies help entrepreneurs bring their visions to life. They have not only the knowledge of all the state laws you need to know, but also forms, documents, and procedures to make your life as easy as possible.
Formation services are a quick and complete way to handle the formation needs of most LLCs.
- They’re easy. In most cases, a formation service will have helped hundreds of people through the exact process you are struggling with now. They have all the documents, information, and know-how you need right on hand.
- They don’t cost much. Because formation services have such a large volume of business, they don’t have to charge their clients that much money.
- They’re reliable. All of the formation services’ products have been used hundreds of times over in the real world. That kind of testing should give you peace of mind and confidence going forward.
- They’re fast. Formation services have seen almost every kind of LLC you could form already. Chances are, they have many options for you that are ready right now before you even know you need them.
While formation services can be great for most people, they are not always the best choice. Some cons for these services are:
- They’re not the best solution for complex LLCs. If you are forming a complex company or one in a heavily regulated industry, you will have concerns that probably need more focused expertise in that area of business.
- Even if a formation service is a good fit, you can expect upselling. Formation services have to make money too, and some of them may pressure you to buy products you don’t need. Even when you are using a formation service, you need to be a smart and informed shopper.
Using a professional LLC formation service can be a great way to set up a business. Check out our Best LLC formation services article for some of our suggestions.
Attorneys are licensed, reliable, and a powerful resource for business formations. They are also quite pricey, especially in bigger cities like Birmingham or Mobile. A business owner like Linda, with low startup funds, likely won’t be able to afford to pay a good lawyer by the hour.
As with many other things in life, owners with more money may have more options. If you are starting a complex business or one that involves several people, it can also make sense to get a lawyer to make sure everything is done fairly and is tailored to your LLC’s needs. For that reason, some owners choose to go this route.
Despite the expense, sometimes hiring a lawyer is the best choice.
- Lawyers help you manage risk. An LLC with tough legal issues needs a lawyer. For example, if Linda’s bar had served alcohol, there would have been more licensing and insurance issues she would have had to think about. A lawyer could help with that.
- Lawyers offer more customization when you need it. Do you need specific things put in an operating agreement? Is your company going to have a unique ownership structure? You may need a lawyer to make sure these issues are handled properly.
For most people, getting a lawyer comes with considerable downsides that outweigh any benefits.
- Lawyers cost more than any other option. The price tag alone should convince you that if you don’t need a lawyer, it’s not worth hiring one.
- Finding a lawyer takes a long time. Getting a lawyer who specializes in what you need, costs what you’re willing to pay, and can work with you well is a tall order.
- Lawyers also take longer to form a business than a formation service. Because lawyers are also very caring people, they will generally take much longer to form your company than non-lawyers would. Fortunately, most people don’t need a lawyer. In 90% of cases, a formation service will do just fine.
Do it Yourself
Many people, after searching the Internet for the information they need, decide to try forming their new LLCs themselves. This process can give you a lot of personal expertise, but remember that time is money. If you are spending hours on your business formation, that’s time you’re not spending on the substance of your business.
In most instances, then, it is more cost-effective to just pay an LLC formation service, with confidence that everything has been done correctly, rather than try to reinvent the wheel yourself.
- Personal knowledge. A DIY business owner will learn a lot about the process while forming their own LLC, and they probably will retain that knowledge for years to come.
- It costs less upfront. If you don’t figure out the value of your time, a DIY solution is the cheapest option.
- You’re losing money when you consider how much time it takes to DIY. If you figure out that your time is worth $30 per hour, and you take 20 hours to complete your business formation, you have essentially spent $600 on business formation. And that’s not money you will be able to write off.
- There’s the risk of making a mistake. DIY business owners can easily make a mistake with all the paperwork that then costs them more time and money.
- It’s a headache. State workers are very helpful, capable people. But they will also tell you that the laws and rules governing business formation are not easy, and they follow those rules for a living. It’s going to be even more challenging for you.
Annual Alabama LLC Fees: How Much Will it Cost to Maintain your LLC?
Even after you’ve formed the LLC, there are annual costs for which you will have to budget. These include both government fees and amounts paid to third parties, like:
- Local Business License: varies depending on location and nature of business
- Alabama Business Privilege Tax (includes filing of an annual report): $100 and up, depending on LLC receipts
- Registered agent service fee: $100
- Domain name renewal: $20
How Much are LLC Taxes in Alabama
As stated above, Alabama charges all LLCs a Business Franchise Tax that is based on the money they make in one year. That tax will be at least $100.
In terms of income tax, Alabama usually treats LLCs as pass-through entities and taxes income to members in the following tax brackets:
- Up to $500 of taxable income: 2%
- Next $2,500: 4%
- $3,000 and up: 5%
You will also have to pay other taxes associated with your business. For example, if your LLC hires workers, you must pay employment taxes. If it sells goods and services (and it almost certainly will), you'll also have to collect sales and use tax. Those taxes and more can all be calculated and handled through the Alabama Department of Revenue.
Alabama LLC Formation Costs Quick Links
- City of Mobile — Business License
- Department of Revenue — Business Privilege License
- Department of Revenue — Business Privilege Tax
- Department of Revenue — Handbook of Privilege and Store Licenses
- Department of Revenue — Register Online Account
- Department of Revenue — Sales and Use Tax
- Department of Revenue — Tax Forms
- Department of Revenue — Withholding Tax
- IRS — apply for an EIN online
- IRS information regarding the federal tax treatment of LLCs
- Secretary of State — Business Entity Search
- Secretary of State — Fee Schedule
- Secretary of State — Form LLC Certificate of Formation
- Secretary of State — Name Reservation Request Form
- Secretary of State — Online Filing System
- Secretary of State — Trade Name Application (DBA)
Alabama LLC Formation Costs FAQs
How much does it cost to start an LLC in Alabama?
The minimum cost is $225. You must pay at least this amount to reserve your LLC’s business name and file its Alabama LLC certificate of organization with the state.
What is the cheapest way to start an LLC in Alabama?
A do-it-yourself approach will have the lowest price tag, but it isn’t the cheapest in terms of your time. The best balance of price and time, for most people, is to use a formation service.
Do I need to hire an attorney to form an LLC in Alabama?
No. Most people will not need to invest the considerable expense and time of hiring a lawyer. A formation service or a DIY approach will work for most business owners.
Can I pay to form an LLC more quickly in Alabama?
Yes. Formation services will generally complete formation tasks faster than business owners acting on their own. There is not, though, any option to expedite LLC filings with the state.