LLC in Alabama: The Secrets of Starting an LLC

Starting a business in Alabama is easy as long as a business owner knows where and how to start.

In this article, we will give you the necessary information about registering a business in Alabama.

How to form an LLC in Alabama

An LLC is a limited liability company based on a state statute.

The members of an LLC are not held personally liable for business debts and liabilities, unlike the sole proprietor or partnership forms of business organization.

An LLC can be filed in your local county probate court or secretary of state’s office, where a jurat is administered by either a notary or a court clerk.

Whether you use an attorney, do it yourself, or have your attorney assist in the process, there are many steps to forming an LLC in Alabama:

1. Alabama LLC Name Reservation.

File a name reservation to obtain the exclusive right to use the business name for an Alabama limited liability company. Then you will get the certificate of name reservation. The initial filing fee is $40.

The service is not mandatory but it reserves your LLC name so no one else can file our LLC with that specific name in the future and this is why you need to do it before registering an LLC in Alabama.

Naming requirements:

  • your LLC name must contain the words “limited liability company” or “limited company,” or the abbreviations “LLC” and “LC”;
  • your LLC name may not contain language stating or implying that it is organized for a purpose other than one permitted by state law;
  • the name of an LLC may be the same as or similar to another Alabama limited liability company, corporation, limited partnership, limited partnership association, a foreign entity registered in this state or federal trademark registered with the United States Patent and Trademark Office without prior written consent from the other business entity;
  • the name of a professional service corporation shall contain “professional association,” “professional corporation” or the abbreviation “PC”;
  • a foreign LLC with an address outside of the state must file a name that clearly indicates it is a foreign entity.

2. Alabama Registered Agent.

After the name registration, choose an agent for service of process, or in other words a person who will receive legal papers if your business is sued.

You must maintain a physical address within Alabama to file the Registered Agent with the Alabama Secretary of State.

A domestic LLC can be its own registered agent in Alabama, but that does not make sense since it is a small cost to pay for a professional registered agent service to handle this.

Most business owners choose the Secretary of State as their Alabama Registered Agent since it is convenient and cost-effective, costs $40 annually for service.

Secretary of State features:

  1. Receive important legal notices by email.
  2. Update your business address online anytime with the “Online Address Change Form.”
  3. Get your business’s free EIN from “EIN Online Form.”
  4. Print, fax or email a copy of your current Certificate of Formation. You can also have multiple Certificates of Formation printed.
  5. Sign a document online to authorize someone else, known as your “Authorized Agent,” to file the Certificate of Formation, sign other formation documents for you, and retrieve copies of documents on your behalf.
  6. Receive updates about the status of your business entity from the Secretary of State’s office.
  7. Auto-fill your name and street address on all filing forms.

3. Alabama LLC Certificate of Formation.

The Certificate of Formation is a document filed with the Secretary of State’s office to create an LLC. It is signed by at least one member and notarized.

The filing fee for limited liability companies in Alabama is $300.

Whether you are using an attorney or not, this document will be prepared on your behalf by filling in the pertinent information about your new LLC and delivering it to the Secretary of State’s office.

The filing will not be complete until you have provided your Secretary of State’s office with a copy of your Business Licenses.

4. Alabama LLC Operating Agreement.

An LLC with more than one member should have an Operating Agreement between the members which is a private contract.

It is not filed with any government agency but it will be referenced in the Certificate of Formation.

This document describes how your LLC will operate and what its terms are.

An Operating Agreement may include how you plan on dealing with future issues, such as what needs to happen should a member decide to leave the company or if one of you passes away.

You may want to include provisions in your Operating Agreement about what happens when new members join the LLC, and how many votes are required for LLC decisions.

An operating agreement is not filed with any government agency but must be available for review by members, creditors, and other third parties.

5. Federal Tax ID Number (EIN Number)

The federal tax ID number or Social Security Number is a number issued by the IRS that’s assigned to business entities division, including corporations and LLCs.

It is used for tax reporting purposes which you will need to request your new Alabama LLC’s tax ID number (EIN) from the IRS within 60 days of formation.

This number will be used when registering your business online in 3 steps:

  1. Registering with the State of Alabama.
  2. Registering your Business License with the City of Mobile.
  3. Registering your Business License with the State of Alabama.

6. Alabama LLC Annual Report and Business Privilege Tax Return

You also will need to register your business with the Alabama Department of Revenue. To do so, you must file an Annual Report and Business Privilege Tax Return (Form CR-4) for each year in which you or your corporation conducts business operations. This includes the period of time between the effective date and the close of the tax year.

An Annual Report and Business Privilege Tax Return must be filed on or before the last day of the 12th month following the close of the tax year.

If your business is a corporation, then you will need to file both Federal and State tax forms in order to maintain your status as an S-Corp.

7. Business Licenses and/or Permits

Once you form your LLC, you will need to register with the city and county where you plan on conducting business.

This serves as a registration processing for businesses in Alabama.

You must submit all of the following information:

  • Business License Application
  • Proof of Business Ownership (i.e., Alabama Certificate of Formation)
  • Local Zoning Information
  • Materials & Products (i.e., Statement of Business)

The city and county have the right to require a business license tax, which is collected as part of your annual business privilege tax return.

The city and county will determine how much you should be paying for this license.

Types of licenses and permits in Alabama

1. A.D.A. (Alabama Disabilities Act)

This permit ensures that you do not discriminate against a person with disabilities during the hiring process and prohibits retaliation if someone files a complaint under this act.

It also helps to ensure that the accessibility of your business is compliant with ADA guidelines.

2. Home Occupational Business License

In order to operate a home-based business, such as an online store or consultant you should register your business with the city and county.

This is done by completing the Home Occupational Business License Application with proof of insurance, materials, and products list as well as any other necessary permits/licenses required for that particular line of business.

3. Mobile Food Vending Permit

If you plan on operating a food truck or otherwise selling food from your business, then you will need to obtain a Mobile Food Vending Permit.

This permit allows you to operate within the city limits of Mobile.

The Permitting Department website explains that this permit is “good for one year from date of issuance and expires at midnight August 31 of the same year.”

4. Mobile Transit Authority Street Vending Permit

If you plan to conduct business in a public right-of-way, such as selling on a street corner or at a sidewalk sale, then you will need to obtain this permit from the Mobile Transit Authority.

The fee is $50 for each day it is scheduled to be conducted, and the same permit cannot be used on consecutive days.

The Mobile Transit Authority Street Vending Permit Application shows that there is space for you to list other permits/licenses that you hold, such as an Alabama Home Occupational Business License or a Mobile Food Vending Permit.

Other licenses and permits that may be required for your business include:

  • Alcohol Beverage Control
  • Mobile County Health Department Permit
  • Construction Permits (i.e., building permit, electrical permit, etc.)

You can find out what licenses/permits are required for your business with the city and county that you plan on conducting business operations.

8. Alabama LLC Bank Account

You should set up a bank account for your LLC in the state of Alabama.

It is important to have a bank account for your LLC, even if you only plan on conducting business in one state.

If you conduct business interstate, then the state where you are registered to do business will expect to be paid taxes and filing fees like any other resident of that state.

Having an account set up in Alabama allows you to easily pay taxes as well as file annual reports and other necessary business documents.

Banks may require you to fill out a form and submit it to the State of Alabama in order to set up your bank account.

9. Business Phone Number

You should purchase a phone to use for your business.

Using a home phone is ok but it does not look professional and will cause hesitation in clients/customers. This may make the difference between signing or losing a client.

If you plan on hiring employees or contractors then they may need their own cell phones as well.

Benefits and drawbacks of starting an LLC in Alabama

Benefits:

  1. Only costs $50 to form your Alabama LLC.
  2. Can be done online in a couple of minutes.
  3. Can be set up by a resident of Alabama even if you plan on conducting most or all business elsewhere or not even living in the state.
  4. Is easy to change an existing LLC into another type of business structure, such as an S-corp or nonresident/foreign LLC.
  5. .Can be set up by a local resident even if you plan on conducting most of your business outside of Alabama.
  6. LLC’s liability protection.

Drawbacks:

  1. State government tax records are only published digitally so it is harder to find specific information about your LLC.
  2. You must file a separate disclosure statement to operate your LLC in Alabama if it is not an S-corp.
  3. State fees are due quarterly even for nonresident/foreign LLCs while most other states require annual filings.

How much does it cost to start an Alabama LLC?

The only cost to start an LLC in Alabama is $50. This fee can be paid by check or credit card (there is a small convenience fee for using this option).

The filing fee may have to be paid in cash if you do not have a valid check and/or CC on hand.

Registering as a Foreign Entity:

  • Companies that are not formed in the state of Alabama and do not have a physical presence within the state, such as a registered office or employees, are considered nonresident or foreign entities.
  • Nonresidents must file Annual Reports which costs $50 plus an Extension Fee of $15. The Annual Report is due by April 1st each year.

How long does it take to start an Alabama LLC?

Once you have completed the LLC application, it is filed electronically with the State of Alabama.

The state will then send you an email confirming receipt of your application.

Once all information has been determined and verified, which may take a few days to complete, your LLC will be approved.

If you applied on a Friday afternoon/evening or over a weekend, you may not receive confirmation until Monday.

How do I file an LLC Annual Report?

The Annual Report is filed online using the State of Alabama website: https://www.alabama.gov.

Once logged in to the site, look for the “Annual Report” link at the top left part of your screen (looks like a calendar). This will take you to the Annual Report page.

Tax Filing Requirements

Alabama LLCs are subject to Alabama income tax unless they elect to be taxed as an S-corp or nonresident/foreign entity.

  • An annual report must be filed in this case every year by April 1st, even if you did not do business during the year.
  • A resident LLC where at least one member is a resident of Alabama must file an income tax return with the state as well, even if they are electing S-corp status.
  • Nonresident/foreign entities are not required to file an annual report but may elect to do so in order to be federally recognized.
  • All LLCs must file a federal income tax return regardless of the entity type. This is required by the IRS to maintain your corporate status.

In order to remain classified as an LLC, you must also file a separate state income tax return in Alabama if you do business or have employees in this state and elect to be taxed as a resident company.

Alabama Sales Tax

All LLCs are required to charge sales tax on product and service transactions if they have a business presence within the state.

This includes but is not limited to, having an office or warehouse in Alabama, or using an independent contractor who lives in this state.

However, it is possible for businesses that do not have a physical presence in Alabama to sell tax-exempt products (intangible property) in the state.

Applicants should note that Alabama-only sales tax does not apply if the company has a business presence in other states where they also sell products/services.

Alabama Employer Taxes

Alabama LLCs are required to collect Alabama withholding taxes if they have employees who live and work in this state. This includes:

  • full-time;
  • part-time;
  • seasonal;
  • temporary;
  • independent contractors with an office in Alabama;
  • anyone who lives in the state for more than 180 days a year.

Employers must withhold tax from employee paychecks and then pay that money to the state’s unemployment office.

If you have employees who live in Alabama, you will need to register your LLC with the Alabama Department of Revenue (ADOR).

This is a simple process; it can be done online or over the phone by calling 1-334-242-1165.

Registration requires the LLC to open an Employer Identification Number (EIN) and the company must then report that number to all employees.

  1. If you are required to withhold any taxes, generally you can register with ADOR up to 2 years after you hire your first employee.
  2. You will also be required to pay a one-time registration fee of $500 if you have employees. Once you have registered with the state, you will be issued an Employer Identification Number (EIN) that must be reported to all employees on their W-2’s each year.

The LLC may also collect employee income tax withholding if they do not have a physical presence in Alabama but hire independent contractors who live and work within the state for a total of 180 days or more during the year.

These independent contractors may also be required to file individual income tax returns with the state.

Self-Employment Taxes

Alabama has adopted an estimated income tax, which means that LLCs are responsible for paying taxes on their net profit instead of filing and paying an annual return.

This reduction in paperwork is a benefit to small businesses but it means that LLCs must pay self-employment taxes (SE tax) each quarter.

Self-Employment Taxes Requirements:

I. In Alabama, SE tax is based on the company’s net profits as reported on its Annual Filing Return (Form 700).

The company reports this number to the IRS using Schedule C and then pays the state directly.

II. The LLC must pay in four quarterly installments, due on 1/15 of every quarter and April 15th.

The self-employment tax rate in Alabama is 12% for both the employee and employer portions (6.2% each).

However, if you are a sole proprietor who reports all income on your own personal income tax return, you are not required to pay the employer portion of the self-employment tax.

III. If your LLC’s net profits for a quarter are more than $1,500 or total payroll expenses over that time period exceed $3,000, you must report and pay both portions of SE taxes.

You may also be eligible for one of the state’s many tax credit programs.

IV. The LLC may decide to pay estimated taxes in a lump sum or through the installment system.

For example, if your company generated $20,000 of net profit for the year and you expect it will do the same during each quarter of that year, you could make one large payment with your Annual Filing Return.

If instead, you expect to have net profits of $30,000 over the course of the year with slightly more fluctuation during each quarter, you could pay each installment separately.

V. Employers must notify their employees on how much money they withheld from their paycheck using Form W-2 at the end of every year.

You may also be required to file Form W-2C with the IRS and report any income you withheld but did not payout.

Hiring Employees in Alabama

As an LLC, you will be able to dictate the terms of employment for any employee that works for your company.

You may choose to set up a regular payroll schedule and have a salary or wage paid biweekly or monthly. Some employers choose to pay employees hourly and pay out their earnings weekly.

Tips for Hiring Employees:

  1. Depending on the type of work performed, you may need to issue quarterly or annual tax withholding returns.
  2. As the employer, you must make sure that you are in compliance with local and state laws regarding how much money will be withheld from each employee’s paycheck and when it will be reported.
  3. Keep in mind that different IRS requirements may apply if your LLC hires federal contractors or employees who work on federal contracts.
  4. Not all employers are required to collect their employees’ social security numbers (SSN) for tax purposes, so long as the employees are paid less than $50,000 per year in wages.
  5. If your company is one of these smaller businesses and only employs seasonal or temporary workers that will not exceed this amount, you do not need to collect their SSNs. However, if you do need to collect an employee’s SSN for tax purposes, you must ensure that your company is in compliance with all relevant laws and regulations regarding the usage of this number.
  6. If you decide to hire employees that exceed these thresholds or have certain jobs associated with a higher risk of fraud, like businesses involving medical care, you will need to get an EIN to report payments. You should also contact your accountant or a lawyer to ensure compliance with these laws and regulations.

How to Build Business Credit

The first step to building business credit is to sign up for a Trade Line with Dun & Bradstreet.

This will give you the opportunity to obtain an EIN if needed and report your company’s information to D&B so that it can be updated on their records.

After receiving your Dun & Bradstreet number, you may want to establish a credit line with local banks.

This will allow you to send and receive payment for goods or services and keep them updated on your financial well-being.

Additionally, you may want to create a Payee Data File (PDF) for any business that will be handling a large amount of money from your company over the course of a year.

Employer-Employee Relationship:

As an employer, your LLC is required to withhold federal and state income taxes from the earnings of each employee that falls below a certain amount.

If you do choose to establish payroll with this type of schedule, once again, consulting an accountant or tax lawyer may be beneficial as there are many laws regarding how much can be withheld.

If you hire more than one employee, you will need to report their earnings on a W-2 for each company and make sure that the Social Security Number (SSN) is requested before beginning that employment relationship.

These forms should be obtained each year from your employees so they can submit them to the IRS at tax time.

Wage and Hour Laws:

  1. As an employer, you are responsible for following the Fair Labor Standards Act (FLSA) in regards to how much money is paid to each employee. This includes regular hourly wages as well as any overtime that is earned if they work more than 40 hours per week.
  2. If your LLC chooses to pay its employees a flat rate or salary, you should consult an accountant regarding how much is considered a reasonable wage.
  3. The FLSA also requires that employers provide their workers with plenty of breaks throughout the day and have them paid for any time spent traveling to and from work.
  4. You should also be aware of any state laws that may hold different requirements regarding your employees’ breaks.

If you do not follow these laws, your business could be subject to a fine of up to $1,100 per offense, which can quickly add up if there are several employees or violations during the course of one year.

To ensure that your LLC is in compliance with these various employment regulations, it may be helpful to consult attorneys if you are unclear about any of the laws, especially any that pertain to overtime.

Other Duties:

As an employer, there are other duties that your company may be responsible for outside of those listed above.

  • if your employees work in a dangerous field or environment at your direction and request protective clothing or equipment, you will need to provide it;
  • the employer is also responsible for guaranteeing the safety of any tools and equipment that their workers will use, which means making sure they are provided with the appropriate training as well as protective gear and supervision if required.

How to Obtain a Certificate of Good Standing in Alabama

To obtain a Certificate of Good Standing in Alabama, you will need to contact the Secretary of State’s office for the state that your LLC was created in.

Information to fill in:

  • LLC Name and Address
  • Your name as it appears on the records
  • The type of form you are submitting (a certificate or affidavit)
  • Why do you need the certificate
  • The date of formation for your company
  • A filing fee (usually $10-15)

Once this information has been received, a Certificate of Good Standing may take anywhere from 1 to 4 weeks to arrive in the mail.

Once it has been completed and sent out, make sure that it is placed with any legal documents that are kept in your company’s office.

The key to obtaining a Certificate of Good Standing is:

  1. To make sure it is done correctly from the start so you do not encounter any problems down the line. If you file incorrect information or neglect to submit an updated document when required, there may be consequences for doing so that include additional fines and possible criminal charges.
  2. When filing a Certificate of Good Standing, it is also essential that you are requesting the correct type since mixing up the forms can cause unnecessary problems as well.

As an alternative to visiting your Secretary of State’s Office, you may be able to obtain this (or any other LLC paperwork) online through their website or have your attorney submit the paperwork for you.

Don’t let the simple title of “Certificate of Good Standing” fool you; there are certainly a lot of rules that must be followed when filing this document with your state’s office in order to provide nothing but the most accurate information about your LLC.

You should take these guidelines into consideration before completing any Certificate of Good Standing documents to ensure that the information is as accurate as possible.

If you are not sure what type of LLC you have (for example, if it’s a Professional LLC or LPA), be sure to consult an attorney for clarification so you can avoid making any mistakes.

Conclusion

All the above legal documents from this guide are pretty much required for every LLC, so ask your company’s attorney to prepare them.

Your lawyer will also be able to provide you with a lot of valuable tips about how to approach the table at the initial meeting and how you can make a great impression on the first client.

The key is to always stay professional and make sure that your business runs efficiently.

Let your clients know that you are invested in their experience and want to see them succeed, so they have an incentive to keep doing business with you on a regular basis after the initial meeting.

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