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Alabama is the heart of the South, with plenty of offerings for small business owners. The state boasts the third-lowest property tax in the United States and offers tax breaks on income, sales, and use. Areas like the Gulf Coast, Greater Auburn, and Chambers County are among the fastest-growing local economies in the country, thanks to an influx of shipping, manufacturing, and research opportunities. Alabama is an excellent launch point for your limited liability company (LLC). This guide walks you through the steps.
How to start an LLC in Alabama
- Name your Alabama LLC
- Create a business plan
- Get a federal employer identification number (EIN)
- Choose a registered agent in Alabama
- File your Alabama Certificate of Formation
- Obtain business licenses and permits
- Understand Alabama state tax requirements
- Prepare an Alabama LLC operating agreements
- Examine business insurance options in Alabama
- Understand financial considerations
- Market your Alabama LLC
What is an LLC?
A limited liability company (LLC) is a type of business entity that offers liability protection to its owners, while allowing more flexibility than a corporation. LLCs can be founded by one person or multiple people, and its owners are called “members.”
Unlike a sole proprietorship or partnership—which makes no legal distinction between a business and its owners—LLC members won’t be held financially responsible for the company’s debt or lawsuits.
And unlike a corporation, LLCs are pass-through entities by default. This means you won’t need to file federal taxes for the LLC itself. Instead, any profits pass through to LLC members who record them on their personal tax returns.
Is an LLC right for you?
- You want to limit your personal liability. LLC owners are not held personally liable for legal damages and debts incurred by the company, meaning that, as an owner, your personal assets can’t be used to pay off creditors or legal damages.
- You’re looking to limit your tax obligations. LLCs are taxed at members’ personal-income levels, unlike corporations, which pay tax on income generated at the business level.
- You don’t need to fundraise via the issuance of stock. LLCs don’t issue stock or have shareholders like C corporations. While this limits your business’s ability to raise money from investors, it simplifies its ownership structure and executive decision-making process.
1. Name your Alabama LLC
One of the most fundamental decisions you’ll make as an Alabama LLC owner is choosing a name for your business. Aside from picking something catchy and memorable, you’ll need to follow three statewide business-naming rules:
- Your name must be unique. Your LLC’s name must be different from any other existing business in the state. Run a search on the Alabama Secretary of State’s website to see if your preferred name is available.
- Your name must include the entity type. An Alabama LLC must include the words “Limited Liability Company,” “L.L.C.,” or “LLC” in its name.
- Your name can’t contain certain words. Your Alabama LLC cannot have words that would confuse it with a government agency, like the FBI or Treasury. Other words are restricted based on licensing, such as “attorneys at law” or “credit union.”
2. Create a business plan
A viable business needs a thorough business plan, and Alabama LLCs are no exception. A good business plan includes your LLC’s name and a brief description of its function. It should also have a detailed market analysis, an organizational structure flowchart, descriptions of your products and services, a target customer profile, and marketing, logistics, and finance plans.
3. Get a federal employer identification number (EIN)
For tax purposes, you need a federal employer identification number (EIN), assigned to your LLC by the federal government. You can apply for this nine-digit number, which identifies your company to both state and federal tax authorities, by applying (for free) through the US Internal Revenue Service (IRS).
4. Choose a registered agent in Alabama
Alabama LLCs need to appoint a registered agent to receive legal documents and service of process (notice of legal action). Your business’s registered agent can be an individual, an employee or member of your LLC, or registered agent service. In either case, Alabama registered agents must have an address in Alabama and be on-site and available to accept legal correspondence and documents during regular business hours.
5. File your Alabama Certificate of Formation
Once you’ve appointed an agent for your Alabama LLC, you must register it with the Alabama Secretary of State’s office. In Alabama, these filings are called Certificates of Formation—known as “Articles of Organization” in many other states. You can submit the filing online or by mail, along with a $200 filing fee. Articles should include:
- Your LLC’s name
- Your registered agent’s name and address
- The effective date of the LLC (if different from the filing date)
- A signature of the organizer (i.e., an LLC member or a hired manager)
6. Obtain business licenses and permits
You can obtain an Alabama business license in person or online by applying with the proper regulatory agency. Business licensing requirements generally depend on your Alabama LLC’s activity and location. There are three primary licensing jurisdictions—state, county, and local—with some overlap between them:
- State level. You'll need a business privilege and store license if your LLC intends to sell a product or service. Despite being authorized by the state, you obtain these through your Alabama county probate office. Check the state’s online directory to see which office applies to your LLC. You’ll also need to register for a seller’s permit if you sell a product or service, which would ordinarily be subject to sales tax if sold at retail. You can register for a seller’s permit through the My Alabama tax website.
- County and local level. You may need other licenses and permits from your county or local city government, depending on the nature of your business. The Alabama Department of Revenue provides a directory of all local regulatory agencies that require licensing.
You must renew your Alabama business and tax licenses annually. Fees vary depending on the county or city in which your LLC operates.
7. Understand Alabama state tax requirements
Alabama requires LLCs to file a Business Privilege Tax Return and an annual report with the Alabama Department of Revenue. You can access the tax forms online at the department’s website. All LLCs pay, at minimum, $100 in taxes yearly, which covers the business privilege tax.
If your LLC sells goods and collects sales taxes, you’ll need to register with the Alabama Department of Revenue. Sales tax in Alabama is 6.5%. Alabama LLCs with employees are also subject to a 2% to 5% payroll tax.
8. Prepare an Alabama LLC operating agreement
An operating agreement is a legal document that outlines your LLC's ownership, its organizational chart, and operating procedures. Alabama LLCs do not need to prepare operating agreements, but for administrative and goal-setting purposes, it’s a great idea to have one. A solid operating agreement describes:
- How ownership rights are distributed between business owners (members)
- Members’ roles and responsibilities
- Procedures for when a member wants to leave the LLC or when the LLC winds down
- Details on how you’ve elected to be taxed as an LLC
9. Examine business insurance options in Alabama
Purchasing insurance for your Alabama LLC is essential to managing risk and can free up your mind to focus on growing your business. Standard insurance plans for Alabama businesses include:
- Workers’ compensation insurance. Businesses in Alabama are required to have workers’ compensation insurance if they employ five or more people.
- General liability insurance. General liability insurance provides broad protection from lawsuits, financial losses from property damage, and injuries on the job, such as a customer slipping and falling on your shop floor. According to state law, you don’t need to buy this policy, but many commercial leases require it.
- Professional liability insurance. Professional liability insurance covers financial losses resulting from mistakes like poor advice for professional services such as consultancies, accountants, medical professionals, or real estate agents.
10. Understand financial considerations
Aside from insurance, you may have to make additional investments to set up your Alabama LLC. These might include rent toward a lease on a brick-and-mortar retail space, paying for a professionally designed website or social media management, or purchasing equipment and software. In addition to paying employees, you may want to hire contractors and other professionals to support your business, like lawyers and accountants. Resources are available to help entrepreneurs raise startup funding to assist with these costs.
11. Market your Alabama LLC
Once you’ve worked through the administrative startup, it’s time to get the word out about your Alabama LLC—and make it stand out with a marketing campaign. A solid marketing plan for your small business includes:
- Market research. Before marketing your products or services, gain an understanding of your target customer as well as a sense of what your competitors are up to.
- Advertising. Promote your LLC by paying for print, TV, radio, or digital advertising, or by hiring an agency to do this for you.
- Social media. Your small business has everything to gain from a robust social media presence. Make your Alabama LLC known on platforms like Facebook, Instagram, and YouTube.
- Public relations. Paid media only goes so far. To increase your business’s visibility, try for some publicity by connecting with local and national media organizations.
Starting an LLC in Alabama FAQ
How much does LLC formation and maintenance in Alabama cost?
It costs $200 to register your LLC in Alabama and at least $100 in taxes annually to operate.
Do you need a registered agent in Alabama?
Your LLC must appoint a registered agent in Alabama—either an individual or an agency with an address in the state.
How do state taxes work in Alabama?
Alabama LLCs are subject to a minimum of $100 in tax annually. If your LLC sells goods and collects sales taxes, you’ll need to register with the Alabama Department of Revenue. Sales tax is 6.5%, and Alabama LLCs are subject to a 2% to 5% payroll tax.