Form an LLC in Alabama
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Start a Business
Many entrepreneurs across the United States, including in Alabama, choose to operate their businesses as an LLC ( limited liability company). The LLC is a business entity type that offers some of the same legal protections and tax flexibility as corporations but with less administrative complexity and fewer costs.
Should you form an LLC in Alabama? Let’s look at the LLC’s features, advantages, formation process, ongoing compliance, and frequently asked questions.
Legal and Tax Considerations When Forming an LLC
An LLC is a separate legal entity from its members. So, if the business gets sued or faces financial difficulties, the owners’ personal assets are generally not at risk of being used to settle those debts.
By default, the IRS treats an LLC as a pass-through entity. It considers the LLC and its members as the same tax-paying entity. Profits, losses, and income tax obligations flow through to the LLC’s owners’ personal tax returns. Qualifying Limited Liability Companies may instead be taxed as an S Corporation. S Corp tax treatment is also on a pass-through basis. However, how self-employment taxes (Medicare and Social Security) are applied differs from how they are handled with the default LLC tax treatment. Normally, all an LLC’s profits are subject to self-employment taxes. Alternatively, with the S Corp tax election, only owners’ salaries and wages are subject to Medicare and Social Security taxes. Compensation paid as distributions to members is subject to federal income tax but not self-employment taxes.
Advantages of LLC Registration
Here are some of the reasons entrepreneurs find the LLC business structure attractive:
- Limits the owners’ personal liability for the business’s debt and legal issues.
- Allows for the transfer of ownership – If a member leaves or dies, an LLC’s operating agreement should have provisions for handling that member’s ownership stake.
- The business may survive beyond a member’s lifetime because an LLC is a legal entity separate from its owners.
- Has fewer corporate formalities than a corporation – e.g., no bylaws, board of directors, shareholder meetings, etc.
- May have an unlimited number of members.
- Provides ownership flexibility – LLC members do not need to be U.S. citizens or have permanent residences in the state.
- Offers tax treatment flexibility – Members may choose to be taxed as either a Partnership (or Sole Proprietorship if a single-member LLC), S Corporation, or C Corporation.
Comparison of Types of LLCs
LLCs come in different sizes, management structures, and other variations. Here’s a comparison of some of the options entrepreneurs may choose from.
Single-Member LLC vs. Multiple-Member LLC
If a company has just one owner (or a married couple as the owner), the business is a single-member LLC. That single member has full control over the company and how it’s managed. When an LLC has two or more owners, it is a multiple-member (multi-member) LLC. Multi-member LLCs may have an unlimited number of members (unless they elect for S Corporation tax treatment, which limits ownership to 100 or fewer members). All LLC share control over their multi-member LLC, with roles, responsibilities, and profit distribution set forth in the LLC operating agreement.
Member-Managed LLC vs. Manager-Managed LLC
LLCs may choose to be member-managed or manager-managed. An LLC is member-managed when the business’s owners run the day-to-day operations and administration efforts. Rather than task the LLC owners with managing everyday details, members may identify their company as a manager-managed limited liability company. As such, they appoint someone as a manager responsible for handling daily business activities. An LLC’s manager could be someone that the company hires or one of its members.
Domestic LLC vs. Foreign LLC
When an LLC has registered its Articles of Organization in a state, it goes on record as a domestic LLC there. That state is the company’s home state (a.k.a. domicile). If an LLC registers as a domestic LLC in one state and it conducts business in another state (with either physical presence or economic nexus), typically, it must file as a foreign LLC (foreign qualify) in the additional state(s).
LLC vs. PLLC
The primary difference between an LLC and a professional limited liability company (PLLC) is that only professional license holders in certain fields (attorney, physician, accountant, architect, etc.) may form the entity. Some states do not recognize the PLLC structure but have other options for licensed professionals who want to start a business. Another difference between an LLC and PLLC is that in a PLLC, each member is shielded from personal liability for other members’ malpractice. If any member conducts malpractice in a regular LLC, all owners can be held personally liable.
LLC vs. LLP
An LLP (limited liability partnership) is like a general partnership except that an LLP is considered a separate legal entity from its owners. The business structure provides personal liability protection similar to that of a PLLC, with individual members shielded from debts of the business and any malpractice by other partners. Each owner is responsible for their own malpractice or negligence, though. Some states laws only allow certain licensed professionals to form an LLP, something significant to consider if a business might expand to multiple states in the future.
8 Steps to Form an LLC in Alabama
1. Select a Name for Your New LLC
After the business owners know what they’d like to call their business, they should conduct a name search to ensure no other company has already claimed the name at the state or federal level. States will usually deny a business from using a name that’s too similar to another company’s name within the state, especially if the two businesses provide similar services or products. Likewise, it’s important to do a trademark search to confirm the desired business name isn’t used as a trademark by another company within the United States.
2. Appoint a Registered Agent
An LLC must designate a registered agent authorized to accept service of process (essential government documents and legal notices) on behalf of its business in the state. Having a registered agent is legally required for LLCs. LLCs that have operations in multiple states must designate a registered agent in each of those states. Fortunately, CorpNet is authorized to provide our registered agent services in all 50 states, so we make things easy for business owners who want to grow and expand their companies.
3. File Articles of Organization
The paperwork that business owners must submit to a state’s Secretary of State office (or other designated state agency) to form an LLC is called “Articles of Organization” or “Certificate of Organization.” The turnaround time and cost to file formation documents vary by state. If the paperwork is completed incorrectly, it will cost business owners more money (filing fees are not refundable) and cause delays in opening the company. For peace of mind, consider asking CorpNet’s filing experts for assistance. We have experience helping entrepreneurs in all 50 states correctly prepare and file their LLC formation documents.
4. Draft an LLC Operating Agreement
An LLC operating agreement is the governing document that describes the roles and responsibilities of an LLC’s members and managers and how to run the business entity. While states don’t require LLCs to have (or file) their operating agreements, these legal documents can help reduce misunderstandings among members by spelling out the business’s owners’ authority and obligations.
Possible elements included in an LLC operating agreement:
- How the LLC should distribute profits among members
- The approval process when making certain decisions (such as adding or removing members, hiring employees, entering into vendor contracts, applying for loans, etc.)
- Whether the LLC must hold annual member meetings and record minutes (including how to approve meeting minutes)
- Dispute resolution process
- What happens when a member leaves or dies
These are just a few examples of the details an LLC operating agreement might contain.
5. Apply for an EIN
An EIN (employee identification number) is required for any business that hires employees. EINs are free of charge and may be ordered online from the IRS (or CorpNet can take care of ordering your EIN for you). A multi-member LLC (taxed as a partnership) must include its EIN (also known as its “federal tax ID number”) on the informational return the business must file with the IRS at tax time. Moreover, many banks require that an LLC have an EIN before they open a bank account in a business’s name. An EIN may also be required when applying for business licenses and permits or a business line of credit.
6. Obtain Required Business Licenses and Permits
Depending on the type of business an LLC conducts, there may be state, federal, or local business licenses and tax permits required to operate legally. It’s critical to research the business license requirements so that the LLC has the proper authority to conduct business in the jurisdictions where its located.
7. Register for State Payroll Taxes
Businesses with employees must be set up to remit any employment-related taxes and fees to the state tax authorities. Payroll tax registration details can become confusing, so consider relying on CorpNet’s specialists to manage the process of registering your LLC for payroll taxes.
8. Keep Your New LLC compliant
Besides the startup activities involved in forming an LLC, business owners must also fulfill some ongoing compliance requirements. The rules vary from state to state. Below are a few common LLC compliance obligations that entrepreneurs might expect.
- Keep your business bank account and transactions separate from your personal finances.
- Renew business licenses and permits.
- File an annual report (if required by the state).
- Hold an annual member meeting and record meeting minutes (if required by the LLC operating agreement).
- File and pay taxes.
- Inform the state of any significant changes to the business, such as moving to a new location or adding (or removing) members.
FAQs About LLC Formation
What Does LLC Stand For?
LLC stands for “limited liability company.” An LLC is a business entity that is legally separate from its owners. The owners of an LLC are called “members.”
What are the Advantages of Setting Up an LLC?
An LLC offers some legal protections to business owners, shielding their personal assets from being taken to settle debts and legal claims against the business. Another advantage is tax flexibility. LLCs are by default pass-through tax entities, with all profit and loss flowing through to the owners’ personal tax returns. However, eligible LLCs may be taxed as S Corporations to help minimize business owners’ Social Security and Medicare tax obligations
What are the Disadvantages of Setting Up an LLC?
A potential drawback of the LLC is that pass-through taxation may create an unfavorable financial situation for some business owners. Because all profit and loss are taxed at the owners’ individual tax rates, the LLC structure could cost owners more in taxes — depending on their tax bracket. In some cases, the corporate tax rate (at the federal or state level) might be less than the individuals’ tax rates. It’s important for entrepreneurs to talk with a tax professional for advice on how setting up an LLC will affect their tax obligations.
Can anyone Form an LLC?
Individuals, other LLCs, corporations, or foreign entities may own a limited liability company. Note that some states also allow the formation of variations on the LLC, such as PLLC (professional liability company), and those may come with restrictions on who may own them.
Do I Need a Lawyer to Form an LLC?
There are no requirements to have an attorney complete LLC formation paperwork. CorpNet saves our clients money on legal costs because we can prepare and submit your LLC forms for less than many lawyers charge for providing those services. However, entrepreneurs can greatly benefit from consulting an attorney when deciding which business entity type will be best for their business.
Which LLC is Right for Me?
That will depend on several factors, such as how many owners the business has and who will manage day-to-day operations. Also, the eligibility requirements for certain types of LLCs (such as professional liability companies, a.k.a. PLLCs) may limit which kind of LLC entrepreneurs may form. That’s why it’s essential to ask for professional advice on the legal and tax aspects before deciding on a business structure.
How Many LLCs Can I Own?
No restrictions exist on the number of LLCs that eligible individuals or companies may set up and operate. Know that how entrepreneurs structure their multiple LLCs has legal and financial impacts, so it’s helpful to research the options carefully before forming the entities.
Do I Register a Single-Member or Multi-Member LLC?
A single-member LLC must have a sole owner or be a married couple that is collectively considered the owner. An LLC with multiple owners is considered a multi-member LLC.
How Many Members Can an LLC Have?
LLCs may have an unlimited number of members. The exception is if an LLC elects to be considered an S Corporation for tax purposes; then, it may have no more than 100 members.
Does an LLC Need a Board of Directors?
No. An LLC is not required to have a board of directors. However, LLC members may choose to have one if they adopt that method of management in the LLC operating agreement.
Do I Need to Register an LLC in All States I Operate?
Typically, an LLC that conducts business in states beyond its home state must apply for foreign qualification in those additional states. The rules for what “conducting business” means vary depending on the state. In general, the following activities require an LLC to foreign qualify:
- Having a physical presence, such as an office, retail store, or warehouse in the state.
- Having a distributor or sales representative in the state who sells the LLC’s products and services there.
- Owning property (e.g., a vehicle fleet or real estate) in the state
- Reaching a level of income or sales in the state that defines the LLC as having economic nexus there.
Do I Need a DBA?
If an LLC will use its registered name to do business, it does not have to file that name as a DBA (doing business as). However, if the LLC’s owners want to conduct business under a different name or use another name for a particular product line or another purpose, they will have to file a DBA to get the state’s permission to use the fictitious name. For example, suppose an entrepreneur forms an LLC registered as “Josephine’s Creperie.” If Josephine wants to offer catering services under a different name, say “Josephine’s Event Catering,” she would need to file a DBA for that name.
Related Articles and Resources
- Types of LLCs
- Sole Proprietorship vs. LLC
- LLC vs. Corporation
- LLC vs. Partnership
- S Corporation vs. LLC
- LLC vs. S Corp vs. C Corp
- LLP vs. LLC
- LLC vs. PLLC
- Single Member vs. Multiple Member LLC
- Domestic LLC vs. Foreign LLC
- 3 Documents for Filing an LLC
- LLC Owners and Self-Employment Tax
- Corporations as LLC Members
- Using an LLC for More Than One Business
- Changing an LLC Name
- Multi-Member LLCs
- Setting Up LLC Partnership Agreements
- Foreign LLC Registration and Management
Is Forming an LLC Right for Your Business?
Choosing a business entity type for your company has both legal and financial implications. We know there are lots of questions that come up and we'd like to provide a free resource to help you along your path to entrepreneurship.
Our free guide to forming an LLC is written by business attorneys at Corpnet.com. This guide answers the common questions for creating a Limited Liability Company for your new business.