How to Start a Company in Alabama

Published: May 9, 2025 • Incorporation

Contents

Alabama Business Entities: Complete Guide to Formation and Compliance

Alabama offers entrepreneurs and business owners a comprehensive menu of entity types under Title 10A of the Alabama Business and Nonprofit Entities Code. Whether you’re forming a traditional LLC, creating a benefit corporation, or exploring niche structures like series LLCs or employee cooperatives, understanding Alabama’s entity landscape is essential for making informed business decisions.

Alabama’s Legal Framework

Alabama consolidated its entity laws under Title 10A – Alabama Business and Nonprofit Entities Code, creating a unified “hub and spoke” structure where Chapter 1 contains general provisions applicable across all entity types, and subsequent chapters address specific entities.

The Alabama Secretary of State – Business Entities Division serves as the central filing office for formations, foreign registrations, and ongoing entity management. This centralized approach replaced the older system where some filings went through county probate courts.

Entity Types Comparison

Entity Type	Liability Protection	Management Structure	Tax Treatment	Best For
LLC	Limited	Flexible (member/manager)	Pass-through (default)	Small businesses, real estate, flexibility
Corporation (C)	Limited	Board + officers	Double taxation	Raising capital, venture funding
S Corporation	Limited	Board + officers	Pass-through	Active businesses wanting corp structure
Benefit Corp	Limited	Board + officers (stakeholder duties)	C-corp or S-corp	Mission-driven businesses
Professional LLC	Limited (malpractice excluded)	Member/manager	Pass-through	Licensed professionals (groups)
Professional Corp	Limited (malpractice excluded)	Board + officers	C-corp or S-corp	Licensed professionals (traditional)
Limited Partnership	General partner: unlimited; Limited: limited	General partner controls	Pass-through	Investment funds, family businesses
LLLP	All partners limited	General partner controls	Pass-through	Investment funds wanting full shield
Series LLC	Each series separate	Per series	Pass-through	Real estate portfolios, multiple ventures
Nonprofit Corp	Limited	Board of directors	Tax-exempt (if qualified)	Charitable, educational, religious orgs

Limited Liability Companies

Standard LLCs

Alabama’s Limited Liability Company Law of 2014 (Title 10A, Chapter 5A) governs LLCs formed in the state. Alabama LLCs offer significant flexibility through operating agreements while maintaining strong statutory default provisions.

Formation Requirements:

Name: Must include “Limited Liability Company,” “LLC,” or “L.L.C.”
Name Reservation: Mandatory before filing Certificate of Formation (§10A-1-4.02(f))
Filing: Certificate of Formation filed with Secretary of State
Registered Agent: Required Alabama street address and agent

Key Statutory Features:

The 2014 Act includes modern provisions addressing distribution clawbacks, member information rights, and fiduciary duties. Notably, operating agreements cannot eliminate the implied covenant of good faith and fair dealing or change the LLC’s nature as a separate legal entity.

Operating Agreement Flexibility:

Alabama law grants wide latitude in structuring management, profit distribution, voting rights, and transfer restrictions. However, certain statutory provisions cannot be overridden, including member access to certain records and the requirement that distributions not render the LLC insolvent.

Annual Compliance:

Alabama eliminated separate annual reports for all entities effective October 1, 2024 (Act 2024-213). However, LLCs must still file the Business Privilege Tax (BPT) return annually. The BPT historically had a $100 minimum, but Act 2022-252 reduced or eliminated minimum tax for many small businesses starting in 2023-2024.

Professional LLCs (PLLC)

Section 10A-5A-8.01 permits LLCs to render professional services if each member and employee providing services in Alabama holds proper licensing or registration. PLLCs work well for:

Law firms
Medical and dental practices
Engineering firms
Accounting practices
Architecture firms
Other licensed professional groups

Key Considerations:

Professional licensing boards impose additional requirements beyond general LLC law. For example, the Alabama Board of Dental Examiners has specific rules for dental PLLCs. Coordination with board rules and ethics opinions is essential during formation.

Series LLCs

Alabama authorizes series LLCs under §10A-5A-11.01, allowing a single LLC to establish multiple series with segregated assets, liabilities, members, and business purposes.

Structure:

Master LLC: Files single Certificate of Formation checking “Series LLC” box
Individual Series: Each operates semi-independently with separate assets/liabilities
Name Reservation: Required even for series LLCs

Common Uses:

Use Case	Benefit
Real Estate Portfolios	Each property in separate series; one mortgage default doesn’t affect others
E-commerce Brands	Separate brand/product lines; liability isolation between brands
Investment Vehicles	Different investment strategies in different series
Franchise Operations	Each franchise location in separate series

Important Limitations:

Series LLC liability protection remains uncertain in bankruptcy and across state lines. Not all states recognize series LLCs, which creates conflict-of-laws risks for multi-state operations. Courts have split on whether series truly provide liability separation, particularly in bankruptcy proceedings.

For clients with multi-state holdings, comparing the series LLC structure against simply forming multiple standard LLCs is worthwhile. The administrative simplicity of a series LLC must be weighed against legal uncertainty.

Nonprofit LLCs

While less common than nonprofit corporations, Alabama permits nonprofit LLCs under Chapter 5A. These entities can pursue charitable, educational, or other nonprofit purposes while maintaining LLC flexibility. They must comply with both LLC law and nonprofit requirements, and achieving 501(c)(3) status requires careful drafting.

Corporations

Business Corporations (C and S)

The Alabama Business Corporation Law (Title 10A, Chapter 2A) governs for-profit corporations. This revised statute became effective for all corporations on January 1, 2021, modernizing Alabama corporate law.

Formation Process:

Name Reservation: Obtain Certificate of Name Reservation from Secretary of State
Certificate of Incorporation: File with Secretary of State including:
- Corporate name
- Authorized shares (number, classes, par value if any)
- Registered office address and county
- Registered agent name and address
- Incorporator names and addresses
- Optional: initial directors, specific purposes, governance provisions, liability limitations

Required Annual Compliance:

As of January 1, 2024, the Secretary of State (rather than Department of Revenue) processes annual reports for corporations. However, effective October 1, 2024, Alabama eliminated annual reports entirely for all entities (Act 2024-213). Corporations still must:

File federal and state income tax returns
File Business Privilege Tax returns
Maintain registered agent and office
Hold required shareholder/director meetings
Keep minutes and corporate records

C Corporation vs. S Corporation:

The distinction between C and S corporations is purely federal tax-based; Alabama corporate law treats them identically. The choice depends on:

Factor	C Corporation	S Corporation
Taxation	Double (corporate + shareholder)	Pass-through (shareholders pay)
Ownership	Unlimited shareholders, any type	Max 100, U.S. individuals/certain trusts
Stock Classes	Multiple classes allowed	One class only
Investor Appeal	Preferred for VC/PE	Limited investor base
Retained Earnings	Can retain at lower rates	Taxed to shareholders even if retained

Benefit Corporations

Alabama’s benefit corporation statute (Article 17 of Chapter 2A) creates a hybrid entity pursuing both profit and public benefit. This structure is increasingly popular with mission-driven businesses and social enterprises.

Formation:

The Certificate of Incorporation must state the corporation is subject to Article 17 and identify at least one specific public benefit. The corporate name must include “Benefit Corporation,” “B.C.,” or “BC” and cannot use “Inc.” or “Corp.”

Expanded Fiduciary Duties:

Directors of benefit corporations must:

Act in a “responsible and sustainable manner” (pursuing positive material effects on society and environment)
Consider stakeholder interests (employees, customers, communities, environment, suppliers, etc.)
Pursue any specific public benefit identified in the certificate

However, the statute clarifies that directors owe duties to the corporation itself, not directly to stakeholders. This prevents stakeholder groups from suing for breach of fiduciary duty while still requiring directors to consider their interests.

Public Benefit Concepts:

“Public benefit” includes positive effects (or reduction of negative effects) on communities, persons, or the environment through:

Artistic, charitable, or cultural activities
Economic opportunity (particularly for underserved communities)
Educational advancement
Environmental protection or restoration
Health and wellness
Scientific or technological innovation

Annual Benefit Report:

At least annually, benefit corporations must prepare a report describing:

Objectives for responsible/sustainable operation
Standards used to measure progress (third-party standards optional but not required)
Assessment of success in meeting objectives
Basis for that assessment

The report must be delivered to shareholders and posted on the company website if one exists.

Practical Considerations:

Benefit corporation status can:

Attract mission-aligned investors and customers
Protect directors who prioritize stakeholders over short-term profit
Provide marketing advantages
Complicate exit transactions if buyers don’t share mission commitment

Converting an existing corporation to benefit corporation status requires board recommendation and shareholder approval (typically two-thirds vote). Shareholders who dissent from the conversion may have appraisal rights.

Professional Corporations (PC)

The Revised Alabama Professional Corporation Act (Title 10A, Chapter 4) governs professional corporations organized to render regulated professional services.

Name Requirements:

The corporate name must contain “Professional Corporation” or “P.C.” and indicate the professional service (e.g., “Smith & Jones, P.C., Attorneys at Law”).

Ownership Restrictions:

Only licensed professionals authorized to provide the professional service can own shares. This prevents non-professionals from controlling professional practices.

Licensing Board Coordination:

Each professional licensing board has additional rules governing professional corporations in their field. For example:

Alabama State Bar has ethics opinions on law firm PCs
Board of Dental Examiners has regulations on dental PCs
Board of Medical Examiners regulates medical PCs

PC vs. PLLC Comparison:

Factor	Professional Corporation	Professional LLC
Statute	Chapter 4	Chapter 5A, §10A-5A-8.01
Governance	Board + officers (more formal)	Member/manager (flexible)
Name	Must include “P.C.”	Must include “LLC” or variant
Tax Default	C-corp (can elect S)	Pass-through
Formality	Higher (meetings, minutes)	Lower
Best For	Traditional professional practices	Modern, flexible practices

Many professionals now prefer PLLCs for their flexibility and simpler governance, but PCs remain common in conservative fields like law and medicine.

Nonprofit Organizations

Nonprofit Corporations

Title 10A, Chapter 3A (Alabama Nonprofit Corporation Law) governs nonprofit corporations. These entities can pursue charitable, religious, educational, scientific, literary, or other lawful purposes.

Formation:

File Certificate of Incorporation with Secretary of State specifying:

Corporate name (need not include “corporation” or similar designation)
Whether corporation will have members
Registered office and agent
Incorporator information
Purpose (general or specific)

501(c)(3) Considerations:

To qualify for federal tax exemption, the Certificate of Incorporation must include:

Proper exempt purpose language
Prohibition on private inurement
Prohibition on substantial lobbying/political activity
Dissolution clause directing assets to other 501(c)(3) organizations

Governance:

Nonprofit corporations must have a board of directors. If the corporation has members, they typically elect directors and approve major transactions. Member vs. non-member structure depends on organizational goals:

Structure	Advantages	Disadvantages
Members	Broader community engagement; democratic control	More complex; potential conflicts
No Members	Board controls all; simpler governance	Less community input; self-perpetuating board

Compliance:

Nonprofits have no state annual report requirement but must:

File federal Form 990 annually (if gross receipts exceed threshold)
Maintain tax-exempt status
Follow conflict-of-interest policies
Hold required board meetings
Keep proper records

Unincorporated Nonprofit Associations

Chapter 17 of Title 10A gives unincorporated nonprofit associations certain entity-like powers without formal incorporation. These associations can:

Hold property in the association’s name
Sue and be sued
Contract in the association’s name

When to Use:

Unincorporated associations work for:

Small clubs and groups not needing liability protection
Organizations testing viability before incorporating
Groups wanting minimal formality

Limitations:

Without incorporation, members and managers may have personal liability for association obligations. For any organization with significant assets, employees, or liability exposure, incorporating as a nonprofit corporation provides better protection.

Conversion Path:

Many successful unincorporated associations eventually incorporate as nonprofit corporations. This process involves filing a Certificate of Incorporation and typically transferring assets from individual trustees to the new corporation.

Partnerships and Related Entities

General Partnerships

Alabama Partnership Law (Chapters 8 and 8A of Title 10A) governs general partnerships. A general partnership forms automatically when two or more persons carry on a business for profit, even without written agreement.

Key Features:

Formation: No filing required (exists by conduct)
Liability: All partners jointly and severally liable for partnership obligations
Management: Each partner has equal management rights (absent agreement)
Taxation: Pass-through; partners report share on individual returns

Partnership Agreement:

While not required, a written partnership agreement should address:

Capital contributions
Profit/loss sharing
Management authority and voting
Addition/withdrawal of partners
Dispute resolution
Dissolution procedures

Limited Liability Partnerships (LLP)

Partnerships can register as Limited Liability Partnerships with the Secretary of State, providing partners with protection from liability for other partners’ negligence, malpractice, or misconduct.

Registration Requirements:

File statement of qualification with Secretary of State
Name must include “Limited Liability Partnership,” “LLP,” or “L.L.P.”
Maintain registered agent and office
File annual or biennial reports (pre-2024; now eliminated)

Professional Use:

LLPs are popular with:

Law firms (protecting partners from malpractice of other partners)
Accounting firms
Architecture and engineering firms
Other professional partnerships

Limitation:

Partners remain liable for their own negligence and for partnership obligations they personally guarantee. The LLP shield primarily protects against vicarious liability for other partners’ actions.

Limited Partnerships (LP)

The Alabama Uniform Limited Partnership Act of 2010 (now codified in Title 10A) governs limited partnerships.

Structure:

General Partners: Manage the partnership; unlimited personal liability
Limited Partners: Passive investors; liability limited to investment

Formation:

File Certificate of Limited Partnership with Secretary of State including:

Partnership name (must include “Limited Partnership,” “LP,” or “L.P.”)
Registered agent and office
General partner names and addresses

Uses:

Limited partnerships work well for:

Real estate investment funds
Private equity and venture funds
Family investment vehicles
Oil and gas ventures

Tax Treatment:

LPs are pass-through entities. Partners receive Schedule K-1 showing their share of income, deductions, and credits.

Limited Liability Limited Partnerships (LLLP)

Alabama permits limited partnerships to register as LLLPs, extending liability protection to general partners.

Key Difference:

Entity	General Partner Liability	Limited Partner Liability
LP	Unlimited	Limited to investment
LLLP	Limited (except own acts)	Limited to investment

Registration:

File statement making the LP an LLLP with the Secretary of State. The partnership name must include “Limited Liability Limited Partnership,” “LLLP,” or “L.L.L.P.”

When to Use:

LLLPs make sense when:

General partner is an individual (not an LLC or corporation)
Partnership wants LP tax treatment with full liability protection
Investors require general partner liability protection

For many modern ventures, an LLC taxed as partnership provides similar benefits with less complexity.

Specialized and Niche Entities

Real Estate Investment Trusts (REITs)

Title 10A, Chapter 10 authorizes Alabama real estate investment trusts. These entities invest in income-producing real estate and can qualify for special federal tax treatment if they meet REIT requirements:

Distribute 90%+ of taxable income to shareholders
Derive 75%+ of income from real estate sources
Invest 75%+ of assets in real estate
Have 100+ shareholders (after first year)

Alabama law provides the state-level structure; federal tax qualification requires separate analysis.

Employee Cooperative Corporations

Chapter 11 authorizes employee cooperative corporations where workers own and democratically control the business. These entities combine:

One worker, one vote (democratic control)
Profit sharing among worker-owners
Corporate liability protection

Employee co-ops can pursue social missions while providing worker ownership and can elect S corporation status for tax purposes.

Business Trusts

Chapter 16 provides statutory authority for business trusts as separate legal entities. These trusts can:

Own property and conduct business
Sue and be sued
Provide liability protection for beneficial owners

Business trusts are less common than LLCs or corporations but may offer advantages for specific investment vehicles or securitization structures.

Special Purpose Entities

Chapter 20 authorizes various special purpose entities for unique financing and investment structures. These entities typically serve narrow, specialized purposes like:

Asset securitization vehicles
Project-specific financing entities
Bankruptcy-remote structures

Legacy Entities

Chapter 30 addresses entities that can no longer be newly formed but continue to exist:

Close Corporations: Prior to the revised business corporation law, Alabama had a separate close corporation statute. While new close corporations cannot be formed, existing ones continue under Chapter 30. These corporations can adopt special governance provisions appropriate for closely-held businesses.

Unincorporated Professional Associations: These were professional entity structures available before professional LLCs became common. New ones cannot be formed, but existing associations continue to operate under Chapter 30 and can convert to PLLCs or PCs.

Cross-Cutting Compliance Issues

Business Privilege Tax

Alabama’s Business Privilege Tax (BPT) applies to corporations, S corporations, LLCs, limited partnerships, LLPs, LLLPs, and other “limited liability entities.”

Filing Requirements:

Initial Return: File within 2.5 months of formation
Annual Returns: Generally due April 15 (15th day of 4th month of tax year)
Calculation: Based on net worth in Alabama

Recent Changes:

Act 2022-252 reduced or eliminated minimum BPT for many small businesses starting in 2023-2024. The $100 minimum that previously applied has been phased down for qualifying smaller entities.

Important Note:

The BPT return serves Alabama’s entity data collection purpose now that annual reports have been eliminated. All limited liability entities must file even if no tax is due.

Pass-Through Entity Tax Election (PTET)

Alabama allows electing pass-through entities (S corporations and partnerships/LLCs taxed as partnerships) to pay entity-level tax at 5% on Alabama taxable income.

Benefits:

Owners get dollar-for-dollar state tax credit
Effectively deducts state tax on federal return (avoids $10,000 SALT cap)
Reduces individual Alabama tax liability

Election Timing:

For tax years beginning 2024 and after, entities can make or revoke PTET election up to the income tax return due date with extensions (September 15 for calendar-year filers).

Considerations:

Coordinate with tax advisor and all owners
Consider whether all owners benefit
Evaluate administrative costs vs. tax savings
Document election in operating agreement or bylaws

Beneficial Ownership Information Reporting (BOI/CTA)

The Corporate Transparency Act initially required most U.S. entities to report beneficial ownership information to FinCEN. However, major changes occurred in 2025:

March 21, 2025 Interim Final Rule:

FinCEN revised the “reporting company” definition to exclude all domestic entities. Now only entities formed under foreign law that register to do business in a U.S. state or tribal jurisdiction are “reporting companies.”

Impact on Alabama Entities:

Entity Type	BOI Reporting Required?
Domestic LLC (formed in Alabama)	No (currently exempt)
Domestic Corporation (formed in Alabama)	No (currently exempt)
Domestic LP, LLP, LLLP (formed in Alabama)	No (currently exempt)
Foreign Entity registered to do business in Alabama	Yes

Foreign Entity Deadlines:

Foreign entities that became reporting companies before March 26, 2025: file by April 25, 2025
Newly registered foreign entities: file within 30 days of registration

For International Clients:

Foreign companies registering to do business in Alabama must:

Report company applicants and beneficial owners
Update information within 30 days of changes
Maintain accurate records

This creates significant compliance obligations for non-U.S. entities entering Alabama markets.

Entity Selection Framework

Choosing the right entity involves analyzing multiple factors:

Liability Protection Needs

Questions to Consider:

What liability risks does the business face?
Do you need protection from business debts and obligations?
Are there professional malpractice concerns?
Do you want to segregate different business lines or assets?

Entity Recommendations:

High liability risk: LLC, corporation, or LLLP (avoid GP)
Professional practice: PLLC or PC (depending on flexibility needs)
Asset segregation: Series LLC or multiple LLCs
Passive investment: LP (as limited partner) or LLC

Management and Control

Questions to Consider:

How many owners will the business have?
Do all owners want management authority?
Is formal governance structure needed?
How important is operational flexibility?

Entity Recommendations:

Single owner, maximum flexibility: Single-member LLC
Multiple active owners: Multi-member LLC or partnership
Passive investors + active managers: LP, LLLP, or manager-managed LLC
Formal structure needed: Corporation or benefit corporation

Tax Considerations

Questions to Consider:

Do you want pass-through or corporate taxation?
Will you retain earnings or distribute profits?
Are owners in high tax brackets?
Will you need to attract outside investors?

Entity Recommendations:

Pass-through taxation: LLC, partnership, LP, S corporation
Retain earnings at lower rates: C corporation
Venture capital investment: C corporation (Delaware)
SALT cap mitigation: LLC or S-corp with PTET election

Funding and Growth Plans

Questions to Consider:

Will you raise outside capital?
Do you plan to issue equity to employees?
Are venture capital or private equity investors likely?
Do you plan to go public eventually?

Entity Recommendations:

VC/PE funding: C corporation (consider Delaware)
Angel or friends/family: LLC or S corporation
Bootstrapped growth: LLC
IPO planned: C corporation

Exit Strategy

Questions to Consider:

How do you plan to exit the business?
Will you sell assets or ownership interests?
Are there specific succession planning needs?
Do you want ongoing management role after sale?

Entity Recommendations:

Sale to strategic buyer: C corporation or S corporation
Sale to financial buyer: LLC or corporation
Family succession: LLC, LP, or S corporation
Management buyout: LLC or S corporation

Foreign Entity Registration

Out-of-state and foreign entities conducting business in Alabama must register with the Secretary of State.

When Registration Required

An entity must register if it has a physical presence or engages in intrastate business in Alabama beyond:

Maintaining bank accounts
Holding shareholder/member meetings
Conducting isolated transactions
Owning passive investments
Enforcing contracts

Registration Process

For Foreign LLCs:

File Application for Registration (two originals)
Obtain name reservation
Pay registration fee
Appoint registered agent

For Foreign Corporations:

File Application for Certificate of Authority
Obtain name reservation
Provide certificate of existence from home state
Appoint registered agent
Pay registration fee

Ongoing Requirements:

Maintain registered agent and office
File Business Privilege Tax returns
Comply with BOI reporting (foreign entities remain subject)
Update information within 30 days of changes

Consequences of Failure to Register

Entities conducting business without proper registration face:

Inability to bring lawsuits in Alabama courts
Penalties and fees
Personal liability for managers
Tax compliance issues

However, registration failure doesn’t void contracts or prevent defending lawsuits.

Conversions, Mergers, and Domestications

Alabama’s Chapter 1 provides comprehensive provisions for entity conversions, mergers, and domestications.

Conversions

Title 10A, Chapter 1 allows entities to convert from one type to another (e.g., LLC to corporation, LP to LLLP) through:

Approval by owners (vote requirements vary by entity type)
Filing plan of conversion and articles/certificate of conversion
Effect: converted entity continues existence in new form

Common Conversions:

LLC to corporation (preparing for equity investment or public offering)
Corporation to LLC (simplifying governance, changing tax treatment)
LP to LLLP (adding general partner liability protection)
Sole proprietorship to LLC (adding liability protection)

Tax Consequences:

Conversions can trigger taxable events depending on entity types involved. Advance tax planning is essential, particularly for appreciated assets or when changing from partnership to corporation taxation.

Mergers

Alabama permits mergers between entities of the same or different types. The surviving entity can be any type regardless of merging entities’ types.

Merger Process:

Boards/managers approve plan of merger
Owners vote on merger (typically majority or supermajority)
File articles of merger with Secretary of State
Merger becomes effective per plan (immediately or future date)

Common Merger Scenarios:

Combining related businesses under single entity
Simplifying corporate structure (subsidiary into parent)
Effectuating acquisitions
Reorganizing before sale

Domestications

Domestication allows an entity formed in another jurisdiction to become an Alabama entity (or vice versa) while continuing its existence.

Domestic to Foreign:

An Alabama entity can domesticate to another state by:

Approving plan of domestication
Filing with Alabama Secretary of State
Forming in new jurisdiction
Canceling Alabama registration

Foreign to Domestic:

A non-Alabama entity can domesticate to Alabama by:

Approving domestication under home jurisdiction law
Filing certificate of domestication with Alabama Secretary of State
Complying with formation requirements

When to Domesticate:

Moving business operations to Alabama
Accessing Alabama-specific benefits
Simplifying compliance (eliminate foreign registration)
Preparing for sale to Alabama buyer

Professional Entity Comparison

For licensed professionals, Alabama offers multiple entity options:

Factor	Professional Corporation	Professional LLC	LLP
Statute	Chapter 4	Chapter 5A, §8.01	Chapter 8A
Formation	Certificate of Incorporation	Certificate of Formation	Statement of Qualification
Name	Must include “P.C.”	Must include “LLC” variant	Must include “LLP” variant
Ownership	Licensed professionals only	Licensed professionals only	All partners licensed
Liability	Limited (except malpractice)	Limited (except malpractice)	Limited (except own malpractice)
Management	Board + officers	Member/manager	Partners (per agreement)
Tax Default	C-corp	Pass-through	Pass-through
Formality	High	Medium	Medium
Annual Meetings	Required	Not required	Not required
Best For	Traditional practices	Modern flexible practices	Partnership structure

Malpractice Liability

Critical Point: No entity form shields professionals from their own malpractice liability. Entity structure only protects from:

Other professionals’ malpractice
Business debts and contracts
Employment claims
General business liability

Each professional remains personally liable for their own negligence and the negligence of those they supervise.

Licensing Board Requirements

Before forming any professional entity, consult the relevant licensing board:

Alabama State Bar: Law firms (PCs, PLLCs, LLPs)
Board of Medical Examiners: Medical practices
Board of Dental Examiners: Dental practices
Board of Public Accountancy: CPA firms
Board of Licensure for Professional Engineers and Land Surveyors: Engineering firms
Board of Architecture: Architecture firms

Each board has specific rules on entity names, ownership restrictions, and management requirements.

Practical Considerations and Tips

Name Selection Strategy

Availability Check:

Search the Secretary of State’s business entity database before settling on a name. Alabama requires name reservation ($25) before filing formation documents, which holds the name for 120 days.

Name Requirements Vary:

LLC: Must include “Limited Liability Company” or LLC variant
Corporation: Must include “Corporation,” “Incorporated,” “Company,” “Limited,” or abbreviation
Benefit Corporation: Must include “Benefit Corporation,” “B.C.,” or “BC”; cannot use “Inc.” or “Corp.”
Professional entities: Must include applicable designation (P.C., LLC, etc.) and professional service indication

Distinguishability:

Names must be distinguishable from existing entities’ names. “Distinguishable” means the Secretary of State can tell them apart, not that they couldn’t cause marketplace confusion. For trademark protection, conduct separate trademark search.

Multiple Name Strategy:

For businesses launching soon, consider reserving multiple name variants to preserve flexibility. Each reservation costs $25 and lasts 120 days.

Registered Agent Considerations

Every Alabama entity must maintain a registered agent with a physical street address (not P.O. box) in Alabama.

Options:

Owner/member: Free but may compromise privacy (agent’s name/address is public)
Office employee: Free but may create continuity issues if employee leaves
Professional service: $100-300/year; provides privacy, continuity, and reliable service

Service Benefits:

Privacy protection (keeps owner address off public record)
Reliable acceptance of service of process
Immediate notification of legal documents
No missed service issues if you move or travel

Compliance Note:

Failure to maintain a registered agent triggers administrative dissolution proceedings. The Secretary of State will mail notice, and if not cured within 60 days, the entity may be dissolved.

Operating Agreement / Bylaws Essentials

Even though Alabama doesn’t require filing operating agreements (LLC) or bylaws (corporation), these documents are essential.

LLC Operating Agreement Must Address:

Capital contributions (initial and future)
Profit/loss allocation
Distributions (timing, amounts, priorities)
Management authority (member vs. manager; decision thresholds)
Voting rights (per capita vs. per interest)
Transfer restrictions (right of first refusal, buy-sell provisions)
Admission of new members
Buy-out rights and valuation methods
Dissolution triggers and procedures

Corporate Bylaws Must Address:

Shareholder meeting procedures (notice, quorum, voting)
Director election, terms, and removal
Board meeting procedures
Officer positions, appointment, and authority
Stock transfer restrictions
Dividend policies
Amendment procedures

Multi-Member/Shareholder Agreements:

For entities with multiple owners, supplemental buy-sell, voting, or shareholders’ agreements often address:

Triggering events (death, disability, divorce, bankruptcy)
Valuation methodology (formula, appraisal, earnings multiple)
Payment terms (lump sum vs. installments)
Funding mechanisms (life insurance, sinking fund)
Drag-along and tag-along rights
Non-compete and non-solicitation provisions

Initial Capitalization Strategy

Adequate Capitalization:

Courts can “pierce the corporate veil” and hold owners liable if an entity is inadequately capitalized. This means the entity must have sufficient capital to meet reasonably foreseeable obligations.

Capitalization Methods:

Method	Advantages	Disadvantages
Cash contribution	Simple; no debt/equity issues	Uses owner’s liquid funds
Property contribution	Preserves cash	Triggers tax consequences; valuation needed
Services	No cash outlay	Limited recognition; tax issues
Loans from owners	Creates debt; interest deduction	Subordination risk; equity recharacterization

Tax Considerations:

Contributions to LLCs and partnerships generally tax-free under IRC §721
Contributions to corporations tax-free under IRC §351 if contributors receive 80%+ control
Property contributions require allocation methods for built-in gain/loss
Service contributions trigger ordinary income recognition

Debt vs. Equity:

Excessive owner loans vs. equity can cause problems:

IRS may recharacterize debt as equity (lose interest deductions)
Bankruptcy courts may subordinate owner loans to third-party claims
Thin capitalization can support veil-piercing arguments

Insurance and Risk Management

Entity formation provides liability protection, but comprehensive risk management requires insurance:

Essential Coverages:

General liability: Third-party injury and property damage claims
Professional liability: (E&O/malpractice) for service businesses
Employment practices liability: (EPLI) for discrimination, harassment, wrongful termination claims
Directors and officers liability: (D&O) for corporations; protects personal assets of board members
Cyber liability: Data breach and cyber-attack coverage
Commercial property: Buildings, equipment, inventory
Business interruption: Lost income during covered closures

Professional Practices:

Even though PLLCs and PCs provide some liability protection, professional liability insurance remains essential. Entity structure doesn’t eliminate personal malpractice liability.

Ongoing Formality Compliance

Maintaining entity liability protection requires respecting the entity as separate:

Critical Practices:

Separate bank accounts: Never commingle personal and business funds
Separate records: Maintain distinct books and records
Corporate formalities: Hold required meetings; document decisions in minutes
Entity signing: Sign contracts and documents in entity name with title
Adequate capitalization: Maintain sufficient working capital
Arms-length dealings: Document and fair-value all owner transactions

Red Flags Courts Look For:

Commingled funds
Undercapitalization
Failure to observe formalities
Personal use of entity assets
Lack of separate identity
Fraudulent transfers

Multi-State Operations

Physical Presence Test:

An entity must register in each state where it has sufficient physical presence or conducts intrastate business (beyond passive investments, maintaining bank accounts, etc.).

Qualification Strategy:

Situation	Recommendation
Isolated transaction	No qualification needed
Ongoing sales/services	Qualify in state
Employees in state	Qualify in state
Office/warehouse	Qualify in state
Remote services	Analyze specific state law

Choice of Entity State:

While Alabama entities work well for Alabama-centric businesses, companies with multi-state operations or venture capital funding often choose Delaware for:

Well-developed corporate law
Business-friendly Court of Chancery
Strong precedent on fiduciary duties, M&A, governance
Investor and attorney familiarity

However, Delaware entities doing business in Alabama must:

Register as foreign entity in Alabama
Pay both Delaware and Alabama fees
Maintain registered agents in both states
Comply with BOI reporting (as foreign entity)

Common Mistakes to Avoid

Formation Phase Errors

Insufficient Planning:

Rushing into entity formation without analyzing tax consequences, ownership structure, or funding plans creates problems. Common oversights:

Choosing wrong entity type for tax situation
Failing to coordinate with accountant on tax elections
Inadequate operating agreement or bylaws
Unclear ownership percentages or vesting schedules

Recommendation: Spend time upfront with legal and tax advisors before filing formation documents.

Name Problems:

Using name too similar to existing entity (rejected or trademark infringement)
Forgetting to include required designations (LLC, Inc., P.C.)
Not conducting trademark search (can use name but face infringement claims later)

Recommendation: Search Alabama SoS database, USPTO trademark database, and domain availability before committing to name.

Operational Phase Errors

Ignoring Formalities:

LLCs have fewer formality requirements than corporations, but both need proper documentation:

Operating agreement/bylaws never finalized
Major decisions not documented
No annual meetings held (corporations)
No minutes or resolutions

Recommendation: Set calendar reminders for annual meetings; document all major decisions; update governance documents as business evolves.

Commingling Funds:

Using business accounts for personal expenses (or vice versa) is the fastest way to lose liability protection:

Paying personal credit cards from business account
Depositing business revenue to personal account
Using business funds for personal investments
Making undocumented “loans” to owners

Recommendation: Strict separation of accounts; document all distributions and loans; reimburse business for personal use.

Missing Tax Elections:

Certain tax elections have strict deadlines:

S corporation election: within 2.5 months of formation or start of tax year
PTET election: extended to return due date with extensions
§754 election (partnerships): with return for year of triggering event

Recommendation: Coordinate with accountant on election timing; calendar all deadline dates; file elections timely.

Compliance Phase Errors

Forgetting Annual Requirements:

Although Alabama eliminated annual reports in 2024, entities still have compliance obligations:

Business Privilege Tax returns (due annually)
Federal and state income tax returns
Maintaining registered agent
Updating entity information when changes occur

Recommendation: Create compliance calendar with all filing deadlines; consider using compliance service or registered agent that provides reminders.

Improper Amendments:

Changes to entity structure require formal amendments filed with Secretary of State:

Name changes
Registered agent/office changes
Authorized shares (corporations)
Adding/removing managers (LLCs, if in certificate)

Recommendation: Any significant change should trigger review of whether Secretary of State filing is needed; don’t assume internal documentation suffices.

Foreign Registration Failures:

Companies expanding to new states often forget to qualify:

Opening office or warehouse without qualifying
Hiring employees without qualifying
Assuming online sales don’t require qualification

Recommendation: Before establishing presence in new state, research qualification requirements; budget for foreign registration fees and annual compliance.

Frequently Asked Questions

What’s the best entity type for a small business in Alabama?

The answer depends on your specific situation, but LLCs are often the default choice for Alabama small businesses because they combine liability protection with pass-through taxation and operational flexibility. However, consider:

Single owner: Single-member LLC (simple, flexible)
Multiple owners wanting simplicity: Multi-member LLC
Raising outside capital: C corporation
Want S corporation benefits: LLC with S election or S corporation
Licensed professional: PLLC or PC
Mission-driven business: Benefit corporation

The “best” entity balances liability protection, tax treatment, management needs, and growth plans. Consult with an attorney and accountant before deciding.

How much does it cost to form an entity in Alabama?

Alabama formation costs are relatively modest:

Secretary of State Filing Fees (2024):

LLC Certificate of Formation: $200 (plus $25 name reservation)
Corporation Certificate of Incorporation: $200 (plus $25 name reservation)
Limited Partnership Certificate: $200 (plus $25 name reservation)
Foreign registration: $200-225 (varies by entity type)

Additional Costs:

Registered agent service: $100-300/year (optional; can self-serve)
Attorney fees for formation: $500-3,000+ (depending on complexity)
Operating agreement/bylaws drafting: Included with attorney formation or $500-2,500 separately
EIN (federal tax ID): Free from IRS
Business licenses: Varies by locality and business type

Total First-Year Cost:

DIY formation: $225-500
Attorney-assisted formation: $1,000-4,000

The investment in proper formation documents (operating agreement, bylaws, initial consents) pays dividends by preventing disputes and establishing clear governance.

Do I need an operating agreement for my Alabama LLC?

While Alabama law doesn’t require filing an operating agreement, you absolutely should have one for several critical reasons:

Legal Protection: Operating agreements establish the LLC as a separate entity and document that you’re respecting formalities. This supports your liability shield.

Member Rights: Without an operating agreement, Alabama’s default LLC statutes apply. These defaults may not match your intentions regarding profit sharing, management authority, or voting rights.

Dispute Resolution: Operating agreements prevent disputes by clarifying expectations upfront. They address common issues like:

What happens if a member wants to leave?
How are major decisions made?
Can members compete with the LLC?
What happens upon death, disability, or divorce?

Bank and Investment Requirements: Banks often require operating agreements to open business accounts. Investors always require them before investing.

Tax Treatment: For single-member LLCs wanting to be taxed as S corporations, or multi-member LLCs wanting corporate taxation, the operating agreement should document governance that supports the tax election.

Even simple, single-member LLCs benefit from written operating agreements documenting the separate entity and establishing basic rules.

How do I convert my sole proprietorship to an LLC?

Converting from sole proprietorship to LLC involves these steps:

1. Form the LLC:

Choose LLC name (include “LLC” or variant)
Reserve name with Secretary of State ($25)
File Certificate of Formation ($200)
Obtain EIN from IRS (free)
Draft operating agreement

2. Transfer Assets:

Transfer business assets to LLC (vehicles, equipment, intellectual property, contracts)
For titled assets (real estate, vehicles), execute deeds or title transfers
Update contracts to show LLC as party
Document asset transfers in LLC records

3. Update Licenses and Permits:

Transfer or reapply for business licenses in LLC name
Update professional licenses (if applicable)
Update sales tax registration
Update local business licenses

4. Update Banking and Accounts:

Open new business bank account in LLC name
Transfer business accounts to LLC
Update payment processors (credit card processors, PayPal, etc.)
Update vendor accounts

5. Notify Customers and Vendors:

Send notice of business structure change
Update invoices, contracts, and business documents
Update website and marketing materials

6. Address Tax Matters:

File final sole proprietorship Schedule C
Begin filing LLC returns (1065 if multi-member; disregarded if single-member unless electing otherwise)
Make any desired tax elections (S corporation, etc.)

Tax Consequences:

Generally, contributing assets to your own LLC is tax-free under IRC §721. However, if you transfer liabilities exceeding basis, or have appreciated property, consult a tax advisor about potential tax consequences.

What’s the difference between an LLC and an S corporation in Alabama?

This is a common source of confusion because “S corporation” is a tax status, not an entity type. Here’s how they interact:

Entity Types:

LLC: Alabama entity formed under Chapter 5A
Corporation: Alabama entity formed under Chapter 2A

Tax Status:

S corporation: Federal tax election available to both LLCs and corporations

Comparison:

Factor	LLC (default)	S Corporation (tax election)
Entity formation	File Certificate of Formation	File Certificate of Incorporation (corp) or Certificate of Formation (LLC)
Tax form	1065 (partnership) or disregarded	1120-S
Self-employment tax	All income subject	Only wages subject; distributions not
Ownership restrictions	None	Max 100 shareholders; U.S. individuals/certain trusts only
Profit allocation	Flexible (per operating agreement)	Pro-rata by shares only
Ease of conversion	Can elect S status	Can revoke to C or cancel election

Practical Example:

LLC taxed as partnership: Members pay self-employment tax on entire share of income
LLC taxed as S corporation: Members/shareholders pay self-employment tax only on reasonable salary; distributions avoid SE tax

When S Election Makes Sense:

For profitable businesses where owners actively work in the business, S corporation status can save self-employment taxes. However, this requires:

Running payroll and paying reasonable salary
Additional tax compliance (quarterly payroll taxes, W-2s, 1120-S)
Restrictions on ownership and profit allocation

Many Alabama small businesses start as default LLCs and elect S status once profitable enough to justify the payroll overhead.

Can a non-U.S. citizen or foreign company form an Alabama LLC or corporation?

Yes, Alabama law does not restrict LLC or corporation ownership based on citizenship or residency. Foreign individuals and companies can:

Own 100% of Alabama LLCs or corporations
Serve as managers, directors, or officers
Form new Alabama entities

Practical Requirements:

Registered Agent: Every Alabama entity needs a registered agent with physical Alabama address. If you don’t have U.S. presence, use a professional registered agent service.

EIN Application: Foreign owners need EINs from the IRS, which requires either:

Social Security Number (for individuals)
Individual Taxpayer Identification Number (ITIN)
Foreign tax ID (with third-party designee application)

Tax Withholding: Foreign owners of U.S. entities face potential withholding on certain income types. Consult a tax advisor familiar with international taxation.

BOI Reporting: Under current rules (as of March 2025), domestically formed Alabama entities are exempt from BOI reporting. However, if a foreign entity registers to do business in Alabama (rather than forming a new Alabama entity), BOI reporting applies.

Strategy for Foreign Entrepreneurs:

Many foreign entrepreneurs form Delaware or Alabama LLCs to access U.S. markets, payment processors, and banking. Alabama LLCs work well for simpler structures, while Delaware is common for tech startups seeking venture capital.

Does Alabama recognize series LLCs, and should I use one?

Yes, Alabama authorizes series LLCs under §10A-5A-11.01, allowing a single LLC to create multiple series with segregated assets, liabilities, and members.

When Series LLCs Make Sense:

Real Estate Portfolios: Each property in a separate series provides liability isolation. One property’s mortgage default or lawsuit doesn’t affect other series.

Multiple Business Lines: Separate brand lines or product categories in different series.

Investment Vehicles: Different investment strategies or risk profiles in separate series.

Advantages:

Single formation: File one Certificate of Formation; create series in operating agreement
Lower costs: Avoid filing fees for multiple LLCs
Simpler management: One parent LLC manages multiple series

Significant Limitations:

Bankruptcy Uncertainty: Courts have split on whether series truly provide separate bankruptcy estates. Some courts consolidate series in bankruptcy.

Multi-State Issues: Not all states recognize series LLCs. Your Alabama series LLC might not maintain liability separation in states that don’t recognize the structure.

Legal Uncertainty: Series LLCs are relatively new; case law is limited. Courts may not respect series separation, particularly across state lines or in bankruptcy.

Recommendation:

For single-state operations with 3-5+ similar assets or ventures needing separation, series LLCs can work. For multi-state holdings or situations requiring absolute certainty of separation, traditional multiple LLCs provide clearer protection despite higher cost.

For any series LLC, consult an attorney familiar with the structure and work with an accountant on tax and accounting treatment of each series.

What happens if I don’t file the annual Business Privilege Tax return?

Failure to file Alabama Business Privilege Tax returns creates several problems:

Penalties and Interest:

Late filing penalty: 10% of tax due (minimum $50)
Late payment penalty: Additional amounts for continued non-payment
Interest: Accrues on unpaid tax

Administrative Dissolution:

Although Alabama eliminated separate annual reports in 2024, the Department of Revenue can report non-filing entities to the Secretary of State, potentially triggering administrative dissolution proceedings.

Loss of Good Standing:

Entities not in good standing cannot:

Maintain lawsuits in Alabama courts
Obtain certificates of good standing (often required for loans, contracts, or transactions)
Transact certain business

Personal Liability Risk:

In extreme cases of willful non-compliance, members/shareholders could face personal liability for taxes due.

Criminal Penalties:

Willful failure to file returns can trigger criminal tax evasion charges, though this is rare for business entities and typically reserved for egregious cases.

Reinstatement:

If administratively dissolved for tax non-compliance, reinstatement requires:

Filing all delinquent returns
Paying all taxes, penalties, and interest
Filing application for reinstatement with Secretary of State
Paying reinstatement fee

Prevention:

Set calendar reminders for April 15 (or 15th day of 4th month after year-end for non-calendar-year entities). Even if no tax is due, file the return. The BPT return is now Alabama’s primary entity data collection mechanism after elimination of separate annual reports.

How do I dissolve an Alabama LLC or corporation?

Formal dissolution requires specific steps to properly wind up the entity:

1. Member/Shareholder Approval:

LLC: Members approve dissolution per operating agreement or statute
Corporation: Board recommends; shareholders approve (typically majority vote)

2. Wind Up Business:

Cease new business activities
Collect accounts receivable
Sell or distribute assets
Pay or provide for all debts and obligations
Resolve all claims and litigation

3. File Articles of Dissolution:

LLC: File Articles of Dissolution with Secretary of State
Corporation: File Certificate of Dissolution with Secretary of State

4. Tax Clearances:

File final federal tax return (check “final return” box)
File final Alabama income tax return
File final Business Privilege Tax return
Close state sales tax account if applicable
Obtain tax clearance from Department of Revenue

5. Cancel Permits and Licenses:

Cancel business licenses
Cancel professional licenses (if applicable)
Notify regulatory agencies

6. Notify Creditors and Claimants:

Send written notice to known creditors
Publish notice to unknown claimants (if required/desired)
Establish claims bar date

7. Close Accounts:

Close business bank accounts
Cancel credit cards
Cancel utilities and services
Final distribution to members/shareholders

8. File Final Documents:

Preserve entity records (even after dissolution, maintain records for potential claims or audits)
Document final distributions
File final consents and resolutions

Administrative Dissolution:

If you simply abandon the entity without formal dissolution:

Entity remains on Secretary of State records
Annual tax returns remain due
Penalties and interest accrue
Secretary of State may administratively dissolve for non-compliance

Recommendation: Even if the business has ceased operations, formal dissolution provides clean closure, eliminates ongoing compliance obligations, and prevents future penalties.

Conclusion

Alabama’s Title 10A provides a comprehensive, modern framework for business entity formation and operation. Whether you’re launching a single-member LLC, converting to a benefit corporation, or structuring a complex limited partnership, Alabama law offers the flexibility and protection businesses need.

The elimination of annual reports in 2024 simplified compliance, though Business Privilege Tax returns and proper entity maintenance remain essential. For foreign entrepreneurs and multi-state businesses, Alabama offers accessible formation with reasonable costs and straightforward procedures.

Entity selection is not one-size-fits-all. The right choice depends on your liability protection needs, tax situation, management preferences, funding plans, and exit strategy. Taking time upfront to structure correctly—with proper formation documents, operating agreements or bylaws, and tax elections—prevents disputes and problems down the road.