How to Incorporate in Alabama vs. How to Start an Alabama LLC

In matters of choosing between forming an LLC or incorporating your business, despite which state you choose, there are general characteristics you can base your decision off of:

• Level of Maintenance
  LLCs are low maintenance, which is the leading reason why new business owners choose LLCs over corporations. Corporations involve holding annual meetings, directors meetings, resolutions, meeting minutes, and a significant amount of paperwork to maintain. Unlike corporations, LLC members and owners can make executive decisions whenever necessary and seldom need resolutions. An LLC will be your best choice if you have a small to medium-sized business and require the lowest amount of maintenance. 
• Tax Structure
  LLCs default to a pass-through entity tax structure, where profits are passed directly onto the owners and members as personal income, resulting in only the owners being taxed on that income personally. By default, corporations are taxed as C corporations, but can potentially elect an S corporation tax status if it’s more beneficial. When the net income of a C corporation is taxed, and profits are distributed to the shareholders (owners), the distributions are taxed again as personal income, resulting in double taxation. This aspect of corporations may seem consistently negative, but this structure can provide more positive advantages, such as reinvesting profits into the company. When you elect an S corporation tax status, your corporation becomes a pass-through entity, and is allowed tax advantages such as dividends not subject to self-employment tax.
• Investors
  A corporate structure is a well known concept by investors and venture capitalists, where they feel comfortable investing their time and money. If investors are something you want for your company, consider incorporating. While LLC ownership can be divided into percentages, investors may still prefer and trust investing in stock.
• Prestigious Title
  The oldest and most prestigious entity form is the corporation. Being able to attach the “Inc” or “Corp” ending to your business name conveys permanence and soundness. LLCs are still following close behind and are able to provide some level of prestige and flexibility as they continue to gain popularity in the future.

Note that whether you form an LLC or a corporation, you’ll need to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) once your company is officially formed with the state of Alabama. This report provides the federal government with identifying information about your company and those with the most control over profits and business operations. However, unlike state filings, the information shared in your report does not go on the public record and there is no filing fee. (Though if you don’t want to file this on your own, we offer BOI filing service for just $25.)

Now that we’ve covered the basic advantages and disadvantages of LLCs and corporations, we need to cover more specifically why an Alabama LLC or an Alabama corporation may be better for you. Each state will be unique in the way it operates based on its governing state statutes; understanding this fact demonstrates the importance of knowing the different advantages of these entities on a state level. Keep reading to see the unique differences between an Alabama LLC and an Alabama corporation.

• Alabama Annual Report Requires Franchise Tax Reporting
  In most states, businesses don’t have to file any reports other than an annual or biennial report. In Alabama, however, corporations and LLCs must file a combined form known as the Alabama Business Privilege Tax Return and Annual Report. Alabama imposes a franchise tax called the Business Privilege Tax (BPT). The BPT is a tax based on a business’s net worth. Most businesses pay a minimum BPT of $100, and a $10 annual report filing fee (one of the lowest in the US) will also be required. This enhanced form calculates your tax for you, and allows you to complete your annual reporting requirement simultaneously.
• Alabama Corporate Income Tax
  Incorporated businesses in this state are required to pay a state corporate income tax. This tax is fairly low compared to other states, with a flat rate of 6.5%.
• Alabama Business Privilege Tax (BPT)
  While franchise taxes aren’t uncommon in many states, the Alabama BPT is on a graduated scales and taxes a business based on their net worth—the higher your worth, the higher this tax will be for your business each year. The rates range from $.25 to $1.75 for each $1,000 of your net worth, with a minimum tax of $100.
• Alabama Personal Income Tax
  For individuals, the personal income tax rate is a graduated scale. This scale is significant  if you plan to start an LLC, since your personal income from your LLC will be taxed according the below tax brackets:

Alabama LLC or Alabama Corporation? Final Answer.

Compared to corporations, the low-maintenance and straightforward LLC business structure offers less paperwork and annual requirements for its owners. In Alabama, LLCs are more complex than a typical LLC, partly due to the fact you are subject to an extra four pages of filing for the Alabama Business Privilege Tax (which is the same form as the annual report) which varies in cost depending on the net worth of your company. The other part of the added complexity is the need to file state income tax returns versus just reporting the LLC profits and losses on your personal income tax return. The state statutes within Alabama do not demonstrate any special advantages towards either LLCs and corporations in terms of liability protection.

The answer to whether you should choose an LLC or a corporation for your business can be answered by determining the business size and number of investors in your future. The limited liability aspects are structured the same for both corporations and LLCs in Alabama. An LLC will suit your needs if you are maintaining a small or medium-sized business. If you predict your business will grow substantially and investors are a factor in your future, a corporation will be in your favor if you can take on the extra annual paperwork.

To form a corporation in Alabama, also known as incorporating, you must file the Corporation Certificate of Formation document. This document must be filed alongside a Name Reservation Certificate, which can be obtained online immediately or through postal mail after submitting a Name Reservation Request Form.

Filing the Alabama Corporation Certificate of Formation
Alabama is the only state that requires you to reserve your name before you can file your Certificate of Formation. To reserve your name, obtain the Name Reservation Certificate by submitting a Name Reservation Request Form immediately online ($28) or through postal mail with the Secretary of State ($25). Once you’ve obtained a Name Reservation Certificate and filled out the Certificate of Formation, you must include a Secretary of State fee of $200.

How much does it cost to incorporate in Alabama?
There is a $200 Secretary of State fee,  and a $25-$28 Name Reservation Certificate fee. If filing online, there’s also a small processing fee (4%).

To complete the Alabama Certificate of Formation, you must include the following information:

To form an LLC in Alabama, you must file the Limited Liability Company Certificate of Formation with the Alabama Secretary of State.  This document must be filed alongside a Name Reservation Certificate, which can be obtained online immediately or through postal mail after submitting a Name Reservation Request Form.

Filing the Alabama Limited Liability Company Certificate of Formation
Alabama is the only state that requires you to reserve your name before you can file your Certificate of Formation. To reserve your name, obtain the Name Reservation Certificate by submitting a Name Reservation Request Form. A reservation is $28 online or $25 by mail. Once you’ve obtained a Name Reservation Certificate and completed the Certificate of Formation, you must also include a Secretary of State fee of $200.

How much does it cost to incorporate in Alabama?
There is a $200 Secretary of State fee and a $25-$28 Name Reservation Certificate fee. If you file online, there’s also an online processing fee of 4%.

To complete the Alabama Certificate of Formation, you must include the following information:

In order to keep your LLC or corporation in Alabama in good standing, you need to complete a couple tasks with the state to keep your business entity up and running.

Below, you’ll find instructions and resources to help you complete your annual maintenance.

What is an Alabama Annual Report?
Every active LLC and corporation in the state of Alabama must file an annual report, which is actually a combination of a report and a tax return. There is no standalone annual report—only entity information to give as part of the Business Privilege Tax Return.

Specifically, the annual report is combined with the Alabama Business Privilege Tax (ABPT) that must be paid every year. When you file this tax, you’re are also completing your annual report requirement. This combination report is jointly referred to as the Alabama Business Privilege Tax Return and Annual Report (Form BPT-V).

What is the Alabama Initial Privilege Tax?
Initially, Alabama requires all entities to file the one-time filing of an Initial Business Privilege Tax Return (Form BPT-IN) with the Department of Revenue within two and one-half months of incorporation. The amount due for that filing will be a minimum of $100, but you may owe more depending on your federal taxable income and your net worth.

How do I file an annual report in Alabama?
LLCs and corporations can only file the Alabama Business Privilege Tax Return and Annual Report through postal mail and use different forms depending on the entity. Unlike most states, this must be filed through the Department of Revenue.

• LLCs:
Mail Form PPT (and Form BPT-V if making a payment) to:
Alabama Department of Revenue
Business Privilege Tax Section
PO Box 327431 (327320 if making a payment)
Montgomery, AL 36132-7431

• Corporations:
Mail Form CPT (and Form BPT-V if making a payment) to:
Alabama Department of Revenue
Business Privilege Tax Section
PO Box 327431 (327320 if making a payment)
Montgomery, AL 36132-7431

How much does it cost to file an annual report in Alabama?
The cost to file an annual report will be a minimum of $100, but you may owe more depending on your federal taxable income and your net worth. The enhanced PPT/CPT forms will calculate what you owe automatically.

When are Alabama annual reports due?
Annual reports for LLCs are due by the 15th day of the 3rd month after the beginning of the taxable year, or March 15th for most LLCs.

Annual reports for corporations are due by the 15th day of the 4th month after the beginning of the taxable year, or April 15th for most corporations.

There is an exception for businesses with a fiscal year end of June 30. The Alabama Business Privilege Tax Return and Annual Report is then due on the 15th day of the 3rd month after the beginning of the taxable year.

Can I file my Alabama annual report online?
Yes, you can take care of your Alabama annual report documents online at Alabama’s Department of Revenue website.

Alabama’s business taxes are involved. For corporations, the state imposes a corporate income tax. For all businesses, the state imposes a business privilege tax (BPT), which is an amount based on a business’s net worth.

The filings are complicated and you may need the help of a tax service or CPA to complete these requirements, but regardless of your accounting skills, we’re here to help get you started.

Take a look at our Alabama Business Tax FAQ below:

What is the Alabama Business Privilege Tax?
The Business Privilege Tax (BPT) is an annual franchise tax imposed on all businesses for the privilege of conducting business in the state, as well as ensure that businesses are operating legally in Alabama.

This tax is filed in a combined report with the annual report each year as well.

How is the Alabama Business Privilege Tax calculated?
The BPT is a graduated scaled, and the amount owed is based on the businesses net worth, with a minimum tax of $100. The amount is calculated at the following rates:
0.025%: $0 – $1
0.100%: $1 – $200,000
0.125%: $200,000 – $500,000
0.150%: $500,000 – $2.5 million
0.175%: $2.5 million +

Who has to pay the Alabama Business Privilege Tax (BPT)?
All Alabama businesses must pay the Alabama Business Privilege Tax. This includes all forms of corporations and limited liability entities.

What tax forms do I need to file for the BPT?
Limited liability entities must file Form PPT and corporations must file Form CPT, which are combination forms that also satisfy the annual reporting requirements. These forms can be found and submitted at the Alabama Department of Revenue website.

In Alabama, do I also have to file an income tax return for my LLC?
In addition to the BPT filing, your LLC may need to file a state income tax return under the following classifications:

If your LLC is taxed as a partnership, you will need to file Form 65, which is for informational purposes.

If you own a single member LLC, you will need to file Form 40, which is your personal income tax where you report all your LLC profits and losses.

If your LLC is elected as an S corporation, you will need to file Form 20S, which is both a tax return and serves informational purposes.

Okay, so what tax forms do I need to file for an LLC in Alabama?
Your LLC will need to file forms depending on their classification:

If your LLC is taxed as a partnership, you will need to file Form 65, which is mainly for informational purposes.

If you own a single member LLC, you will need to file Form 40, which is your personal income tax where you report all your LLC profits and losses.

If your LLC is elected as an S corporation, you will need to file Form 20S, which is both a tax return and serves informational purposes.

What information is required on these various LLC tax return forms?

Form 65 requires:
Federal Business Code Number
Federal Employer Identification Number
Federal income, deductions, losses, and expenses
Schedule K-1 (as attachment)

What tax form does an Alabama corporation need to file?
C corporations need to file Form 20C, which is a consolidated income tax return. This form can be found and submitted at the Alabama Department of Revenue website.

What’s the Alabama corporate tax income rate?
Alabama’s corporate income tax rate is a flat 6.5%.

How are Alabama corporate income taxes calculated?
Alabama corporate income taxes are calculated with a flat scale, and do not have a minimum tax amount.

What’s the personal income tax rate in Alabama?
There are marginal tax rates for single filers :
2%: $0 – $500
4%: $500 – $3,000
5%: $3,000 +

When are my business tax returns due?
Business tax returns and the BPT filings are due:

• by the 15th day of the 3rd month after the fiscal year ends, or March 15th for most LLCs, or
• by the 15th day of the 4th month after the fiscal year ends, or April 15th for most corporations.

An initial tax return filing is due 2.5 months after forming your business, called the Alabama Initial Business Privilege Tax Return.