Alabama LLC Formation Guide

LLCs, or limited liability companies, are the most popular business structure in Alabama. Alabama LLCs offer more liability protection than corporations with a flexible tax structure.

When forming or updating an Alabama LLC, it is crucial to consider state-law considerations. Because the laws of each state are different, the LLC’s documents—especially the Alabama limited liability company agreement—must be prepared to meet Alabama’s specific requirements. This article discusses how to form Alabama LLCs that meet the requirements of Alabama law.

How are LLCs formed in Alabama?

An Alabama LLC begins its existence when it files a certificate of formation with the Alabama Secretary of State. The certificate of formation is a simple, short form that includes the minimum amount of information needed to notify the Alabama Secretary of State of the LLC’s existence. It does very little to structure the LLC to accomplish the owners’ objectives.

What is an Alabama limited liability company agreement?

An Alabama limited liability company agreement is a legal document that serves as a blueprint for LLC operations, including control of the LLC, distribution of profits, and the rights and duties of LLC members and managers.¹

An Alabama limited liability company agreement is the most important LLC formation document. It provides the framework for how the LLC will be governed. Without a valid limited liability company agreement, LLC owners are left to the default provisions of the Alabama Limited Liability Company Law to govern the most crucial LLC planning opportunities. A well-drafted limited liability company agreement should:

• Specify who controls the LLC and how the LLC may act. Different states have different default laws governing control of the LLC. To avoid relying on these fallback provisions, the limited liability company agreement should specify the management structure and be clear about what is necessary to constitute an action by the LLC. The management structure should also be designed with creditor protection in mind. When structured properly, a manager-managed structure can provide enhanced creditor protection.
• Provide clear rules for profit distribution. Different states have different laws regarding how profits and losses are allocated among the members of an LLC. These laws may not match the member’s intent. The limited liability company agreement should specify the member’s economic rights. Depending on how the LLC is structured, tax distribution provisions may be necessary to deal with the phantom income problem.
• Maximize liability protection. The limited liability company agreement should be designed to provide maximum protection to both the LLC itself and each member (both inside and outside liability). This requires strategic thinking to ensure that the limited liability company agreement reflects the LLC’s substantive business arrangement while simultaneously making the LLC unappealing to a creditor if a dispute arises. Care should also be given to adequate LLC documentation—including an organizational action without a meeting as discussed below–to prevent veil piercing claims.
• Define differences in voting rights for different classes of equity. If the LLC will have classes of equity that differ in either economic or voting rights, these classes should be created and clearly defined in the limited liability company agreement.
• Protect against unintended spousal ownership. The family law of some states can give a spouse an interest in an LLC by operation of law. This may be unacceptable to other LLC members who don’t want to be surprised to find themselves in business with their business partner’s spouse. The limited liability company agreement should include provisions and waivers to deal with unintended spousal ownership of the LLC.
• Clarify fiduciary duties. States have different approaches to fiduciary duties. Many rely on a patchwork of case law and statutes with lots of gray areas. The limited liability company agreement should include customized fiduciary duty provisions that match the owners’ specific intent.
• Take advantage of tax flexibility. Of all types of business entities, LLCs offer the most flexible tax structure. The limited liability company agreement should specify a tax-efficient tax classification to optimize tax planning opportunities.

What is the Alabama Limited Liability Company Law?

In Alabama, Alabama Business and Nonprofit Entities Code governs business entities in general.² Alabama LLCs are governed by the Limited Liability Company Law.³

How does the Alabama Limited Liability Company Law relate to the limited liability company agreement?

As stated above, the limited liability company agreement is the most important LLC formation document for structuring an Alabama LLC. The Alabama Limited Liability Company Law assumes that the LLC will have a valid limited liability company agreement to govern its business operations.

Most provisions of the Alabama Limited Liability Company Law are simply default provisions that serve as a fallback for LLCs that fail to plan properly. These default provisions are the Alabama legislature’s best guess about what the owners might want. These guesses rarely align with the owners’ specific goals in setting up the LLC.

Does the Alabama Limited Liability Company Law limit what the members can agree to in the limited liability company agreement?

Alabama law limits the operating agreement’s authority in a few ways. An Alabama limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.⁴ Similarly, a limited liability company agreement may not “eliminate or limit the liability of a member or other person for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.”⁵

A member’s promise to contribute capital to an LLC is unenforceable if it is not in writing and signed by the member.⁶ A limited liability company agreement may not waive this provision.⁷ The limited liability company agreement may not waive the prohibition on the issuance of a certificate of transferable interest in bearer form (unregistered).⁸

The limited liability company agreement may not waive the provision of the Code that provides for the enforceability of obligations and expenses of series against assets.⁹ The provision provides that the obligations of a series are enforceable against the assets of that particular series only, and must not be enforced against any other series, when its records are maintained separately from other series, and in accordance with the limited liability company’s certificate of formation and agreement.¹⁰

How much does it cost to form an Alabama LLC?

The cost to form a new Alabama LLC depends on three factors:

• Document preparation fees. Proper LLC formation requires preparation of an Alabama limited liability company agreement that is tailored to the goals of the LLC owners, as well as an organizational resolution and related documents needed to structure the LLC.
• Filing fees. Each new Alabama LLC formation requires filing fees. The fee to file the certificate of formation with the Alabama Secretary of State is $100.00.
• Registered Agent cost. As stated below, each Alabama LLC must appoint a registered agent to receive legal documents on the LLC’s behalf. Although nothing prevents an Alabama resident from serving as registered agent, many LLC owners prefer to use a registered agent for professionalism and to prevent junk mail. Alabama registered agent fees are usually $100.00 to $200.00 a year.

What are the filing procedures for Alabama LLCs?

An Alabama LLC is officially formed when the LLC’s certificate of formation is filed with the Alabama Secretary of State.¹¹ A limited liability company’s initial certificate of formation must be signed by at least one organizer.¹² An organizer is a “person, who need not be an owner or member of the entity, who, having the capacity to contract, is authorized to execute documents in connection with the formation of the entity.”¹³ The organizer assumes the responsibility of filing the limited liability company’s certificate of formation with the state of Alabama.

Alabama law does not allow the certificate of formation to be signed electronically (e-signed) or submitted electronically for e-filing. A hard copy must be mailed or hand delivered to the Alabama Secretary of State. There is no publication requirement.

What ongoing reporting requirements apply to Alabama LLCs?

Unlike many states, Alabama law does not require periodic filings with the Alabama Secretary of State to maintain the LLC.

Does Alabama law recognize series LLCs?

Alabama law recognizes series LLCs.¹⁴

What is a member of an Alabama LLC?

An owner of an Alabama LLC is called a member.¹⁵

Who makes decisions on behalf of an Alabama LLC?

An Alabama LLC may be governed by the members (member-managed), or LLC managers may be appointed to govern the day-to-day affairs of the LLC.

How may LLC members and managers act on behalf of the LLC?

Alabama LLC members and managers may act by formal meeting and vote, but that is relatively uncommon. In most cases, members and managers will sign an action without a meeting agreeing to actions on behalf of the LLC.¹⁶

What is an Alabama registered agent?

An Alabama registered agent is an Alabama resident or business organization that is designated to receive legal notices from the Alabama Secretary of State on behalf of the LLC. Each Alabama LLC must appoint a registered agent to receive service of process on the LLC. The registered agent need not sign a document accepting the appointment, but should be notified and engaged before the organizer files the certificate of formation.

What is a membership interest under the Alabama Limited Liability Company Law?

In Alabama, a member’s economic interest in an LLC is called a membership interest. The Alabama Limited Liability Company Law recognizes both economic interest and non-economic interests in an LLC. It refers to an economic interest as transferable interest¹⁷, but does not specifically define a non-economic interest.

What fiduciary duties apply to Alabama LLC members and managers?

Fiduciary duties are an important—but often overlooked—aspect of LLC law. A fiduciary duty is a responsibility to act on behalf of another person and, where necessary, to put the other person’s interest ahead of one’s own.

It is not uncommon for LLC members and managers to be involved in different activities, some of which could be viewed as adverse to the interest of the LLC or other members or managers. Failure to consider fiduciary duties in the limited liability company agreement can create unexpected liability for breach of fiduciary duty claims.

The Alabama Limited Liability Company Law imposes fiduciary duties on each member or manager, depending on whether the LLC is member-managed or manager-managed. The Alabama Limited Liability Company Law imposes the duties of loyalty and care to individuals who have the authority to direct and oversee the activities and affairs of a limited liability company or a series of a limited liability company.¹⁸ These individuals owe the duties of loyalty and care to the limited liability company (or series of a limited liability company) and its members.¹⁹

Members and managers must also discharge their duties in compliance with the implied contractual covenant of good faith and fair dealing.²⁰ Along with the covenant of good faith and fair dealing, all members must refrain from disclosing or using information of the company to the detriment of the company (or series) and its members.²¹

Duty of Care

Under Alabama law, each person with managerial authority (each member of a member-managed LLC and each manager of a manager-managed LLC) must refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.²²

• Uncabined duty of care. The duty of care is not limited to the duty of care defined in the Alabama Limited Liability Company Law. Related case law may impose a duty of care that is in addition to the duty of care defined in the statute.
• Elimination of the duty of care. The Alabama Limited Liability Company Law allows the limited liability company agreement to completely eliminate the duty of care.
• Modification of the duty of care. The Alabama Limited Liability Company Law allows the limited liability company agreement to modify the duty of care.

Duty of Loyalty

The duty of loyalty requires members of member-managed LLCs and managers of manager-managed LLCs to act in the interest of the company and refrain from engaging in activities and affairs that are averse to the company or in competition with the company prior to the dissolution of the company.²³

Under Alabama law, each person with managerial authority (each member of a member-managed LLC and each manager of a manager-managed LLC) has the following duty of loyalty: (a) to account to the LLC and to hold as trustee for it any property, profit, or benefit derived by that person in the conduct or winding up of the LLC’s activities and affairs or derived from a use by that person of the LLC’s property, including the appropriation of the LLC’s opportunity; (b) to refrain from dealing with the LLC in the conduct or winding up of the LLC’s activities and affairs as or on behalf of a party having an interest adverse to the LLC; and (c) to refrain from competing with the LLC in the conduct of the LLC’s activities and affairs before the dissolution of the LLC. ²⁴ Fiduciary duty provisions in the limited liability company agreement should take the following into account:

• Uncabined duty of loyalty. The duty of loyalty is not limited to the duty of loyalty defined in the Alabama Limited Liability Company Law. When litigating a breach of fiduciary duties, the court may find a duty of loyalty from sources other than the statute.
• Elimination of the duty of loyalty. The Alabama Limited Liability Company Law allows the limited liability company agreement to completely eliminate the duty of loyalty.
• Modification of the duty of loyalty. The Alabama Limited Liability Company Law allows the limited liability company agreement to modify the duty of loyalty.
• Ratification of breach of duty of loyalty. The Alabama Limited Liability Company Law permit the limited liability company agreement to allow all of the members of a member-managed LLC or managers of a manager-managed LLC to authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty (ratify).
• Identifying activities that do not violate the duty of loyalty. The Alabama Limited Liability Company Law permit the limited liability company agreement to identify specific types or categories of activities that do not violate the duty of loyalty.

Does Alabama law permit LLC domestication or conversion?

Alabama is one of a handful of states that does not have a statutory procedure to move an LLC from one state to another.

May an LLC member withdraw (voluntarily dissociate) from the LLC?

LLC law is based in large part in partnership law, which (unlike corporate law) treated partners as having an obligation to continue to participate in the venture. A member that wants to divest himself of his interest in the LLC and cease to be a member may sometimes do so by withdrawal.

The default provisions of the Alabama Limited Liability LLC Law do not prohibit a member’s withdrawal from the LLC, but the limited liability LLC agreement may do so. Even if the limited liability LLC agreement prohibits withdrawal, however, a member may still wrongfully withdraw from the LLC.

A person that wrongfully dissociates as a member is liable to the limited liability LLC and to the other members for damages caused by the dissociation. The liability is in addition to any other debt, obligation, or liability of the member to the limited liability LLC or the other members.²⁵

The default provisions of the Alabama Limited Liability LLC Law do not require the LLC to redeem a withdrawing member’s membership interest in the LLC.

Does Alabama LLC law allow member expulsion?

The default provisions of the Alabama Limited Liability LLC Law allow the LLC’s ability to involuntarily dissociate (expel) a member from the LLC in certain circumstances.²⁶ The limited liability LLC agreement may allow or prohibit expulsion.

What charging order protection applies to Alabama LLCs?

LLCs benefit from a feature known as charging order protection. Charging order protection limits the ability of a member’s creditors from seizing LLC assets (outside liability protection).²⁷ A charging order is the exclusive remedy for creditors of a member.²⁸

What creditor notification requirements apply upon dissolution of an Alabama LLC?

An Alabama LLC is dissolved by filing articles of dissolution. The Alabama Limited Liability LLC Law requires notice to creditors on liquidation.²⁹ It includes provisions for involuntary windup³⁰ and judicial dissolution.³¹

1. See Ala. Code § 10A-5A-1.02(l).
2. Alabama Business and Nonprofit Entities Code.
3. Ala. Code § 10A-5-1 et seq.
4. Ala. Code § 10A-5A-1.08(c)(5).
5. Ala. Code § 10A-5A-1.08(c)(6).
6. Ala. Code § 10A-5A-4.04(c).
7. Ala. Code § 10A-5A-1.08(c)(7).
8. Ala. Code §§ 10A-5A-1.08(c)(10) and 10A-5A-5.02(c).
9. Ala. Code § 10A-5A-1.08(c)(15).
10. Ala. Code § 10A-5A-11.02.
11. Ala. Code § 10A-5A-1.02(a).
12. Ala. Code § 10A-5A-2.04(a)(1).
13. Ala. Code § 10A-1-1.03(70).
14. Ala. Code § 10A-5A-11.01.
15. Ala. Code § 10A-1-1.03(71)(C).
16. Ala. Code § 10A-5A-4.07(c).
17. Ala. Code § 10A-5A-1.02(t).
18. Ala. Code § 10A-5A-4.08(a).
19. Ala. Code § 10A-5A-4.08(a).
20. Ala. Code § 10A-5A-4.08(e).
21. Ala. Code § 10A-5A-4.08(g).
22. Ala. Code § 10A-5A-4.08(d)(1).
23. Ala. Code § 10A-5A-4.08(b)–(c).
24. Ala. Code § 10A-5A-4.08(b).
25. Ala. Code § 10A-5A-6.01(c).
26. Ala. Code § 10A-5A-6.02.
27. Ala. Code § 10A-5A-5.03.
28. Ala. Code § 10A-5A-5.03(f).
29. Ala. Code § 10A-5A-7.05(a).
30. Ala. Code § 10A-5A-7.01(a)–(c).
31. Ala. Code § 10A-5A-7.01(d).