Business formation has been a staple of the Corrigan Law Firm for many years. The experience we bring to the business launch is where we really add value. The very first step in starting a business is figuring out what type of entity you want to use. In Alabama, like most states, you have a variety of options available.
1. Sole Proprietorship. A Sole Proprietorship simply means that an individual starts a business in his or her own name and using his or her social security number to keep track of income and expenses.
2. Partnership. A Partnership is where two or more individuals come together to form an entity known as a Partnership. Partnerships may also have other types of entities as partners.
The Partnership may have a separate tax identification number (EIN) issued by the IRS. It is absolutely crucial that a written Partnership Agreement is drawn up spelling out exactly the rights and obligations of each party to the Partnership are.
3. Limited Liability Company (LLC). Limited Liability Companies were first allowed in Alabama in 1993. I believe the first American LLC statute was adopted in Wyoming in the 1970’s and fit the niche between the simplicity of a partnership and the complexity of a corporation.
In Alabama, in order to start an LLC, you first have to obtain a Name Reservation Certificate with the Secretary of State of Alabama. Their website is found at www.SoS.Alabama.gov. The name of your entity may not be “confusingly similar” to an entity already in existence. If another entity has the name you would like, there are, however, ways to get around this.
Once the name has been reserved, Articles of Organization (now called a “Certificate of Formation”) are drafted which set out various requirements of the LLC. These requirements are found at Alabama Code §10A-5A-2.01 and currently include a) the name of the LLC, b) the name and address of its registered agent, c) a statement that there is at least one (1) member of the LLC, d) a statement regarding “series” LLCs, if applicable, and e) “any other matters the members determine to include therein.”
It is the “any other matters” that should make you consult an attorney that is experienced in this area of the law. Legal Zoom, for instance, can’t tell you whether to form a member-managed LLC or a manager-managed LLC, or what the practical differences are. You should know what the characteristics of Membership Interests, how they are transferable and how they are not “attachable.”
Warning: The Alabama Secretary of State’s office has gone into the legal document drafting business, but, frankly, these documents leave a lot to be desired. Important aspects of actually operating an LLC are unfortunately left off of these forms and from time to time create a great many problems.
After formation, the governing document of an LLC is called a Limited Liability Company Agreement (“formerly known as an Operating Agreement.”) This Agreement contains a myriad of rights and obligations of the Members of the LLC to each other, the LLC and third parties. Again, the services of an attorney qualified and experienced in this area can save a lot of heartache and money, and a number of clients have learned this lesson the hard way.
4. Business Corporation. The Corporation is by far the more complex entity to use for starting a business, but if used correctly can offer a variety of benefits not available with simpler forms of entities. This section addresses only the formation of Business Corporations.
Similar to an LLC, you first must reserve the name of a corporation with the Secretary of State, and it cannot be confusingly similar to the name of a corporation, or LLC, already in existence. Articles of Incorporation must be drafted and filed with the Office of the Judge of Probate in the County in which the Corporation will be domiciled. The requirements for Articles of Incorporation may be found at Alabama Code §10A-2A-1.20.
5. Non-profit Corporations. Non-profit Corporations are a completely different animal from Business Corporations. They can be tax-exempt, which requires an application to the IRS, do not have stock held by “owners,” and are generally formed for charitable purposes. The requirements of this type of entity are quite complex and should not be attempted without the advice of an attorney qualified in this area.