When you start a business in Alabama you can choose to form the business as one of several types of business structures. These legal structures determine how the business will be taxed, how many formalities and paperwork are needed to run the business, and how well your personal assets are protected from the business’ debts.
In Alabama, business owners can choose from four different types of partnerships, each one offers different advantages.
Types of Partnerships: Liability & Tax Considerations
All partnerships are considered pass-through entities in Alabama. This means that income generated by the business is taxed on the individual partners’ state and federal tax returns and that the business itself doesn’t pay any corporate taxes. The IRS has more information on how partnerships handle federal taxes.
In addition to taxation, you should consider how the partnership structures liability protection. Liability protection is a legal term that refers to how a business structure protects its owners’ personal assets from the business’ debts and legal obligations. If a business offers no liability protection then the owners’ personal assets, such as their homes and saving accounts, may be seized to pay off the company’s debts. The reverse would also be true, meaning business assets could be used to pay off the owners’ personal debts.
General Partnership (GP)
The simplest form of a partnership, the general partnership offers no liability protection but requires less paperwork and government oversight.
- No liability protection, each partner is personally liable for all of the company’s debts
- Your personal assets, such as your home or cash, can be seized to settle business debts
- For tax purposes, income from the business passes through to your personal income
- Exempt from many rules regarding how the business should be named, ran, and maintained—no need for complicated paperwork
Limited Partnership (LP)
Limited partnerships are similar to general partnerships, but allow the owners to organize into two different types of partners: limited and general partners.
- Limited partners are not allowed to manage the day to day operations of the business, but enjoy personal liability protection
- Limited partners are only liable for the money they’ve invested into the company
- General partners are fully liable for the business debts, but they control the day to day operations
- Taxed as a pass-through entity, like a general partnership
- Very popular with partnerships that want to attract outside investors that typically act as limited partners, protecting them from the company’s debts and obligations
Limited Liability Partnership (LLP)
In a limited liability partnership partners can’t be held liable for other partners’ mistakes, errors, or outright fraud. These types of partnerships are very popular with professionals that expect to take on a lot of liability risk (typically as the result of lawsuits), such as doctors and lawyers. For example, if three doctors start an LLP and one of them is sued for malpractice and loses a costly lawsuit, the other doctors won’t be personally liable to pay off that debt.
- Similar to a general partnership, but each partner is only liable for their investments like a limited partner in an LP
- Each partner is protected from the other partners’ debts and obligations
Limited Liability Limited Partnership (LLLP)
A limited liability limited partnership partners is very similar to an limited liability partnership, but offers different types of partners, like a limited partnership.
- Like an LLP, each partner is protected from the other partners’ debts and obligations
- Like an LP, there are limited and general partners. The limited partners don’t have a say in the day to day operations, but are only personally liable for the money they invested into the company
Limited Liability Company
If you need additional taxation choices or greater protection from personal liability you may want to consider forming a limited liability company (LLC). The LLC business structure combines many of the advantages of partnerships while offering greater flexibility in tax structures. On the downside, they often require more effort to maintain than a partnership but even then, they are known for their simplicity.
How to Form a Partnership in Alabama
Now that you’ve decided to form a partnership in Alabama, you will need to take a few steps to formalize the arrangement and get the business going.
Step 1: Select a business name
The business name can be any name that isn’t currently being used by another business. The business name must contain a designation of what type of partnership you are forming. For example, if you are going to be “XZY Printing” and are forming an limited liability partnership, your business name would be “XZY Printing LLP.” The reason for this requirement is to ensure that the public knows they are dealing with a separate business entity, and not a general partnership.
Step 2: Register the business name
Alabama does not require businesses to register their business name but if you would like to protect your business name from being used by another business, you can file it with the Secretary of State. Before you register the name, you should check to see if the name is already in use by another business. You can search the Secretary of State’s Trademark database to see if the name available. Once registered, you have more legal protections if someone else starts doing business under your name.
Step 3: Complete required paperwork
You’ll need to complete the paperwork required to form your partnership. Each type of partnership has slightly different paperwork and each county in Alabama may have slightly different requirements. The basics for each type of partnership are listed below.
General Partnerships: In Alabama, there is no formal filing requirement to form a GP. The partners must simply agree to operate a business for profit.
Limited Partnerships: An Alabama LP must file a Domestic Limited Partnership Certificate with the probate judge in the county where you intend to do business, along with the current filing fee in order to become a recognized legal entity.
Limited Liability Partnerships:
To form a limited liability partnership, you must file a Domestic Registered Limited Liability Partnership Certificate of Formation with the probate judge in the county where you intend to do business, along with the current filing fee to become a recognized legal entity.
Limited Liability Limited Partnerships:
To form an LLLP in Alabama, you must file a Domestic LLLP Certificate of Limited Partnership with the probate judge in the county where you intend to do business, along with the current filing fee to become a recognized legal entity.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
Partnerships with employees should obtain an Employee Identification Number (EIN) from the IRS. Even if you aren’t planning on having employees, an EIN can help you open a bank account in your company’s name, so it is usually recommended to get an EIN as soon as you can.
Additionally, some businesses require additional licenses from the state in order to operate such as a license to practice law or medicine. Further taxes may be required as well, depending on the type of business you’re setting up.
Step 5: Get your day to day business affairs in order
Once you have your appropriate certificate back from the probate judge, you are free to do business in Alabama. If you haven’t already done so, you should set up:
- A bank account for the business
- A permanent address for the business
- A web address for your business
- Email accounts for every partner
Ready to start a partnership? LegalZoom will help you choose which type of business partnership might be right for you. We can also file the paperwork to form your business, help you find a registered agent, and get you in touch with an attorney or tax professional.