Alabama Limited Liability Company Act

by Joseph Scrofano

    The Alabama Limited Liability Company Act governs limited liability companies in Alabama. A limited liability company (LLC) is a business entity that offers flexibility in taxation, organization and management. It shares characteristics of a corporation as well as those of partnerships and sole proprietorships. LLCs are proper business entities in the state of Alabama. The Alabama Limited Liability Company Act is found in Chapter 12 of the Alabama Code.

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    Creation

    To create an Alabama LLC, the owners, known as members, must file articles of incorporation with the local probate judge in the county in which they intend to locate their initial registered office. An LLC can have as few as one member. The articles of incorporation must set forth the LLC’s name, its duration, its purpose, the name and address of its initial registered office and agent, the names and addresses of all its members, as well as the members respective rights and obligations in the LLC. In addition, the articles of incorporation must describe what circumstances, if any, would the LLC dissolve in the event that one or more members left the LLC. Once the members file the articles -- two signed copies -- with the local probate judge, the probate judge will issue a certified copy back to the members and forward the other certified copy to the Alabama Secretary of State.

    Members

    An LLC has the flexibility in determining a management structure that fits the organization’s needs. Members of an LLC have two options in setting up the company’s management structure: Members, like in sole proprietorships and partnerships, can also be managers and directors of the company. On the other hand, members can hire separate managers and directors and act analogously to shareholders in a corporation. However, to have manager-managed LLC, the members must elect this option in the company’s articles of organization. Otherwise, Alabama law presumes that the company is member-managed.

    Limited Liability

    One benefit of forming a corporation, as opposed to a partnership or sole proprietorship, is that, in most cases, the shareholders cannot be held personally liable for the debts or other liabilities of the corporation. The law refers to this principal as the “corporate veil.” In other words, a corporation’s corporate veil protects shareholders from liability. If someone sues the corporation, they can only get assets of the corporation, not the individual owners. Forming an LLC also provides this advantage to its members. Alabama law applies the corporate veil to LLCs. However, members are not always protected. In cases of fraud and misrepresentation, Alabama courts have the authority to “pierce the corporate veil” and hold its members personally liable for certain actions.

    Tax

    An LLC offers the same liability protections that a corporation has. Simultaneously, an LLC offers the tax benefits that partnerships and sole proprietorships have. Partnerships and sole proprietorships get taxed only once. The individual owners must report the business income on their personal tax returns. Corporations, on the other hand, get taxed independently and the owners must report any dividends or income from the corporation to the IRS. Members of an Alabama LLC can simply elect pass-through taxation and be taxed like a sole proprietorship or partnership, avoiding getting taxed twice.

    Warning

    Business owners should contact a qualified attorney licensed to practice in Alabama to determine how the Alabama Limited Liability Company Act applies to their businesses.

    About the Author

    An attorney and founder of ScrofanoLaw, a general practice law firm in Washington, D.C., Joseph Scrofano has been writing on legal issues since 2008. He holds a Juris Doctor from the Washington College of Law, a Bachelor of Arts with special honors from the University of Texas and a master's degree in international affairs from American University's School of International Service.