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Editorial 7 MIN READ

Alabama in April 2023: the $200 formation and the tax that replaced the annual report

A one-time Certificate of Formation fee, no annual report, and a Business Privilege Tax that does the work of both

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 6 sections
  1. What the Secretary of State actually charges
  2. The Business Privilege Tax, which is the real annual cost
  3. Corporate income tax and what is (and isn't) there
  4. Versus Delaware, and why the comparison is not as clean as it looks
  5. Who Alabama actually makes sense for
  6. Sources

n Alabama LLC costs $200 to form, owes no state annual report, and pays a Business Privilege Tax with a $100 floor each year. Those are the three numbers a founder needs before looking at anything else.

This is a guide for someone forming in Alabama in April 2023. It assumes you already know why you are here, and it will not try to sell you the state.

What the Secretary of State actually charges

You form an Alabama LLC by filing a Certificate of Formation with the Secretary of State. The state filing fee is $200, paid once, and there is no recurring Secretary of State fee afterwards. The certificate is short: the name of the LLC (which must include "LLC," "L.L.C.," or "Limited Liability Company"), the name and Alabama street address of the registered agent, and a statement of whether the LLC is member-managed or manager-managed. You sign it and file it.

The governing statute is the Alabama Limited Liability Company Law of 2014, codified at Ala. Code § 10A-5A. It replaced the older Chapter 10A-5 LLC Act on January 1, 2017, for entities formed before that date, and governs every LLC formed on or after January 1, 2015. If you are forming today, § 10A-5A is the only chapter you need to read. The formation mechanics are set by § 10A-5A-2.01, which lists the required contents of the certificate; the registered-agent requirement sits in § 10A-1-5.31.

Alabama historically layered a county-level "name reservation" fee on top of state filing, a quirk that tripped up out-of-state founders for years. That extra step was removed in 2020 when the Business and Nonprofit Entities Code was cleaned up; today, the $200 is the $200, and the Secretary of State collects it directly. Online filing is available through the SOS portal, and turnaround in routine weeks runs a few business days. Expedited processing is available for an extra fee when you need it same-week for a closing.

You will still need an EIN from the IRS and an operating agreement that Alabama does not require you to file but plainly expects you to keep; see § 10A-5A-1.08, which makes the operating agreement the governing document for members' rights, with the statute filling gaps as defaults.

The Business Privilege Tax, which is the real annual cost

Alabama does not make LLCs file a Secretary of State annual report. It makes them file and pay the Alabama Business Privilege Tax, and for most purposes that tax plays the same role an annual report plays in Delaware or Texas: a yearly check-in with the state, a small fee, and a chance to update basic information.

The governing statute is Ala. Code § 40-14A-22, which imposes the privilege tax on every entity doing business in Alabama or organized under Alabama law. The tax is graduated by net worth apportioned to Alabama, with a floor of $100 and a cap of $15,000 per year. For 2023 filings, the Alabama Department of Revenue has indicated an increase to the minimum floor is under legislative discussion, but as of this writing the $100 minimum remains in force for tax years beginning on or after January 1, 2023. Check Form BPT-IN (initial) and Form PPT (pass-through entities) for the exact rate table.

The due date catches out-of-state founders. The privilege tax return is due two and a half months after the beginning of the taxpayer's determination period, which for a calendar-year LLC means April 15 each year. This is the same day federal Form 1040 is due, which is useful mnemonically and annoying operationally, because the tax return your accountant is already thinking about is not this one. For fiscal-year LLCs, count two and a half months from the first day of the fiscal year.

There is also an initial privilege tax return, Form BPT-IN, due within two and a half months of formation. Miss it and the Department of Revenue assesses a late-filing penalty of the greater of $50 or 10% of the tax due, plus interest at the federal short-term rate plus three percentage points.

One quirk worth knowing: the privilege tax base is apportioned net worth, not gross receipts and not income. A brand-new LLC with minimal capital pays the $100 floor. A holding company with significant book equity apportioned to Alabama can climb the graduated table quickly, and the $15,000 cap is reached sooner than first-time filers expect.

Corporate income tax and what is (and isn't) there

If you elect corporate treatment for your LLC, or if you are forming an Alabama C-corp instead, Alabama imposes a flat 6.5% corporate income tax under Ala. Code § 40-18-31. The rate has been 6.5% since the 2001 statutory consolidation, and there have been no enacted changes as of April 2023. Financial institutions pay a separate excise tax at 6.5% under § 40-16-4.

Pass-through LLCs are not subject to the corporate income tax. Members pick up their share of income on their individual Alabama returns at Alabama individual rates, which top out at 5% under § 40-18-5 for tax year 2023. Alabama also adopted an elective pass-through entity tax in 2021 (Act 2021-1) that lets the LLC itself pay Alabama income tax at 5%, with a credit to members, as a workaround for the federal $10,000 SALT cap. Whether to make the election is an accountant conversation, not a formation one, but the option exists.

What Alabama does not have is a franchise tax separate from the Business Privilege Tax. Delaware charges both; Texas charges a margin tax; California charges an $800 minimum franchise tax on top of its LLC fee. Alabama's BPT is the single annual obligation at the entity level for LLCs, and that is the end of the list.

Versus Delaware, and why the comparison is not as clean as it looks

The natural comparison for a founder choosing between home-state and Delaware formation is the annual math. Delaware charges $90 to form an LLC and $300 a year in flat franchise tax (8 Del. C. § 1904), with no annual report for LLCs. Alabama charges $200 to form and a $100 minimum BPT each year.

On a pure minimum-fee basis Alabama's recurring cost is lower: $100 versus $300. On formation cost, Delaware is less than half of Alabama's. But two mechanics complicate the picture. First, Alabama's BPT scales with apportioned net worth, so a well-capitalized operating entity pays more than the floor, sometimes materially more. Delaware's $300 is flat regardless of size. Second, Alabama imposes the privilege tax only on entities with Alabama nexus; a Delaware LLC that does not do business in Alabama owes nothing here. An Alabama LLC that does business in Delaware, by contrast, will need to foreign-qualify there and start paying the Delaware $300 on top of the Alabama BPT.

For a small in-state operating business, Alabama is cheaper than Delaware on a lifetime basis. For a venture-backed company or a holding entity that will eventually need Delaware for the Court of Chancery, paying the Delaware premium from day one avoids a conversion later. For a landlord holding three rental properties in Alabama, form in Alabama and do not look back.

Who Alabama actually makes sense for

Alabama is a sensible home-state formation for anyone whose business operates in Alabama. The $200 formation fee is at the high end of the southeastern range (Georgia is $100, Tennessee is $300 to $3,000 sliding with member count, Mississippi is $50), but the lack of a separate annual report and the $100 BPT floor keep the long-run cost reasonable.

Alabama is a reasonable choice for a family-business reorganization or a multi-generational real-estate holding structure with Alabama property. The statute is modern, the privilege tax is predictable, and Alabama case law on LLC member disputes has developed enough to give counsel something to work with. See, for example, the Alabama Supreme Court's treatment of member fiduciary duties in Espinoza v. Rudolph, 46 So. 3d 403 (Ala. 2010), which confirmed that LLC operating agreements can contractually modify default fiduciary duties within the limits the statute allows.

Alabama is not the state for an entity whose only connection is a mailing address. There is no privacy arbitrage here, no tax haven, no case-law premium that justifies forming in Alabama if your business lives somewhere else. If you are reading this because a forum post said Alabama had a "cheap LLC," the sticker price is not actually the low one; it is the recurring cost that is low, and you only capture that by being here.

If you are forming this month with Alabama nexus, file the Certificate of Formation, calendar the BPT-IN within two and a half months, and calendar April 15 for each year after that. Those three steps are the whole maintenance story for most LLCs in this state.

Sources

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