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STARTING AND OPERATING A BUSINESS IN ALABAMA Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Alabama has an extremely friendly business climate, with low overall tax rates, abundant natural resources, and special tax incentives for new and expanding businesses. It has a fairly typical tax and legal structure under which businesses must operate. Like most states, Alabama imposes an individual income tax, a corporate income tax, a sales and use tax, and various excise taxes, with property taxes imposed at the local level. In 1999, the U.S. Supreme Court held that the former Alabama franchise tax on corporations was unconstitutional, so that it was replaced with a new shares tax on corporations and a new business privilege tax on corporations and all other limited liability entities, beginning in the year 2000. The corporate shares tax was, in turn, repealed by voter approval of a constitutional amendment, effective January 1, 2002, but the business privilege tax remains in effect. The state has adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Alabama in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. While Alabama's business taxes and business laws are generally much like those of most other states, many functions that are performed in most states by a central state agency, such as a secretary of state's office or a corporations commission, are performed by a local county probate judge in Alabama. Probate judges are empowered to do much more than preside over probate proceedings; for example, they are authorized to receive document filings (and applicable fees) for the creation of corporations, LLC's, LLP's, and limited partnerships, and you must also file various other items with the probate judges, such as local business license applications and fees. In a sense, it is almost as though the state government in Alabama has "franchised" many of its functions to the local probate judges, and the state will even penalize such judges in some cases for not properly performing their duties by, for example, causing a probate judge to forfeit $50 of the fees collected when an LLC files articles of organization with the probate judge, if the judge does not transmit copies of the certified LLC documents to the secretary of state as required, within 10 days of the filing of the articles. New businesses should note that the Department of Revenue can grant companies tax exemptions for up to 5 years in enterprise zones, and enterprise zone tax credits of up to $2,500 per new employee hired may be allowed to employers. The Massachusetts Taxpayers Foundation study of state taxes in 2004 (based on 2002 data) found that Alabama had the lowest property taxes in the nation, in relation to residents' income, at only $13 of tax per $1,000 of income. Maine, in contrast, had the highest property taxes, at $55 per $1,000 of income, by comparison. At present, the state's economy is rapidly weakening, in terms of the level of unemployment and other economic measures. For example, in November, 2007, the state's unemployment rate was only 3.7%, after reaching an all-time low in the spring of 2007, but has since shot up to 6.1% in November, 2008, though still well below the national unemployment rate of 6.8%. Employers find it easy to attract workers to the state, since Alabama has a very low cost of living, compared to the national averages, a factor that obviously has contributed to recent employment growth in the state. To view the latest federal Bureau of Labor Statistics unemployment rate data for Alabama or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Alabama can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Alabama also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Alabama can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Alabama income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c), for information on the Alabama income tax and filing requirements for individuals. Doing business as a sole proprietor in Alabama is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. (c) Partnerships. Alabama's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). Partnerships, as entities, are not subject to state income tax in Alabama. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). However, as discussed in Section IV(c), limited partnerships and LLP's are subject to the Alabama Business Privilege Tax, a franchise tax on their capital, which also applies to LLC's and corporations. Partnerships are required to file an annual tax information return with the state. For details on Alabama partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Alabama can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b). There are no specific filing requirements that apply to general partnerships under Alabama state law. However, a partnership may file a Statement of Partnership Authority in the office of the judge of probate in the county where the partnership has its chief executive office, designating which partners in the partnership have (or do not have) the authority to enter into specified types of transactions, such as real estate transactions. If the chief executive office is located outside the state of Alabama, the statement should be filed with the Alabama Secretary of State. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the probate judge for the county where the partnership's records are maintained. Domestic (Alabama) limited partnerships must file a Report of Domestic Limited Partnership, Form DLP-2, plus a $5.00 fee, with the Alabama Secretary of State within 30 days after filing the certificate of limited partnership with the county probate judge. A foreign limited partnership must register with the secretary of state and pay a $75 filing fee. For information on limited partnership filing requirements, see the contact information for the offices of the Alabama Secretary of State, listed in Section VI(a). Unlike general partnerships or sole proprietorships, limited partnerships and all other limited liability business entities that do business in Alabama or that are organized in the state are subject to the Alabama Business Privilege Tax on their capital, as described in Section IV(c). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Alabama. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Alabama state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. To become an LLP, a partnership must file a registration statement, approved by a majority of the partners in most cases. One copy must be filed with the judge of probate for the county in which the partnership has its principal office, and a second copy is to be filed with the Secretary of State of Alabama. Fees of $35 for the probate judge and $40 for the Secretary of State must accompany the registration form. Professional firms are allowed to operate as LLP's, but a partner will not obtain any limitation of liability with respect to his or her own malpractice, just as if he or she were practicing as a sole proprietor or as a shareholder in a professional corporation. However, a partner in an LLP will not generally be held personally liable for malpractice or other misconduct committed by one of his or her partners. Foreign LLP's must register with the Secretary of State and pay a $40 fee before transacting business in Alabama. Both domestic and foreign LLP's are required to file annual renewal statements (on the date specified by the Secretary of State) and pay an annual $70 fee. LLP's, like other limited liability entities, are subject to the Alabama Business Privilege Tax on their net worth, as described in Section IV(c). Note that one potential drawback of LLP's, if you will do business in other states besides Alabama, is that some states, like California and New York, only recognize professional partnerships, or certain types of professional partnerships, as LLP's. If yours is not a professional partnership of a type that is allowed LLP status in those states, such states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). (d) Corporations. To create a corporation, you must file articles of incorporation with the Office of the Probate Judge. You must pay a $35 filing fee to the Probate Judge plus a separate $50 ($40 plus $10 fee for issuing name reservation certificate) filing fee for the judge to forward with a copy of the articles to the secretary of state. Foreign corporations -- those created under the laws of another state -- must obtain a certificate of authority to do business in Alabama, from the secretary of state. The application, Form CD-2, must be filed in duplicate with the secretary of state, and must be accompanied by a filing fee of $175 and an original certified copy of the corporate charter. IMPORTANT NOTE: The state of Alabama previously levied a corporate shares tax on the value of the stock of Alabama corporations (paid by the corporation), or on the value of the stock of foreign corporations. However, after 2000, following voter approval of a constitutional amendment in March, 2000 which increased the corporate income tax, the shares tax was phased out by 2002. All corporations in Alabama, including foreign corporations and S corporations, are required to file annual corporate reports and pay an annual $10 filing fee, by March 15th each year. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Alabama, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition to paying federal income taxes on its income, a corporation that does business in Alabama must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Corporations, like other limited liability entities, are subject to the Alabama Business Privilege Tax on capital, which is also described in Section IV(c). For tax forms and more information on corporate income and other corporate taxes in Alabama, see the contact information for the offices of the Alabama Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Alabama recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, S corporations are fully taxable under the Alabama Business Privilege Tax, like all other limited liability entities that do business in the state. (f) Limited Liability Companies. Alabama, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Alabama may also choose to operate in the form of an LLC. In most states, including Alabama, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLC's under Alabama tax laws. To form an LLC in Alabama, you must file articles of organization with the Office of the Probate Judge, with a copy of the articles for the Probate Judge to certify and deliver to the secretary of state. You must pay a $35 filing fee to the Probate Judge and another $40 filing fee for the judge to forward to the Alabama Secretary of State. Foreign LLC's that do business in the state must register with the secretary of state, paying a $75 fee for filing the foreign LLC registration, in order to obtain a certificate of registration to do business in Alabama. For more information on LLC's in Alabama, contact the Corporations Division of the office of the Alabama Secretary of State. Alabama state law generally follows federal tax rules with regard to tax treatment of LLC's, and now permits the formation of 1-member LLC's. Effective since 1998, Alabama treats LLC's as partnerships unless they are otherwise classified for federal tax purposes, and disregards a 1-member LLC if it is disregarded for federal tax purposes. While LLC's are generally not subject to state income tax in Alabama, all LLC's, including 1-member LLC's that are "disregarded entities" for income tax purposes, are subject to the Business Privilege Tax that applies to corporations and other limited liability entities that do business in Alabama. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Alabama is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Alabama. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. Under the tax laws of most states, if you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. While Alabama has no formal procedure for obtaining either type of such tax release, unlike most other states, you should take the precaution of having the seller obtain a letter of good standing from the Alabama Department of Revenue or, in the case of sales and use taxes, a certificate from the Department of Revenue showing that no tax was due from the seller or that all such sales and use taxes due have been paid. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. As a general rule in Alabama, if a new employer acquires an entire existing business, the buyer will succeed to the seller's unemployment tax experience rating. However, to obtain a seller's favorable experience rating as a successor employer when you make only a partial acquisition of an existing business, you will need to apply on a timely basis to the Unemployment Compensation Division, Experience Rating Unit, of the Department of Industrial Relations, requesting that you be treated as a successor employer. A written application must be made within 90 days after you acquire the business. PLANNING POINT: EXAMPLE: (e) Withholding Tax on Real Estate Purchases. Effective for sales occurring on or after August 1, 2008, Alabama law requires buyers of real estate in Alabama to withhold state income tax when the seller is not a resident of the state. The tax must be withheld at the rate of 3% or 4% of the purchase price, depending on whether the buyer is an individual or not, but the tax withheld may not exceed the amount of the net proceeds received by the seller. There are several possible exemptions from withholding:
A reduced amount of withholding (or none at all) may be allowed where the seller has little or no taxable gain and submits Form NR-AF2 (Affidavit of Seller’s Gain) attesting to the amount of the taxable gain. IV. ALABAMA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Alabama provides a low-tax environment, with relatively little in
the way of business regulations, generally, compared to other states.
For example, there is no state minimum wage law in Alabama and no
separate system of state anti-discrimination or OSHA-type laws, except
for an age discrimination law. The corporate income tax rate is only
a relatively low 6.5%, the personal income tax rate tops out at 5%,
and the general (state) sales tax rate is only 4%.
In addition, business inventories are generally exempted from
property taxes.
Employment discrimination laws, minimum wage laws, and job health
and safety laws are all enforced by the federal government in Alabama,
since there are no separate Alabama anti-discrimination, minimum wage,
or OSHA-type labor laws. Thus, employers in Alabama need only be
familiar with federal law requirements in those areas of employment
law, unlike in most other states, which have separate bureaucracies
that enforce parallel but often differing sets of state laws and
regulations governing discrimination, minimum wages, and job safety
requirements.
On the other hand, Alabama imposes a property tax on intangible
property (such as bonds), which only a few other states still tax --
but generally does not tax intangible property owned by a business.
Alabama also has what is probably the most complex and intricate
sales and use tax system of any state, with hundreds of different
sales tax jurisdictions, each with its own tax rate and local
rules and forms with which you must comply. Sales tax compliance
can thus be quite burdensome if you operate a statewide business.
For state tax forms and tax information, see the contact
information for the Alabama Department of Revenue in
Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some
kind. In most cases, this will be a local license, issued
by your city or county. Before you open your business,
contact your local city or county hall and find out if
your particular business needs one or more local licenses.
Most kinds of local business licenses are granted upon
payment of a fee, with no further requirements, except
possibly for annual or other periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning
and planning restrictions. If you own or rent any type
of facility, you will generally need fire department
permits, showing that you meet fire safety codes and
any construction or improvements to an existing structure
will usually require a building permit. If you intend to
simply operate your business from your home, you may be
in violation of local zoning requirements, but this is
less likely to be a concern if you don't have clients,
customers, suppliers, or employees coming to your house
on business, on a regular basis.
State law in Alabama requires that all businesses must
obtain local business licenses, which are generally
issued by the local probate judge.
In addition, while the state administers the state sales tax
and local sales taxes for over 300 different city and county
sales taxes, hundreds of other local governments have local
sales taxes that are not administered by the state, so you
may have to register separately for the local sales tax in
your particular city or county.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Alabama has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
Authority for issuing state and local licenses in Alabama
generally lies with the Judge of Probate in the county where
a business is conducted, the Commissioner of Licenses, or
the Alabama Department of Revenue.
Local governments in Alabama usually impose duplicate
license fees or taxes on those occupations requiring state
licenses, generally at one-half the state fee or rate. For
more details on licensing requirements, you should write or
call both the Judge of Probate (for the county where the
business is located) and the Sales, Use and Business Tax
Division of the Alabama Department of Revenue.
Most businesses will have to register for one or more
state taxes, including income tax withholding on wages,
sales tax, or lodging taxes, which can be done online
at the website of the Department of Revenue (see link
in Section VI(c)) or by filing the
Form COM: 101, Combined Application/Registration
form. One section of this form will also allow you to apply
for an Alabama withholding tax account number, but sole
proprietorships or partnerships that have no employees
should not complete that portion of the form.
For information on state licensing and business registration
requirements in Alabama, see the contact information for the
offices of the Department of Revenue, listed in
Section VI(a).
(c) Income and Franchise Taxes.
Alabama has both an individual income tax and a corporate income
tax. In 1999, its franchise tax on corporations was held to
be unconstitutional. In place of the former franchise tax on
corporations, Alabama enacted a new Business Privilege Tax,
effective in the year 2000 and subsequent years.
ALABAMA BUSINESS PRIVILEGE TAX
The Alabama Business Privilege Tax is an annual tax on the
net worth of a business' assets in the state, as determined
under a statutory formula. Net worth is adjusted to include
any compensation paid to an individual owner in excess
of $500,000 for the taxable year. The Business Privilege
Tax applies to corporations, limited liability entities
(including LLC's, LLP's, and limited partnerships), and to
any "disregarded entity," such as a one-member LLC or an
S corporation subsidiary that is disregarded for income
tax purposes. Sole proprietorships and general partnerships
are exempt from this tax.
The Business Privilege Tax is applied to the net worth
of a business, but the tax rate that is applicable depends
on the taxable income of the business. The tax rate varies
from $0.25 per $1,000 of taxable net worth, for a business
with no taxable net income or under $1 of taxable income,
to as much as $1.75 per $1,000 for a business with over
$2.5 million in taxable net income for the year. The
minimum tax is $100, and the maximum tax, except on
certain large utility corporations and financial institutions,
is generally $15,000 in 2001 and subsequent years.
The maximum tax is $500 on certain "family limited liability
entities," which are generally family-owned passive entities
that hold investments, such as securities, timberlands, or
other assets such as royalty interests.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Alabama individual income tax is very nearly a flat tax,
as it is imposed at a tax rate of 5% on all income in excess of
$3,000, with a 2% tax rate on the first $500 of taxable income
and 4% on the next $2,500. (Tax rate brackets are doubled for
married couples filing joint returns.)
Individual taxpayers generally pay state income taxes on
their business earnings from a sole proprietorship, or on
their share of the earnings of a pass-through entity, such
as a partnership or S corporation or LLC. The Alabama personal
income tax return, Form 40, must be filed with
the Alabama Department of Revenue. Sole proprietorships are
not subject to the Alabama Business Privilege Tax
on net worth.
Partnerships, or entities taxable as partnerships, such
as LLC's, are not subject to state income taxation in Alabama,
but must file an information return with the Alabama Department
of Revenue each year, showing each partner's share of taxable
income, losses, and credits, on Form 65.
However, limited partnerships and limited liability partnerships
(LLP's) are subject to the Business Privilege
Tax. General partnerships are not subject to the Business
Privilege Tax.
While Alabama does not directly tax the income of pass-through
entities such as partnerships, any partnership that has nonresident
partners may be required to withhold Alabama income tax on their
share of the partnership's Alabama taxable income, at the rate
of 5% for individual partners or 6.5% for corporate partners.
As with S corporations or LLC's that have nonresident owners,
a partnership must report and pay any tax due on behalf of
its nonresident partners on a composite return for some or
all of such nonresidents, Form PTE-C. Under
2009 law changes, the tax rate for withholding is at the highest
applicable marginal tax rate applicable to the type of taxpayer
(corporation, individual, etc.) for whom the tax is withheld.
No other income tax filing with the state is required for such
nonresident partners, unless they have other income in Alabama
which must be reported or have deductions and wish to file a
return to obtain a refund, in which case the tax paid on their
behalf by the partnership (or other pass-through entity) is
treated as a payment of estimated tax by the taxpayer.
A partnership need not withhold tax on behalf of any
nonresident partner who has entered into an agreement with
the state to pay Alabama income tax on income from the
partnership, by filing a Schedule NRA, Alabama
Pass-Through Entity Nonresident Agreement.
Regardless of the legal form of business you have adopted,
it will be necessary to make estimated tax payments, either by
you as an individual owner or by the corporation, in the case
of a C corporation. If your business is a sole proprietorship,
or if you have income from a partnership, LLC, or S corporation,
and if you have taxable income from the business, you will generally
be required to make estimated individual income tax payments on
Alabama Form 40ES, Individual Estimated Tax Form,
on the same dates as your federal quarterly estimated tax payments.
For 2008 and 2009, every individual who has taxable income other
than from salary or wages of more than $3,500 is required to file
an estimated tax form and pay estimated tax. However, no estimated
tax payments are required in 2008 or 2009 if the total estimated
tax owed is less than $100.
The Alabama corporate income tax rate, on corporations
other than S corporations, is a flat rate of 6.5%.
The state corporation income tax return is Form 20C,
Corporation Income Tax Return, which must be filed
with the Alabama Department of Revenue by the 15th day of the
third month following the end of the taxable year, or by March
15th in the case of a corporation whose taxable year is the
calendar year.
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their
tax liability for the year exceeds $5,000. Estimated tax
payments are due in advance, in four equal installments,
on the 15th day of the 4th, 6th, 9th, and 12th months of
the taxable year. Corporations must pay in estimated tax
equal to the lesser of 100% of the current year's tax
or 100% of the prior year's tax. Large corporations, those
with taxable income of $1,000,000 or more in any of the
three preceding taxable years, must pay in 100% of the
current year's tax, except for their first quarter
estimate, as under the federal tax law.
Penalties will be imposed for failure to make the
required estimated tax payments on a timely basis.
S corporations are not subject to Alabama's corporation
income tax; their income passes through and is taxed to the
S corporation's shareholders. However, if an S corporation
has nonresident shareholders, the nonresidents must sign
an agreement (Form NRA) and file it with the
Department of Revenue, agreeing to be subject to the taxing
jurisdiction of Alabama, in order for the S corporation
to be exempt from the state corporation income tax. The S
corporation may file a composite tax return on behalf of
some or all of its nonresident shareholders, paying the
tax on their behalf that they owe on their share of the S
corporation's income, on Form PTE-C. The
S corporation tax return is Form 20S.
All corporations doing business in Alabama, including
S corporations, are subject to the Business
Privilege Tax.
TAXATION OF LIMITED LIABILITY COMPANIES
In Alabama, a limited liability company (LLC) is taxed
in the same manner as a partnership, thus avoiding the
possible double taxation of income that can occur with a
corporation. Under IRS regulations, effective since 1997,
an LLC is able to elect to be treated as a partnership if
it has more than one owner, or as a sole proprietorship if
it does not, for federal tax purposes. Alabama law was
amended in 1998, to treat LLC's as partnerships, unless
classified otherwise for federal tax purposes, which means
that one-member LLC's that are disregarded as entities
(that is, treated as sole proprietorships) for federal
purposes are treated in the same manner under Alabama
income tax laws.
Note that it is not always entirely clear whether an LLC is
a "single-member LLC" or not, where the "single owner" is a
married couple who hold the entire ownership of the LLC in some
form of co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev.
Proc. 2002-69, where a couple hold the LLC interest as community
property, ruling that the IRS will accept whatever choice the couple
make, either to disregard the LLC as an entity (treating it as a
"single-member LLC") or to treat it as a partnership between the
husband and wife.
However, Alabama is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Alabama would treat the LLC as a single-member
LLC or as a partnership.
LLC's and all other limited liability entities are subject
to the Business Privilege Tax on their net
worth, including single-member LLC's that are "disregarded
entities" for state and federal income tax purposes.
While Alabama does not directly tax the income of pass-through
entities such as LLC's, any such entities that have nonresident
partners or members may be required to withhold Alabama income
tax on their share of the entity's Alabama taxable income, at
the rate of 5% for individual owners or 6.5% for corporate owners.
As with S corporations or partnerships that have nonresident
owners, the LLC must report and pay any tax due on behalf of
such nonresident members on Form PTE-C, unless
the nonresident member has filed an agreement with the state
to pay Alabama income taxes on Alabama-source income, on
Schedule NRA.
(d) Sales and Use Tax.
If your business is involved in retail sales or rentals of
tangible personal property, you are required to collect Alabama
sales tax. The gross receipts of places of amusement, pool
rooms, athletic contests, and motion picture shows are also
taxable. Sales of intangible personal property, such as stocks
or bonds, are among the many types of property that are exempt
from sales taxes.
The state sales and use tax rate is 4%,
as is the general tax rate on lodging. However, the state
lodging tax is 5% in the mountain lakes area, which
encompasses 16 counties (Blount, Cherokee, Colbert, Cullman,
DeKalb, Etowah, Franklin, Jackson, Lauderdale, Lawrence,
Limestone, Madison, Marion, Marshall, Morgan, and Winston).
Many cities and counties also impose local sales and use and
lodging taxes, in addition to the state tax, with local
sales tax rates as high as 4% in some localities. Reduced
sales tax rates apply to a number of categories, such as a
3% rate on food sold through vending machines, a 2% rate
on automotive property, and 1.5% on farm machinery and
manufacturing machinery.
Use tax applies to the use of all taxable property
purchased outside the state, where no Alabama sales tax has
been collected, when the property is used or consumed in
Alabama. It also applies to items bought tax-free for
resale by a retailer, but actually used rather than resold
by the retailer.
Vendors are required to apply for a sales tax license
from the Alabama Sales and Use Tax Division, in order to
be able to collect sales tax and resell merchandise. As a
vendor collecting the sales tax, you are entitled to a 5%
collection fee on the first $100 of sales tax collected
and 2% on the excess, if you pay the tax on a timely basis,
limited to a maximum fee of $400 for any month. The discount
applies to state sales tax and to local sales taxes that are
administered by the state.
The use tax law also provides that the governor, by
executive order, may provide for a 3% collection fee on
use tax collected and paid on a timely basis (the $400
monthly cap would not apply), but it appears that no
such executive order has been issued.
Sales and use tax is due on or before the 20th day
of each month for the preceding calendar month. Larger
retailers, who average over $1,000 a month in tax collected,
have to estimate and prepay the tax by the 20th of the
current month. If any single payment of sales and use
taxes (or any other state tax) is $750 or more, payment
must be made by electronic funds transfer.
There are numerous exemptions from the sales tax, the most
important of which is the resale exemption. If you are a
wholesaler or retailer who purchases goods that you will
resell, your purchase of such goods may qualify as an exempt
sale for resale. Similarly, if you sell goods to wholesalers
or retailers for resale by them, your sale may also qualify
as an exempt sale for resale. In any such transaction, the
exemption is ordinarily available only if the purchaser gives
the seller a valid resale certificate, certifying that the
items are being purchased for resale, and not for use or
consumption by the buyer.
While there had previously been some doubt as to whether
"canned" computer software was subject to the sales tax,
the Alabama Supreme Court, in the Wal-Mart Stores, Inc.
v. City of Mobile and County of Mobile case, ruled
that software is tangible personal property. As a result,
the retail sale or rental of canned computer software is
subject to Alabama sales, use or rental tax.
Alabama has the most intricate and complex business tax
filing requirements in the nation, but is looking to the
Internet for relief. Companies currently have to calculate
Alabama sales taxes for as many as 453 different taxing
jurisdictions in the state, plus the state's own sales tax.
However, you can now prepare, file, and pay more than 300
of those returns on the Department of Revenue's website.
Online filing, or filing by telephone, became mandatory
for all sales tax returns on October 1, 2003. Paper returns
may no longer be submitted.
For more information on Alabama sales and use tax
registration and compliance, see contact information
for the offices of the Alabama Department of Revenue in
Section VI(a).
(e) Real and Personal Property Taxes.
In Alabama, as in every other state, any business real estate
you own will be subject to real property taxes. In general,
there is little that you must do, unless you wish to challenge
your assessed valuation, since the assessor will bill you for
each year's property taxes as they come due.
Alabama also imposes personal property taxes on both
tangible and intangible personal property. ("Personal
property" is any kind of property that is not real estate.)
However, certain business personal property, such as
inventory, is generally exempt from personal property
tax in Alabama.
All property in Alabama, real or personal, is subject
to property taxation, unless specifically exempted. The state
tax rate is 6.5 mills (0.65%), and cities and counties all
impose their own millage rates, based on assessment ratios
ranging from 10% to 30% of value, for four different
assessment categories.
Intangibles, such as certain bonds or cash "hoarded"
in a safe deposit box, are generally taxable. Alabama is
one of only a few states that still tax intangible property.
However, cash kept at home for personal use, bank deposits,
and money claims are exempted, and the state securities
registration tax and the property tax on the stock of
corporations have been repealed since December 31, 1999.
Also, intangible property owned by a business is generally
exempt from property tax under the Alabama property tax laws.
For more information on property taxes, contact the
Property Tax Division of the Alabama Department of Revenue,
at the address listed for that agency in Section VI(a).
(f) Other Business Taxes.
Alabama imposes a number of excise and other taxes on businesses,
including:
Localities in Alabama also impose a wide range of local
excise taxes, including transient lodging, gasoline,
and cigarette taxes.
Effective October 1, 2004, Alabama enacted a "Uniform
Severance Tax Act" that imposes a uniform severance tax
rate of 10 cents per ton on various minerals severed and
sold in Alabama. The new law also repeals conflicting local
severance taxes, for the most part, except in Coosa County,
where the 25 cent per ton tax remains in effect. The
application of the "uniform" severance tax is not entirely
uniform, as the law allows individual counties to opt out of
the uniform severance tax, as a number of counties have done.
Alabama does not impose a gift tax and its estate tax
is no longer imposed for decedents dying on or after
January 1, 2005.
(g) Trade Names.
A trade name, also known as a fictitious or assumed name, is
any name used in the course of business that does not include
the actual legal names of all the owners of the business.
Thus, if your business goes by any name other than your own
real name, it is operating under a trade name. The same is
true of a corporation, if it operates under a name other than
its legal name. A trade name might also be one that suggests
the existence of additional owners, by using such words as
"company," "associates," or "group."
In most states where you do business, it will be necessary
to register a trade, fictitious, or assumed name, so that
people who do business with you can find out who the actual
owners of your business are. You may also want to register
any such trade name, as a means of protecting against other
companies usurping that particular trade name.
If you have a corporation or your business has a fictitious
business name, you may want to register it in Alabama, in
order to protect the use of the name. Unlike many states,
Alabama does not require any sort of filings of fictitious
business names. However, no corporation qualified to do
business in the state can use a name that is the same as
or is deceptively similar to that of another corporation,
without the consent of the other corporation or a
certified copy of a court decree establishing its prior
right to use that name in Alabama.
Note also, that the name of a limited partnership must
contain the word "Limited" or the abbreviation "Ltd.,"
"LP," or "L.P." and may not include the name of a limited
partner. The name of a registered LLP must contain the
words "Registered Limited Liability Partnership" or the
abbreviation "L.L.P." or "LLP" as the last words or
letters of its name.
V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Alabama imposes a state income tax on the income of individuals, you must also apply for an Alabama income tax withholding number by completing and submitting Form COM:101, Combined Registration/Application Form, to the Alabama Department of Revenue. Applications can now be filed online, at the Department of Revenue's website. Employers who register for withholding will be assigned an Alabama withholding tax account number. UPDATE NOTE: Employers are generally required to file monthly and quarterly withholding reports. To obtain the publication, Withholding Tax Tables and Instructions for Employers and Withholding Agents and a copy of Form COM:101, see the contact information for the Alabama Department of Revenue, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If you employ one or more individuals at any time during 20 weeks of the current or preceding calendar year or if your payroll is $1,500 or more in any calendar quarter in either such calendar year, you must pay state unemployment tax. Employers subject to the Alabama unemployment tax are required to register with the Alabama Department of Industrial Relations. You can open an Alabama Unemployment Tax account by completing an application (UC Form SR-2). Employers should submit an application as soon as liability has been established. New employers are required to pay tax at a rate of 2.7% in 2009 on the first $8,000 of wages paid to each employee, a tax rate and wage base that are set by statute and have remained unchanged since 1976. After you have had employees for a full fiscal year (ending June 30th), you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you by January 16 of each year of your tax rate, on Form UC-216, once they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Alabama law, cannot be charged to your employees or withheld from their wages. Employers are required to post an unemployment insurance poster, entitled, "Your Job Insurance," in a conspicuous place in the workplace. Unemployment contribution reports and taxes are due each quarter. Reports are filed on Form UC CR-4. For more information on your Alabama unemployment tax obligations as an employer, or to request an application form (Form SR-2), contact the Status Unit of the Alabama Department of Industrial Relations, at the address listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Alabama, virtually all businesses with more than four (4) employees, full-time or part-time, and including corporate officers, are required by law to have workers' compensation insurance, except those able to self-insure. However, corporate officers may elect annually to be exempted from workers' compensation coverage. Note that a sole proprietor or a partner in a partnership is generally not considered an employee. Also, a licensed real estate agent operating under a licensed broker is not considered an employee under the workers' compensation law. While employers with fewer than five (5) employees are not required by law to have coverage, they may nevertheless elect to accept the provisions of Alabama's Workers' Compensation Law. The election stays in effect until it is withdrawn by filing a written notice of withdrawal with the Workers' Compensation Division. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Alabama workers' compensation laws, contact your insurance carrier or see the contact information for the offices of Workers' Compensation Division of the Alabama Department of Industrial Relations, listed in Section VI(a). (d) State Wage and Hour Laws. Unlike most states, Alabama does not have a minimum wage law governing the hourly wage that you must pay to your employees or an overtime law. However, in most cases, unless exempt, your business will be subject to the federal minimum wage and overtime laws, and thus required to pay at least $6.55 an hour and $7.25 beginning July 24, 2009). If you are covered by the federal overtime laws, you must pay and time-and-a-half for overtime hours, for any non-exempt employee who works more than 40 hours in a week. In addition to wage-hour laws, most businesses are subject to federal and state child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. As under federal laws, the employment of children under age 18 is strictly regulated by the state of Alabama, which also regulates the employment of 18-year-olds who are still in high school. As a general rule, children of age 16, 17, or 18 who are enrolled in a primary or secondary school may not work before 5:00 a.m., or past 10:00 a.m. on a night preceding a school day. Children under 16 are protected by even stronger labor law provisions, so that they may not work at all, generally, except for agricultural or domestic service. However, children between 14 and 16 can be employed outside school hours or during vacation periods if the work does not involve manufacturing or any mechanical equipment (other than certain agricultural devices). Children under 16 may not be employed for more than 40 hours a week or 8 hours a day during summer vacation. During the school term, September through May, they may work up to 3 hours after school; up to 8 hours on a non-school day; and up to 18 hours a week; but may not work before 7 a.m. or after 7 p.m. on any day of the week. During June, July and August children between 14 and 16 may work up to 40 hours a week and up to 6 days a week, but may not work before 7 a.m. or after 9 p.m. on any day of the week. Employees must be at least the legal drinking age to serve alcoholic beverages for consumption on the premises and must be at least 18 years of age to work in that part of an establishment where alcohol is served for consumption on the premises. Every employer who employs any minors under the age of 18 is required to display a child labor poster, setting forth the maximum number of hours persons under age 18 may be permitted to work on each day of the week. No minor 14 or 15 years of age may be employed for more than five hours continuously without an interval of at least 30 minutes for a meal or rest period. Any meal or rest period of less than 30 minutes is not considered to interrupt a continuous period of work. Children under the age of 14 generally may not be employed, except as performers or, if age 12 or 13, to deliver newspapers. (e) State Occupational Safety and Health Laws. Employers in Alabama must comply with job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. Alabama relies on the federal Occupational Safety and Health Administration (OSHA) to enforce safety rules in the state. OSHA has offices in Birmingham and Mobile. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Birmingham offices of the U.S. Department of Labor/OSHA, and for the "State Safe" program at the University of Alabama, both listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Alabama labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Alabama law does not specifically provide rules for when final wage payments are to be made by an employer to an employee who quits or is discharged from employment. Instead, the Department of Industrial Relations is empowered to make rules regarding when wages are to be made and other rules regarding the employer-employee relationship. Contact the nearest office of the Alabama Department of Industrial Relations or at the address listed in Section VI(a) if you have questions about when wages must be paid to your employees in different situations. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Alabama has a right-to-work law, which guarantees an employee the right to join or refrain from joining a labor union and also bans agency shop agreements. (3) State anti-discrimination laws. Alabama does not have a state anti-discrimination agency. Federal equal employment opportunity laws are administered in Alabama by the federal Equal Employment Opportunity Commission (EEOC) and the U.S. Department of Justice. However, Alabama law does prohibit age discrimination in employment against persons 40 years of age and older. As is the case with the federal Age Discrimination in Employment Act of 1967, this Alabama law applies only to employers with 20 or more employees for each working day in 20 or more calendar weeks in either the current or preceding calendar year. (4) Reporting new hires. Under federal welfare reform laws, employers in all states must now report newly-hired (or rehired) employees to a designated state agency (the New-Hire Unit of the Alabama Department of Industrial Relations for Alabama employers) within 7 days after the date of hire. Employers electing to file magnetically or electronically may instead transmit reports twice monthly, not less than twelve (12) days nor more than sixteen (16) days apart, when required. Employers who fail to report newly hired or recalled workers may be fined up to $25.00 for each violation. Effective since May 1, 2008, all Alabama employers with 5 or more employees are required to report new hires on the Internet, at the web site maintained by the Department of Industrial Relations. See the link to the online reporting sign-up page in Section VI(c). Note: The New Hire report-of-hire card, NH-1, is no longer accepted. See the contact information in Section VI(a) for the address of the Department of Industrial Relations New-Hire Unit. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike most other states, Alabama does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of Alabama. Accordingly, you will need to contact many of the various Alabama agencies that are mentioned in this book or listed below on an individual basis, in order to obtain needed forms, official posters, information, and other assistance or approvals from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in Alabama is: Alabama Development Office Another good place to start, is by filing a Combined Registration/Application Form COM:101 with the Alabama Department of Revenue. Call or write them at the following address for the required form: Alabama Department of Revenue You can mail the completed application to the above address. Any other account numbers that you may need can be applied for by completing this same form. The COM:101 Form was designed to allow businesses the opportunity to complete one all-inclusive form that will satisfy many needs and eliminate filing multiple forms, in an effort to simplify the registration process. You may also complete the form online, on the Internet, at: www.ador.state.al.us/salestax/register.html SECRETARY OF STATE. Contact the Corporations Division of the office of the secretary of state for information on:
Alabama Secretary of State Send Express Mail or Fedex, UPS or other delivery service to: Alabama Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Alabama Department of Revenue, which is the main tax collection agency in Alabama. Also register with this agency as an employer, for state income tax withholding purposes. Alabama Department of RevenuePROPERTY TAXES. For information on state and local property taxation in Alabama, contact the Department of Revenue, Property Tax Division, at the address listed immediately above for that agency, or visit the Department of Revenue Web site that is listed in Section VI(c) (Internet sites). STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Alabama Department of Industrial Relations STATE LICENSES. The following agency is the main Alabama licensing agency. Register with this state agency for most types of professional and occupation licenses. Business and License Tax SectionSTATE SALES TAX. Obtain your sales and use tax license or permit and information on the Alabama sales and use tax law, from the Alabama Department of Revenue, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the Alabama Department of Revenue (Business and License Tax Administration Section) to register as an employer, for purposes of Alabama income tax withholding, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer, if you are subject. Alabama Department of Industrial Relations NEW HIRE REPORTING. To report newly hired or rehired employees within 7 days of hiring, contact the Alabama Department of Industrial Relations New-Hire Unit at the following address: Alabama Department of Industrial Relations WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Department of Industrial Relations STATE OSHA PROGRAM. There is no state OSHA program in Alabama. The federal government provides federal OSHA enforcement instead. For required posters and information on federal occupational safety and health laws that affect you as an employer in Alabama, contact: U.S. Department of Labor - OSHA For OSHA consultation services, to help your business comply with federal OSHA laws, contact this state office: Safe State Program (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Alabama to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Alabama Small Business Development Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Alabama state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Alabama. Since new sites are appearing frequently, you might also want to search for other Alabama government Web sites by using one of the popular Internet search engines, such as Google, MSN, or Yahoo. To start your Internet search for Alabama government information, you may want to begin with the following Internet sites: Alabama state government home page: Alabama Secretary of State, for corporate, LLC, LLP and limited partnership filing: Alabama Development Office: Southern Development Council, Inc.: Alabama Department of Revenue: Alabama Department of Industrial Relations site, for matters such as workers' compensation, unemployment taxes, and new hire reporting: New Hire reporting site (required method of filing for all Alabama employers with 5 or more employees, effective since May 1, 2008); site maintained by the Alabama Department of Industrial Relations: (d) Financing Sources. For information and help on locating financing for your small business, contact the U.S. Small Business Administration office in Birmingham at the following address: U.S. Small Business Administration Or, contact the following organization, for information on economic development and financial assistance programs in Alabama: Southern Development Council, Inc. You may also wish to contact the Alabama Development Office, for information on economic development and financial assistance programs in Alabama, at: Alabama Development Office |
Copyright © 2009 Michael D. Jenkins
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