How to Form a PLLC in Alabama

Here are the basic rules for forming professional limited liability companies (PLLC) in Alabama.

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As a licensed professional in Alabama you can structure your business as an Alabama professional limited liability company (PLLC). This will give you protection from several important types of liability. It also may provide certain tax advantages compared to other ways of structuring your business.

Note: The Alabama state legislature recently approved many changes to the state’s limited liability company (LLC) law. Those changes are scheduled to take effect on January 1, 2017. Some of these changes specifically concern PLLCs. This article is based on the law prior to the changes.

What is an Alabama PLLC?

An Alabama PLLC is an LLC formed specifically by people who will provide Alabama licensed professional services. LLCs in general are businesses registered with the state that consist of one or more people—called LLC members—who own the business. Like other LLCs, PLLCs protect their individual members from people with claims for many (but not all) types of financial debts or personal injuries.

What is a Professional Service?

Under Alabama’s current LLC law, professional service is not directly defined. The LLC law states only that an LLC can render professional services if each member or employee who renders those services is licensed or registered to do so under the applicable Alabama law. Older Alabama law, relating to professional corporations (PCs), which may or may not be relevant here, briefly defines professional services as: “Any type of service that may lawfully be performed only pursuant to a license issued by a state court, state regulatory licensing board, or other like agency pursuant to state laws.” For comparison purposes, be aware that other states’ laws often provide lists of professional services. These lists typically include, at a minimum, physicians, surgeons, dentists, lawyers, certified public accountants, professional engineers, architects, and veterinarians, but often include other professions, as well. If you’re unsure whether your Alabama-licensed profession is considered a professional service for the purpose of forming a PLLC, check with a local business attorney.

How Do I Form an Alabama PLLC?

To form your Alabama PLLC you’ll need to:

  • have the state license for each LLC member or employee who will render professional services
  • check with the state licensing board for your profession to see if its prior approval is required (and, if so, obtain the necessary documentation showing that approval), and
  • file a certificate of formation with the Office of the Judge of Probate in the county where the LLC's initial registered office is located.

The probate court will provide you with a stamped copy of the certificate and transmit other copies to the Alabama Secretary of State (SOS). The Secretary of State website has a webpage listing the current Judge of Probate for all counties in Alabama.

A blank certificate of formation form is available for download from the SOS website. The form is for all LLCs (as opposed to being specifically for PLLCs). The current filing fee is $150 to the Secretary of State plus any local fees charged by the probate court.

Naming Restrictions

The name of an Alabama PLLC must contain the words “Limited Liability Company” or the abbreviation “L.L.C.” or “LLC.” For additional important information on LLC names, see Nolo's article, How to Name a Business.

Service Restrictions

An Alabama PLLC can provide only one kind of professional service (along with directly related (ancillary) services) and may not engage in any other business. In addition, an Alabama PLLC is subject to the same restrictions as are imposed on Alabama PCs. For more information about these restrictions, consult with an Alabama business attorney. And, finally, remember that Alabama PLLCs and/or their members are subject to the regulation of the relevant state professional licensing authorities.

Operating Agreement

You should make sure you have an operating agreement for your PLLC. Unlike professional licenses, articles of organization, naming restrictions, and service restrictions, this is not a state requirement. However, it is important to have an operating agreement so that other members of the PLLC (if any), as well as outside companies and businesses (for example banks), know what the internal rules are for the company. Depending on your own level of knowledge and expertise, you should consider having a lawyer assist you in preparing this document.

A PLLC Will Not Protect You From All Liability

Forming your professional service business as a PLLC will protect you personally from:

  • creditors seeking to collect unpaid debts owed solely by the PLLC
  • liability for the malpractice of other PLLC members, and
  • people who are personally injured in connection with your PLLC because of things having nothing to do with your own professional malpractice or torts (for example, if someone slips and falls in your PLLC’s offices).

Regarding protection from liability for the malpractice of fellow PLLC members, be aware that, for some professions in some states, PLLC members are required to have a minimum amount of malpractice insurance before they are eligible for such protection. Therefore, it’s always a good idea to double check your state’s PLLC laws, as well as your state’s rules for your particular profession, regarding minimum insurance requirements.

Meanwhile, you are personally responsible if:

  • you personally guarantee repayment of a business loan
  • you engage in professional malpractice (such as completely botching a patient’s treatment or egregiously mishandling a client’s case), or
  • you intentionally or negligently commit a tort (such as assaulting someone).

Because you are not protected from your own malpractice, you should make sure you have professional liability insurance—and, if applicable, that your coverage meets any minimum insurance requirements.

A PLLC is Different From a Professional Corporation

A PLLC is not the same thing as a PC. A PLLC is a newer type of business entity than a PC. Here are some of the key differences:

  • a PLLC, like other LLCs, is comprised of members, but a PC, like other corporations, is comprised of shareholders
  • following from the previous point, PLLC ownership consists of so-called membership interests in the business, but PC ownership is based on shares of stock; and
  • a PLLC, like other LLCs, is a so-called pass-through tax entity, meaning that in most states (though not Alabama) only the individual members have income tax obligations, while a PC, like other corporations, usually has its own income tax obligations.

The tax differences between PLLCs and PCs can become complicated. Alabama, unlike most other states, directly taxes PLLCs. (The tax, which is assessed annually, is called the Business Privilege Tax or BPT; more information on the BPT is available in other Nolo LLC articles.) Moreover, a PC can elect a special tax status (S corporation status) that effectively makes it a pass-through tax entity like a PLLC. And, meanwhile, PCs that don’t elect special status may be subject to double taxation—in other words, both the PC itself and its shareholders may have to pay taxes on business income.

Alabama allows professionals to form both PLLCs and PCs, and both PLLCs and PCs provide liability protection for, respectively, their members or shareholders. Because the protection is essentially the same for both PLLCs and PCs, but PLLCs are simpler to create and operate, many professionals prefer the PLLC structure.

Additional Information

For more information on the requirements for forming and operating an LLC in Alabama, such as those relating to annual reports and taxes, see Nolo’s articles in 50-State Guide to Forming an LLC and 50-State Guide to Annual Report and Tax Filing Requirements for LLCs, along with the other articles on LLCs in the LLC section of the Nolo website.

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