If you are dreaming of forming a corporation in Alabama and you have no idea where to start, then you have come to the right place. Of course, being a newbie in the field of a professional corporation is somewhat hard and confusing. You don’t know where to begin, and you may have no idea about the processes and regulations. Let’s take this step by step.
What is a professional corporation?
A professional corporation is a corporation in which the owners are licensed professionals. This is typically used by professionals such as lawyers, architects, engineers, and doctors. In Alabama, a professional corporation is sometimes called a service corporation or a professional association.
The main purpose of these corporations is to provide professional service to a certain field. For example, a professional corporation of lawyers renders services to anyone who needs legal assistance. Likewise, a professional corporation made up of doctors, provides services regarding health and medicine. A professional corporation made up of architects, renders services on architectural design and such. There are many types of professional corporations as there are many types of professions.
Step 1: Is a professional corporation the right choice for you?
Before starting to form a corporation professionally, ask yourself if this is the right thing to do. Starting a corporation is a huge commitment and investment. To determine if a professional corporation is the right choice for you, you have to evaluate other options first.
Apart from professional corporations, many business owners prefer setting up a Professional Limited Liability Company or “PLLC”. What is a PLLC? Generally speaking, the difference between a Professional Corporation and a “PLLC” is the same difference between a Limited Liability Company or “LLC” and a Corporation. Corporations are more formal, while Limited Liability Companies are more flexible.
In a corporation, the shares of the company are divided among co-owners, also known as shareholders. Before forming a corporation, it is very important to decide how to divide the share to prevent internal conflict in the future. All the shareholders or owners must be professionals in the same field. For example, in a professional corporation of doctors, shareholders must all be doctors, and other professionals like architects or engineers cannot hold a position in the Corporation.
The management of a Professional Corporation is handled by the Board of Directors. They are the first layer of control. All major and key decisions of the Corporation are decided by the board during board meetings. Usually, members of the board are elected by the shareholders.
The Board of Directors each has their appointed officers, which are assigned to carry out the orders and the initiative of the board throughout the whole Corporation. There are many instances where the board members and officers are the same people. Before forming a corporation, you must first decide who will be members of the board.
Step 2. Name the corporation
In Alabama, the law states that in making a professional corporation, the words “professional service corporation” must be present. You can also use the abbreviation “PSC.” Furthermore, the name of your corporation must not imply any other type of business, like a limited liability company or its abbreviation form LLC. Other restrictions include words such as “law office” or “bank” or other terms that refer to other types of businesses. Exemptions can be made, however, if the nature of your professional corporation reflects the word.
Choose a name that is easy to remember and easy to pronounce. You can practice it by saying it out loud, and you can ask other people for their opinions. Afterward, you need to determine the vision of your company. For example, a company that promotes nature can use the words “Mother Earth.” The name of your company is the first thing people see. Make sure that you choose a name that makes you proud and it reflects your mission.
Make sure that you like the way it is spoken and looks excellent when written. Next, you have to make sure that the name you have chosen is available. To do so, visit the website of the Alabama Secretary of State. Go to the Business Name Search tool and verify if other companies have already made use of your chosen name.
Once you have settled on your name, you should register your domain to solidify it and complete your brand. You do this by registering a URL. Your URL is where you will start to build a website with the name you selected so that no one else will use it.
Step 3: Choose your registered agent
All corporations in Alabama need to have a designated agent who handles all the legal notices of the corporation. When you fill-up the articles of incorporation, you need to fill up the name of the registered agent and his/her address.
The address of your agent must be in Alabama so that all the legal services and mail may be received during business hours. It is highly recommended to hire a professional service as your registered agent. In this way, you can reduce junk mail, and your personal and business address would not show on the record. You can find detailed information on hiring a registered agent in Alabama here.
Step 4: Prepare your Articles of Incorporation
This document is perhaps the most vital part. It is the one that officially registers your professional corporation in Alabama. You have only one option for filing this: by submitting through the mail to the Office of the County Judge of Probate as well as the Secretary of State. Please take note that this document must be complete. The office of the Judge of Probate will record your Articles of Incorporation and then send a certified copy again to the Secretary of the State of Alabama with the state filing fee.
Another thing to keep in mind is that in filing this document, you serve as the incorporator. This means that when you sign this document, you are signing as the incorporator. The standard cost in filing your articles of incorporation is 100 dollars (200 dollars for expedited service) plus the filing fee of the county.
|Cost to File||$100 ($200 for expedited service) plus the filing fee of the county|
|Agency||Office of the County Judge of Probate and the Secretary of the State of Alabama|
|Address||Depends on the County|
|Helpline||334-242-5324 (Secretary of the State)|
Step 5: Keep Corporate Record
All professional corporations are bound by the laws of Alabama to document and preserve all the key decisions of the corporation. This corporate record is usually placed in the official location of the corporation or stored elsewhere in a secure location. This is a crucial step, so you must plan a secure digital or physical location to store the corporate records.
Step 6: Select the Board of Directors
The incorporator is the one responsible for selecting the pioneering board of directors of the new professional corporation. The incorporator must record all the initial meetings of the board and then make a signed document to be stored in the corporate record. The name of this document is the “incorporator’s statement”.
The pioneering directors will be serving as the board of directors until new directors will be elected in the professional corporation’s yearly board meetings or as what the corporation has agreed upon. Also, the incorporator usually serves as part of the initial directors. Do not forget that all the members of the board must share the same profession and are all licensed in the respective field that the professional corporation is formed for.
Step 7: Make the Bylaws of the Professional Corporation
Corporate bylaws are the rules in which all the members of the corporation should follow. As with all corporations, the bylaws help make the corporation organize in the way they make decisions and operate. This also prevents internal conflict as the bylaws can be the basis for key decisions.
There are several topics for the creation of the bylaws. Some of these include
- How all the shareholders conduct the voting system
- The overall number of directors and how each director is to be elected
- The types of officers needed
- The frequency of the board meetings (Some prefer to have quarterly board meetings, while some do so annually)
The bylaws are also there to keep everyone in line. In case of disputes, the corporation should have procedures in the bylaws to settle them. All the professional corporations in Alabama need to have their bylaws.
The bylaws are created by the incorporator with the help of the board of directors. All the members of the board must be present in the creation of the bylaws so that everyone is aware. After the bylaws have been agreed upon and made into a formal company document, either the incorporator or a board member shall sign it and then file it to the corporate record. Take note that the bylaws are a company document only and shall not be filed to the Alabama state.
How to Create ByLaws
There are several strategies for creating good bylaws. There are several online templates you can use as a basis for your professional corporation. You can also hire a lawyer to help you in drafting the bylaws. Hiring a lawyer to help you in the creation of bylaws is almost a must if your corporation already has investors, has already started making money, or has several co-owners. Of course, the lawyer has to be familiar with the laws of Alabama for him to be able to help you draft decent bylaws.
Step 8: The first board meeting
As the bylaws are ready, and the board of directors has been appointed, the new set of professional corporations should now hold its very first board meeting. The incorporator, regardless of whether he/she is part of the board or not, should usually take part in the initial board meeting as the person who arranges it. Although several topics must be discussed in the initial board meeting.
First, the board of directors must review the corporate bylaws. After that, they should designate specific officers to manage specific affairs every day. Board members should also in the first board meeting choose a bank to handle their finances. Hence, the board must discuss and approve the issuance of the stock certificates.
The board should think about how the company should be taxed; they could either vote for the company to be taxed as a C corporation or as an S corporation. Learn more of these in the next step.
Some other important matters of discussion that the members of the board or the incorporator figured out should be opened in the first board meeting as well. The discussions in the first board meeting are very important as they may be the basis for changes in the succeeding board meetings. Solely because of this, detailed minutes of the meeting must be kept on record, especially on all the major discussions and on any key decisions made during the meeting.
Once the meeting is over, the minutes of the meeting must be recorded into a formal document which is then sent to members present during the first board meeting for review and approval. A copy of the document should be sent to every member of the board, and one copy needs to be stored in the corporate record for safekeeping.
Step 9: Manage all the tax obligations.
For a professional corporation to start operating, the corporation must first acquire a federal tax ID number or what is known as EIN, which can be obtained for free from the IRS. The process is very easy and fairly simple. The EIN enables corporations to have employees; open bank accounts for their professional corporation, file corporate taxes, and so on.
One of the biggest decisions for any corporation in Alabama is the determination of whether the company should be taxed as an S corporation or as a C corporation. These two formats differ, and the board members must understand the differences between the two formats.
Most of the corporations are C corporations. This is only because there are fewer restrictions compared to S corporations. All the profits of a C corporation are taxed at the corporate level and also taxed once again on the shareholders’ tax returns. This is commonly known as double taxation.
S corporations, on the other hand, can only be selected if the shareholders in the professional corporation do not reach 100 in number, other business entities do not own them or have any foreign shareholders, and only one class of stock is issued.
Register Your Tax Accounts
If your professional corporation meets the requirements to be classified as an S corporation, you can elect an S corporation so that you will not be affected by the double taxation. The dividends of S corporations cannot in any way be taxed.
All the C corporations in the state of Alabama are subject to Corporate Income Tax and the business privilege tax of the State. There are other taxes that your professional corporation may be subjected to, depending on the nature of your business corporation. Some of these taxes include withholding tax, sales and use tax, and more. You can check out the website of the Alabama Department of Revenue for additional information if you have any questions regarding the state requirements.
When your business is formed, then proceed to My Alabama Taxes, which is the free tax portal of the Department of Revenue of Alabama, so that you can register your tax accounts and your business.
In addition to the taxes of the state being mentioned above, several cities in Alabama have other local requirements you need. To be certain of all the other local requirements, you should reach out to the tax or revenue department of the city where your professional corporation is situated and inquire about all the tax obligations.
Step 10: Business Permits and Licenses
Businesses in Alabama are generally required to have at least one business privilege license. You can find more details about state and local licensing requirements and registration from this page. Additional information on the licenses you need to operate your professional corporation in the State of Alabama is available on the Department of Revenue webpage here.
Step 11: Get Insurance for your Business and Employees
The law of Alabama states that all businesses that have at least four or more employees, inclusive of all the part-timers and the family members, are required to have compensation insurance for the workers. For those corporations that have more employees, you can check out the website of the Alabama Department of Labour for more information.
More than that, it is also advisable that you procure general liability insurance and other insurance packages specifically for the industry or profession of your corporation. Since most of the services of professional corporations are specialized, more often than not, you are required to avail of insurances that are specific to the profession of your corporation.
In Alabama, you can avail yourself of the General Business Insurance or the Business Owner’s Policy. Both of these insurance packages cover almost everything, including the company vehicles and product liabilities. A good rule of thumb to remember when availing a package is that their costs run at around 300$ annually, and the level of their protection is extensive.
Step 12: Start a bank account for your professional corporation
Running a professional corporation limits your business liability. So, you must keep your personal assets and finances separate from the business. To achieve that, you must acquire a bank account for your business. It is also in this step that you start building your company credit profile. A company credit profile is one of the requirements to avail lines of credit and loans if you ever need it.
To open an account, all you have to do is select a bank and inquire about how to open a business bank account.
You will need
- Federal Employer Identification Number or EIN
- A resolution of your company that is signed by the board of directors that authorizes your company to open a business bank account
- Filed paperwork
Starting a professional corporation is, to be honest, not an easy task. However, with patience, determination, and the right resources, you can form your professional corporation in no time. Review each step and carefully evaluate how to form your professional corporation. Simply follow the steps above and good luck in your upcoming business!