If you start a for-profit business with a co-owner in Alabama and you don’t file additional business formation paperwork with the state, by default, you have started a general partnership. In general, business partners equally share the profits and losses from their venture.

Running an Alabama general partnership can be low maintenance and beneficial for tax purposes, but that doesn’t mean it’s for everyone. In this article, let’s go over how to form a general partnership in Alabama and the pros and cons of doing so. 

If you’re ready to form a new business, we can help with our Alabama LLC and Alabama Corporation Formation Services. 

Step 1: Determine if you should start a general partnership

Running a general partnership can be beneficial in many ways, but this business structure might not be ideal for your needs. Below, we can go over some basic pros and cons of forming a partnership in Alabama to help you decide if you should run one. 

Pros

A partnership can be a great business option because:

• It’s easy to form
• It’s low maintenance
• The distribution of losses and profits is generally straightforward
• The business structure can enjoy pass-through taxation 

This can also be a great structure for short-term business ventures. However, if you have hopes of running a long-term business that leaves a legacy, a general partnership is probably not for you. Partnerships often dissolve after a partner dissociates or passes away.

Cons

In business and in life, you might have to take the good with the bad. Depending on your needs, running a business partnership in Alabama could have multiple pitfalls that you’d rather avoid, including: 

• Partners being jointly and severally liable for the partnership’s legal and financial issues (debts, negligence, malpractice, etc.)
• Potentially stricter rules for transferring business ownership
• Fewer options for raising capital compared to corporations

It’s best to speak to legal and financial professionals before you make your final decision about forming a partnership. This holds true whether you’re confident you want to run a partnership or convinced that a partnership isn’t the right choice. 

Step 2: Choose a business name

It seems so small, but your business’s name holds a lot of significance. It represents the goodwill of your business, and it goes on your official business documents. Many unregistered general partnerships just use the names of their partners for their official business names. You normally don’t need to register as a general partnership in Alabama, but you might need to reserve or register your business’s fictitious, trade, or “doing business as” (DBA) name with the Secretary of State.

Step 3: File a DBA Name (if needed)

In general, a DBA is a name you use for your business that isn’t your official business name or your personal given name (if you’re running a partnership or sole proprietorship). To register the name, you need to:

• File an Application to Register Trade Name in Alabama 
• Pay the associated filing fee

If you’re not ready to use your trade name, you can reserve it with the Secretary of State.

Step 4: Draft and Sign Partnership Agreement

In many cases, the more you can make your own rules for your business, the better. You can make many of your own rules for running your Alabama general partnership by drafting a Partnership Agreement. With an Alabama General Partnership Agreement, you can write your own partnership rules regarding matters such as (but not limited to):

• When and how to admit a partner
• What events will dissolve your partnership
• How to resolve partnership conflicts
• What kinds of rights the individual partners will have (within reason)

Without a Partnership Agreement, your business has to resolve conflicts and business issues using Alabama’s Uniform Partnership Act (1996). Alabama’s default partnership rules might not be the best for your business, so it’s usually best to customize any relevant rules that you can.   

Step 5: Obtain licenses, permits, clearances

There aren’t normally specific Alabama general partnership registration requirements, but you might have to obtain certain licenses, permits and clearances before you can legally run your business. Your obligation to have licenses, permits, and/or clearances usually depends on the nature, location, and characteristics of your business. You might also need to obtain these licenses at the federal, state, and local levels. 

Figuring out which licenses, permits, and clearances your business needs can drain precious time from your daily business operations. With our partners at Avalara, we can save you time by compiling a Business License Report that identifies all your licensing and permitting needs at every level of government. 

Step 6: Get an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a number your business obtains from the IRS so it can properly pay its federal taxes. The IRS requires partnerships to have EINs. Obtaining an EIN can be another drain on your time, but we can handle that task for you with our Employer ID Number Service. 

Step 7: Get Alabama state tax identification numbers

Depending on the kind of business you run, your business might have to pay various state taxes. To pay certain kinds of business taxes, you need to register through an Alabama Department of Revenue service called My Alabama Taxes (MAT). You receive a state tax account number in the mail when you register through MAT.  

Forming a Business Partnership in Alabama: Next Steps

Once your partnership has the appropriate state and federal tax accounts and numbers, it’s a good idea to quickly set up a business bank account. Your partnership will also likely need one or more types of insurance to protect your investment.  

How We Can Help

Typically, an Alabama general partnership is relatively simple to start. However, you will likely have to fulfill multiple licensing and tax registration requirements to keep your general partnership legally compliant. This is where getting your partnership up and running can get tricky and time-consuming. Not to worry! Our extensive suite of business development and maintenance services, including our Worry-Free Compliance Service, can help you easily fulfill many of your business obligations. 

Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.