When you start a business in Alabama, you can choose from a few different formal business structures.
The structure options are limited by how many people operate the business (whether it’s one person, or more than one).
And the structure you choose determines how the business will be taxed, how much of the business’s debts you are personally liable for, and how much paperwork and registration you need to complete.
We explored the Alabama Secretary of State website, reviewed all the forms, and examined the Code of Alabama to put together an extensive guide on starting an Alabama General Partnership.
We will also describe the primary differences between Sole Proprietorships, Partnerships, and LLCs.
Types of Business Structures
If you start a business by yourself (without a business partner), the easiest structure to use is a Sole Proprietorship. As the business owner (aka the “sole proprietor”), all the business’s profits are yours. But, you are also responsible for all the business’s debts and liabilities.
Your Sole Proprietorship business will not be taxed as a separate legal entity. Instead, all business profits are considered your personal profits. And this profit is taxed at your normal tax rate.
If you’re starting a business with one or more partners, then the simplest structure available is a General Partnership.
Pro tip: General Partnerships don’t protect your personal assets. On the other hand, if you form an LLC, your personal assets are protected in the event of a lawsuit. Check out Partnership vs. LLC below for more information.
A General Partnership is a formal agreement between two or more people to operate a business together. The partners share the business assets, profits, and debts.
In 2019, Alabama consolidated all its partnership provisions into the General Partnership Chapter (Title 10A, Chapter 8A of the Alabama Code). General Partnerships are formed under the rules in Alabama Code, Section 10A-8A-2.01.
Other Types of Partnerships
You can also structure your Alabama business as one of these other types of partnerships:
- Limited Partnerships
- Limited Liability Partnerships
- Limited Liability Limited Partnerships
However, these are specialized partnerships, commonly used to raise capital or structure a law firm. For that reason, we’ll focus on General Partnerships in this article.
Note: LLC University® does not provide legal advice. This article is for information only, and doesn’t offer legal advice for your specific business situation.
How to start a General Partnership in Alabama
You don’t have to file any formation paperwork with the state to start a General Partnership. Only formal business structures (like LLCs or Corporations) have to file formation documents with the state.
However, there are two important business items you must get:
EIN Number. Your General Partnership must file a Partnership Return with the IRS each year, so you must obtain an EIN (Federal Employer Identification Number). You and each of your partners must also file your personal taxes, which will include information about the General Partnership’s income and expenses.
Business License. You must also research business license and permit requirements. Your Alabama General Partnership may need a license or permit based on where it operates and what industry it’s in.
If you want to make the General Partnership more formal (and in order to open a business bank account), you should complete these extra steps:
- Select a business name and file a DBA for that name
- Draft and sign a Partnership Agreement to set out the responsibilities and ownership percentage of each partner
Example: How to start a General Partnership
Omar and Jasmine want to start a design business together. They sit down one evening and discuss what services they will offer, and for what prices. Technically, their General Partnership has now been formed.
They name their business “Jasmar Designs, G.P.” (G.P. stands for General Partnership).
Jasmine goes to the IRS website and obtains an EIN for Jasmar Designs, G.P.
The next day, Omar downloads the LLC University® General Partnership Agreement Template (see below). Omar and Jasmine complete the agreement and sign it.
A few days later, Jasmine files the paperwork to claim their DBA of “Jasmar Designs, G.P.” with the Alabama Secretary of State.
Jasmar Designs, G.P. then must check with their local government in Mobile, Alabama to see if they need a business license or permit to operate.
Next, we’ll discuss the pros and cons of General Partnerships. If you’d rather just get started and create your General Partnership, you can jump to our detailed step-by-step guide.
General Partnership: Advantages and Disadvantages
Advantages of a General Partnership
The primary advantages of a General Partnership are single taxation: you only pay taxes once on your share of the business profits. General Partnerships are also easy to start and maintain.
General Partnerships are easy to create with little or no paperwork to file. And the upkeep and tax obligations are simple, too.
You don’t need a “general” state-level business license in Alabama, so you only have city or county permit requirements to look into. If required, a General Partnership may need to obtain a license or permit, just like any other business.
General Partnerships don’t have the same compliance requirements as LLCs and Corporations. LLCs and Corporations usually have to file annual reports with the state government. General Partnerships don’t have to file these.
However, some state revenue departments require all business types (including General Partnerships) to register for taxes.
General Partnership Taxes
In a General Partnership, business profits flow through to each of the Partners as taxable income.
This means the General Partnership will file an informational return (Form 1065) with the IRS, but the Partnership itself doesn’t pay taxes. The informational return is just to report the business’s profits and losses to the IRS. Then each of the Partners will report their portion of the business’s profit or loss on their personal tax return (Form 1040) and pay taxes as usual.
Double Taxation vs Pass-Through Taxation:
To understand this better, you can think of it in contrast to double taxation, which is how Corporations are taxed. A Corporation pays taxes once at the corporate level. Then, the owners of the Corporation pay taxes again at the individual level.
On the other hand, a General Partnership doesn’t have double taxation. Instead, all the profits from the partnership pass through to the owners as personal income. And then each of the owners pay taxes once on their share of the profits.
Note: LLCs also have pass-through taxation. If you form a Multi-Member LLC in Alabama, you get the same tax advantages as a General Partnership.
General Partnership Disadvantages: Personal Asset Protection
The main disadvantage of a General Partnership is that there’s no personal asset protection.
You and all of your business partners are liable for all the debts and liabilities of the General Partnership.
This means that one of your business’s creditors could go after your and your partners’ personal assets, such as your homes or vehicles, to pay off the business’s debts. Similarly, a court case against your business can also impact your assets.
Instead of a Partnership, you may want to start an LLC in Alabama. Having your business structured as an LLC will protect your personal assets in the event of a lawsuit. And an LLC with multiple owners is taxed the exact same way as a General Partnership.
If you want to hire a company to form your LLC, we recommend Northwest Registered Agent.
How to form an Alabama General Partnership – Step by Step
The only thing you must do to start a General Partnership is agree to go into business together. Once you decide to start the business, you and your business partners are now a General Partnership. You don’t have to file a document “forming” your General Partnership with the state to get started.
However, there are a few things you need in order to operate as a General Partnership. Your General Partnership will need an EIN to file its taxes. And your business may need a license or permit to operate. To open a business bank account, you will need a Partnership Agreement and a DBA.
We’ll walk you through each of these steps below.
Step 1 – Business Planning Stage
Once you have a business idea and have decided to operate as a General Partnership, you need to establish some key components of the Partnership.
First, you should select your business partners. Think carefully about this decision. You can add or remove partners later, but all the existing partners must vote on that decision.
Once you know who the Partners will be, establish ownership percentages (how much of the Partnership each person will own). Ownership percentage determines two important things:
- How much money each Partner will put into the business (their capital contribution), and
- How much profit each Partner receives (their capital distributions)
Both the contributions and distributions are proportionate to ownership percentage.
You should discuss other details during this first step, such as:
- business model
- marketing ideas
- business address
Your business model is how your General Partnership plans to make money – what will you sell, how is it made and delivered, etc.
Review the NAICS codes list to find the standard name for your industry. Selecting your industry ahead of time is important. Applications for business licenses and tax registrations often ask for this information (or the NAICS code). Choosing your industry upfront will reduce confusion when you and your partners complete those forms.
It’s a good idea to think of marketing ideas early on to help your business succeed. A good marketing plan can include developing a logo and brand name, deciding how and when to advertise, building a website, and developing a social media strategy.
You should choose a primary business address. This can be an actual office address, but it doesn’t have to be. It could be your home address or one of your partners’ home addresses. You could even rent a mailbox or a PO box. The purpose is to have one designated address where all mail for the business is sent, and that you can use on official documents.
Step 2: Create a Partnership Agreement
We recommend that you and your partner(s) draft and sign a Partnership Agreement. While Alabama law doesn’t require you to have a Partnership Agreement, you will need one to open a business bank account for your General Partnership.
A Partnership Agreement establishes rules for how the Partnership will be run and how profits will be split. Your agreement should include these basic items:
- the partners’ ownership percentages
- the partners’ responsibilities
- decision-making and voting processes
- rules for resolving disputes
- rules for changing ownership (adding or removing partners)
- arrangements for deaths, bankruptcies, etc.
You can download our Partnership Agreement below and use it for your General Partnership.
Alabama doesn’t require you to file your Partnership Agreement with the state. Partnership Agreements are valid and binding when all the partners sign it. We recommend keeping a copy of the agreement with your business records.
Step 3 – Name your Partnership and Obtain a DBA
Now that you’ve decided on the parameters for your business, you need to name your company.
Tip: If you’re having trouble brainstorming, we provide some tips on how to choose a business name.
A business name that is different from its full legal name is commonly called a fictitious name or doing-business-as (DBA). In Alabama, a DBA is technically called a Trade Name, however, they mean the same thing.
Do we need a DBA?
You may want to operate under a different business name for better branding, recognizability, and privacy.
Additionally, you will probably need a DBA when opening a business bank account. Most banks require a DBA in order to open the account.
Your customers and vendors will also have an easier time doing business with you using your DBA instead of your General Partnership’s full and legal name.
Tip: Since General Partnerships are less common, they may confuse people you’re doing business with. Again, we recommend starting an LLC instead, since it’s a similar amount of paperwork and it offers personal asset protection.
How do we get a DBA in Alabama?
To register your DBA (aka Trade Name) in Alabama, you’ll need to submit an Online Trademark Application and pay a $30 fee.
Need to save time? We recommend hiring MyCompanyWorks ($99 + state fee) to file your DBA.
Step 4 – Get an EIN from the IRS
The IRS requires that all General Partnerships get an EIN (Employer Identification Number).
To explore the steps required to obtain an EIN, see our EIN guide. Although this guide walks you through obtaining an EIN for an LLC, the information can be easily adjusted for partnerships.
Tip: An EIN is also called a Federal Tax ID Number, Federal Employer Identification Number, or FEIN. They all mean the same thing. Also, you don’t need to be an “employer” to get an EIN. The EIN just identifies your General Partnership for federal tax purposes.
Step 5 – Research license requirements
Alabama doesn’t require a “general” state-level business license for General Partnerships.
For more information and to learn whether you need industry-specific or other state and county licenses, consult our Alabama Business Licenses and Permits page or the Alabama Department of Revenue Business License page.
Tip: Save time by hiring an expert. We recommend using IncFile ($99) to handle the business license research for you.
Step 6 – Maintain your Partnership
Once you have established your General Partnership, there are a few things to do in order to keep your partnership in good order.
Getting a business bank account, maintaining business financial records, and filing taxes are crucial to helping your business run smoothly.
Business Bank Account
It’s very important to get a business bank account for your General Partnership. Keeping business finances separate from personal finances is an important part of operating a business safely.
Most banks require the following things to open a business bank account:
- Partnership Agreement signed by all partners
- EIN Confirmation Letter (CP 575)
- DBA stamped and approved by the Secretary of State
- State-issued photo ID for all partners
Most states require you to keep certain business records. Section 10A-8A-1.11 of the Alabama Partnership Law requires a General Partnership keep the following records:
- A current list of the full name and last known street and mailing address of each partner in alphabetical order
- Copies of any filed statements
- Copies of tax reports for the previous three years
- Copies of the Partnership Agreements
- Copies of any financial statements for the previous three years
And unless your Partnership Agreement already includes these items, you should keep a record of:
- The amount of cash each partner contributed (or a description and the agreed value of the other benefits they contributed)
- Any rules about when each partner must make additional contributions
- Rules about dissolving the partnership
You should establish a specific location to store the records. This could be a filing cabinet in someone’s house or at the business’s office location. Or an online cloud storage system where you scan and save all the documents.
File your taxes (or hire an accountant)
As mentioned above, a General Partnership reports federal taxes on Form 1065. However, this form only describes the partnership’s income, profits, losses, and deductions. The partnership itself doesn’t pay taxes directly to the IRS. Instead, the partners owe taxes on their share of the profits, which they report on their personal tax returns.
To stay on top of your taxes, we recommend that you hire a business accountant. See our guide on how to choose an accountant.
Partnership vs. LLC
- Quick Read: What is an LLC and what does it do?
A Limited Liability Company (LLC) is a legal entity that offers pass-through taxation and asset protection. If your LLC is sued or falls into debt, only the business’s assets are at risk. Your personal assets, like your house or car, are protected.
Pros and cons of an LLC:
A Multi-Member LLC is taxed the same way as a General Partnership (it has pass-through taxation), however, LLCs have other advantages too. The most common advantage is personal asset protection. Additionally, LLCs are viewed as more credible businesses.
It’s also easier to open a business bank account, and clients/vendors will take you more seriously. Besides the extra cost to form an LLC, there are no disadvantages.
Pros and cons of a General Partnership:
The advantage of a General Partnership is it’s usually cheaper than an LLC. However, the major disadvantage of a General Partnership is that there’s no personal asset protection.
Plus, because General Partnerships are less common, your interactions with the bank and other businesses will often be confusing. You’ll end up explaining what a General Partnership is, and how it works, in order to get things done.
While a General Partnership may seem easier and less expensive than starting a legal entity (like an LLC), it actually requires a decent amount of paperwork and state filings.
We really don’t see any good reasons to form a General Partnership and we don’t recommend them. They offer no advantages when compared to legal entities, and in fact, they only have disadvantages.
We recommend starting an Alabama LLC instead.
Alabama General Partnership FAQs
You don’t have to register your General Partnership with the Alabama Secretary of State. It simply exists once you and your partners decide to go into business together and complete the steps above.
You can file a Statement of Partnership Authority with the Alabama Secretary of State if you want. This is optional, but can be helpful when dealing with banks and other places where you do business.
However, if your General Partnership will use a DBA (aka Trade Name), then that needs to be filed with the Alabama Secretary of State.
Additionally, you should check with an accountant in Alabama about whether your General Partnership needs to register with the Alabama Department of Revenue for business taxes.
A General Partnership and a Sole Proprietorship are both “informal” business structures, meaning, you don’t have to file paperwork with the state to create them.
The only difference is the number of owners.
A Sole Proprietorship is a business with one owner and a General Partnership is a business with two or more owners.
A General Partner just means one of the partners in a General Partnership. A General Partner is someone who has an ownership interest in the company. It doesn’t have any special properties or rights.
Note that a General Partner doesn’t have an individual interest in property that belongs to a Partnership. The partners – all together – have interest in property owned by the Partnership.
A Managing Partner is the partner who runs most of the company’s activities. In other business structures, this would just be called a Manager or – in an LLC – the Managing Member.
Your Partnership Agreement can list who is the Managing Partner, but it doesn’t have to. Your General Partnership doesn’t have to have a Managing Partner. The General Partners can run the business together.
It depends. You should check your Partnership Agreements as well as Alabama state law to determine whether one partner can sign a contract on behalf of a partnership, or if all partners are needed.
The Partnership Agreement might allow any partner to sign on behalf of the Partnership, or it might require all partners to sign. Some Partnership Agreements only let the Managing Partner sign a contract.
A DBA isn’t a Partnership, however, your Partnership can do business using a DBA (doing business as) name.
A DBA is just a “nickname” for something else – whether that’s a business or person(s).
Partnerships themselves don’t pay taxes. However, they need to file a Partnership Return (Form 1065) with the IRS each year. The partners will also get a K-1 from the Partnership, which shows their share of the profits or losses. If any tax is owed, it’s paid by each partner on their individual tax return.
IRS – Form 1065 Partnership Return
Code of Alabama, Section 40-12-40
Code of Alabama, Title 8, Chapter 12
Code of Alabama, Title 10A, Chapter 8A
Alabama Department of Revenue: Business Taxes
Alabama Department of Revenue: Business Licenses
Alabama Secretary of State: Trademarks and Trade Names