There are many challenges that an entrepreneur will face when launching their businesses, but starting a business in Alabama can be the ideal location because of its low cost of living, diverse economy, and strong, supportive business environment.
The cost of living in Alabama is relatively low compared to other states, which helps keep operational costs at a minimum. Additionally, the state has a diverse economy that includes sectors such as manufacturing, healthcare, technology, agriculture, and tourism – ensuring that there are many opportunities, no matter what type of business you’re looking to start. Finally, Alabama has a reputation for being a business-friendly state because of its low tax burden and relatively light regulations. The state also has a number of programs and incentives to support new businesses, such as tax credits and low-interest loans.
- There are 417,092 small businesses in Alabama that employ 822,668 employees. (2022 SBA Small Business Profile)
- Exports by small Alabama firms reached $2.4 billion. (2022 SBA Small Business Profile)
- Small businesses accounted for 46.8 percent of Alabama employment in 2019, which exceeded the national share. (Statistics of US Businesses)
- Alabama ranks #6 in the Top States for Doing Business Survey with the top three factors being; speed of project permitting (#1), energy availability and costs (#3), and favorable regulator environment (#3)
- Rated by Business Facilities as the state with the best business climate
Steps to Starting a Business in Alabama
While the odds may be stacked in your favor when starting a business in Alabama, the process can still be overwhelming. There are several steps to take and a lot of information to learn that stops many people from ever trying.
To help you get started, I’m going to break down the common steps that are needed to launch a business in Alabama.
Step 1: Choose a Business Idea
If you’re looking for a good business to launch in Alabama, there are plenty of promising ideas. Looking at online search information for starting a business in Alabama, the top searches include:
While these are popular business ideas in Alabama, it’s important to do your research and make sure the venture is right for you. Consider factors such as your interests and expertise, in addition to the cost of startup and potential return on investment, before making any decisions.
If you are still looking for that perfect business idea, my recommendation is to not only look at the money that it can make, but also start looking at ideas that align with your interests, goals, and things you have a natural interest or talent.
Be sure to check out our library of business ideas to get detailed industry information, trends, costs to start, tips, and lots more.
Step 2: Write a Business Plan
Once a solid business idea is in place, it’s time to start working on the business plan.
Many people only consider writing a business plan because the bank asks for one in order to get funding. While that’s a valid reason, more importantly, writing a business plan gets the ideas out of the entrepreneur’s head and helps to anticipate challenges a business owner may face during the course of running the business and prepare effectively for them.
A key part of the business plan is to research the industry you want to enter and what type of customer demand exists for your product or service. Through this research, you should check the feasibility of the idea by asking questions like whether there is demand for your product or service, what it is that you will do differently from the competition, and how you will get customers to buy from your business.
Just as most builders wouldn’t build a house without blueprints, an entrepreneur shouldn’t build a business without a business plan.
Related: How to write a business plan
Step 3: Select a Business Entity
The next step in starting a business in Alabama is selecting a business entity.
The business entity is sometimes called a business structure or legal structure, which refers to how a business is legally organized. There are four primary business entities: sole proprietorship, partnership, corporation, and Limited Liability Company (LLC).
A Sole Proprietorship is an informal business structure with only one owner and is the simplest form of business structure and the cheapest to create. The sole proprietorship is actually not an entity, but it is an individual operating a business without forming an entity.
To operate as a sole proprietorship in Alabama, the owner does not have to file any formation documents with any governmental agency or pay any filing fees, making it the easiest and least expensive of the four entities to set up. There is one optional filing as a sole proprietorship can register for a Trade Name (also referred to as a DBA, Doing Business As, Assumed Business Name, or Fictitious Business Name). While the ease and cost are big selling points for the sole proprietorship, the biggest disadvantage is that the owner has unlimited liability to creditors for obligations and liabilities of the business.
General Partnerships consist of two or more people conducting a business together. Like the sole proprietorship, there is no formal state filing (with the exception of the optional Trade Name registration). Also, like the sole proprietorship, the partnership has unlimited liability. If the partnership were to be sued, the partner’s personal assets would be equally at risk. The partnership itself does not pay tax from business income. Instead, profits and losses are passed through to the owner’s personal tax return. This income is subject to self-employment tax.
Related: What is a partnership?
A Corporation is a business structure that is a separate entity from the individual. While corporations are more expensive and difficult to form than sole proprietorships and partnerships, the major advantage is that the corporation provides personal asset protection for the owners should the corporation be sued. The downside is the compliance requirements and administrative burdens of annual meetings for directors and shareholders, taking minutes at the meetings, issuing stock certificates, and more.
Related: How to form an Alabama Corporation
The Limited Liability Company (LLC) is a popular business entity choice because it provides the liability protection of a corporation with the ease of operation of the sole proprietorship. The Limited Liability Company does not have the many burdens as the corporation and has the greatest tax flexibility of the four entities. Income can be taxed as a pass-through entity like the sole proprietor or partnership or as a corporation.
Related: How to form an Alabama LLC
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular formation services include:
IncFile - Great service and free registered agent the first year.
Northwest - Privacy-Focused: Free registered agent and private business address for 1 year!
ZenBusiness - Easy to use and free registered agent for 1 year!
Step 4: Register the Business
After setting up the business entity, your business is likely to need to register for a variety of licenses and permits. The ones needed for your business will vary on the business’s activities and location. Some common licenses include:
Business Privilege License – While there is no state of Alabama business license, the state requires anyone conducting business in the state to obtain a Business Privilege License in each county where the business operates.
Employer Identification Number – The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number, FEIN, or employer ID number) is a nine-digit tax identification number issued by the Internal Revenue Service (IRS). This number identifies a business operating in the U.S. and is used for paying payroll taxes, filing tax returns, and more. Much like what a social security number is to a person, the EIN is a unique number for a business. While most businesses will need to get an EIN, some do not.
Partnerships, corporations, and most LLCs OR sole proprietorships with employees MUST register for an EIN.
Sole proprietorships or single-member LLCs with no employees are NOT required to get an EIN. In these instances, the owner’s social security number can be used to identify the business; however, an EIN can still be requested.
Filing the EIN can be done online at no cost through the IRS website, which takes only a few minutes, and the number is available immediately. Alternatively, an EIN can be registered by mail or fax by submitting IRS Form SS-4.
Alabama Sales Tax License – In Alabama, most businesses that sell tangible goods or certain services must obtain a Sales Tax License. This license allows businesses to collect and remit state and local sales taxes on taxable goods or services.
According to the Alabama Department of Revenue, businesses that need a Sales Tax License include, but are not limited to:
– Retailers: Any business that sells tangible goods at retail, whether in a physical store or online, is required to obtain a Sales Tax License.
– Service Providers: Certain services are also subject to sales tax in Alabama, such as admission fees, lodging, and telecommunications services. Businesses that provide these services are required to obtain a Sales Tax License.
– Wholesalers: Businesses that sell tangible goods at wholesale may also need a Sales Tax License, depending on the nature of the goods and the customers they serve.
– Manufacturers: Manufacturers that sell finished products at retail may need a Sales Tax License to collect and remit sales tax on those sales.
Occupational License – Some services, such as beauty shops, photographers, restaurants, diaper services, fruit stands, contractors, and others, require professional licensing in Alabama. While this isn’t a license specifically for the business, occupational licensing is required to offer the service.
City Business License – In addition to the Business Privilege License, many cities also require businesses to be licensed by the city to operate.
Step 5: Open a Business Bank Account
Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the income and expenses of the business. Every bank is different, but in general, they will request the following:
Sole proprietorship & partnerships – Trade Name Certificate, EIN or SSN, and owner(s) driver’s license
Corporations – Certificate of Formation, bylaws, Certificate of Good Standing, EIN, and owner(s) driver’s license
LLCs – Certificate of Formation, Operating Agreement, Certificate of Good Standing, EIN, and owner(s) driver’s license
Step 6: Find Financing
Obtaining the funds to start a small business is a challenging process. Not only are there unfamiliar terms like collateral, equity, assets, liabilities, and others to understand, but there are several funding sources with different rules, processes, and costs.
From conventional bank loans to Small Business Administration (SBA) loan guarantees to investors, grants, and many others, it can be difficult to wade through what is available and what is best for your business.
Step 7: Hire Employees
Hiring employees is a complex and often overwhelming process for a new business owner, as there are multiple agencies to register with and labor laws to understand.
Employers are responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment taxes, and payroll withholding taxes, including Social Security and Medicare.
Step 8: Obtain Business Insurance
Business insurance is never at the top of anyone’s list of things they want to do when starting their business, however, business insurance may be critical to protecting your business.
Before opening your business, consider the insurance policies you may need. Insurance is a low-cost way to protect against common liability claims such as slip and fall accidents or professional errors. Also, if you rent or lease a building, you will likely require general liability insurance in case of damage to the property. In addition, if your business has 5 or more employees, not counting contractors, workers’ compensation insurance is required by the Alabama Department of Labor.
Home-based businesses and side businesses may want to consider business insurance, as personal home and vehicle policies may not cover in the event of a business loss.
Step 9: Set up an Accounting System
Setting up an accounting system for your business is one of the most important things you can do for your company to ensure long-term success.
There is just one problem – you’re not a numbers person.
Just thinking about financial statements, debits and credits, and accounting software makes your head hurt.
Staying on top of finances not only keeps the business out of trouble with the IRS but can be used to track and monitor trends in the business and maximize profits.
This material is property of StartingYourBusiness.com
Common questions when starting a business in Alabama
Is Alabama a good state to start a business?
All in all, it’s no surprise Alabama has become a hotbed for entrepreneurs looking to get their businesses up and running. Here are a few of the advantages businesses in Alabama have:
Low Cost of Living: Alabama has a relatively low cost of living compared to many other states, which means that business owners can stretch their dollars further. This can be especially beneficial for new businesses that need to keep their expenses under control.
Business-Friendly Environment: Alabama has a reputation for being a business-friendly state, with a low tax burden and relatively light regulations. The state also has a number of programs and incentives to support new businesses, such as tax credits and low-interest loans.
Skilled Workforce: Alabama has a strong tradition of manufacturing and industry, which means that there is a large pool of skilled workers available. The state also has a number of universities and community colleges that offer training programs in high-demand industries.
Access to Transportation: Alabama is strategically located in the southeastern United States, with easy access to major transportation routes such as I-65 and I-20. This can make it easier for businesses to transport goods and access markets in other states.
Diverse Economy: While Alabama has a strong manufacturing base, the state’s economy is also diversified, with strong industries in healthcare, technology, and agriculture. This can provide opportunities for businesses in a variety of sectors to thrive.
Entrepreneurial Support: The Alabama Department of Commerce provides a number of programs that provide guidance through funding opportunities, technical assistance, and training. Additionally, Birmingham, Huntsville, Mobile, and other cities offer a range of entrepreneurial activities, incubators, and co-working spaces to foster collaboration and networking.
Is an LLC better than a sole proprietorship?
Choosing a business entity is a very difficult decision, and we get a lot of questions about whether the sole proprietorship or Limited Liability Company is the best option. The benefits are different for each business owner, but here are a few things to consider when considering the two.
The sole proprietorship is a popular business entity and has advantages such as ease of setting up, fewer administrative requirements, and lower cost than the Limited Liability Company. The biggest downside of the sole proprietorship is that the owner’s personal finances and the finances of the business are tied together. This means if the business is sued or the business can’t pay its debts, the owner is personally responsible.
The LLC is a legal entity that separates the assets of the business and its owners. If the business is sued, the owners are typically not personally liable. Another significant advantage of the LLC comes from its tax flexibility. Once the LLC is profitable enough, it can provide distributions to the owners which are taxed much less than the self-employment taxes of the sole proprietorship.
How much does it cost to start an LLC in Alabama?
The cost to start an LLC in Alabama $200 to file the Certificate of Formation, which is the state LLC formation document, plus the name reservation fee of $25-$28 that is paid to the Alabama Secretary of State.
What licenses do I need to start a business in Alabama?
There isn’t a general business license required by the state, however, there are potentially several different licenses and permits a business will need before starting.
How much is a business license Alabama?
The cost of a business license in Alabama varies depending on the type of business, where the business is located, and sometimes the gross receipts or other factors related to the business.
There is no state business license, and generally, the city or county government that has licensing requirements where the business operates, though the federal government may have requirements, depending on your business.
Each city or county in Alabama has its own fee schedule for business licenses, so it is essential to check with the local government to determine the exact cost. In general, fees can range from as low as $10 to several hundred dollars or more, depending on the nature of the business and the specific location.
To obtain a business license in Alabama, contact the appropriate city or county government office, such as the revenue or finance department, City Hall, or the economic development to get more information on the necessary licenses.
What is the Alabama business privilege tax?
The Alabama Business Privilege Tax is an annual tax imposed on corporations and Limited Liability Companies doing business within the state of Alabama. The privilege tax is a tax for the privilege of conducting business within the state and is separate from other taxes that businesses might owe, such as income tax or sales tax.
The tax is calculated based on a business’s net worth (also called the “taxable base”) in Alabama, as well as its total income generated within the state.