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STEP 1 - WRITE A BUSINESS PLAN

Write a Business PlanPerhaps the most important, but often undervalued steps to starting a business in Alabama is writing a business plan. 

A lot of people only write a business plan because the bank won’t loan them money until a business plan is submitted.  That’s a valid reason, but there is a more important benefit.  Writing a business plan gets the ideas out of the entrepreneur’s head and helps to create a roadmap for where they want the business to go.  Business planning is a critical element to creating a successful business.

STEP 2 - SELECT A BUSINESS ENTITY

Select a Business Entity in AlabamaThe second step to start a business in Alabama is selecting a business entity.

The business entity is sometimes referred to as the business structure.  This is how a business is legally organized to do business.  The four primary business entities include the sole proprietorship, partnership, corporation and LLC.  A brief description of each is below.

A Sole Proprietorship is an individual entrepreneur that decides to go into business for themselves. This is the easiest and least expensive of the four entities to set up.  The owner is personally responsible for all debts and actions of the company.  This is called unlimited liability and is the biggest downside to the sole proprietorship. This means if the business is sued, the owner’s personal assets are potentially at risk.  The owner will also pay self-employment tax on all business profits and may pay more in taxes than other entities.

There is no filing for a sole proprietorship in Alabama.

Learn more about the sole proprietorship advantages and disadvantages

General Partnerships consist of two or more people conducting a business together. Like the sole proprietorship, there is no formal filing.  Also like the sole proprietorship, the partnership has unlimited liability.  If the partnership were to be sued, each of the partner’s personal assets are potentially 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.

A Corporation is a legal business entity that is separate from the individual.  While corporations are more expensive and complicated than sole proprietorships and partnerships to form, the major advantage is that the corporation shields the owner’s personal assets should the corporation be sued. 

There are multiple ways a corporation can elect to be taxed.  Also, there is no self-employment tax with a corporation as income to the owner(s) will come from either a salary or dividends. 

The cost to form a corporation in Alabama is at a minimum $177, which includes a $27 name reservation fee, the probate judge fee which at a minimum is $50 and a $100 filing fee to the Secretary of State.  To form a corporation, the Certificate of Formation must be filed with the Alabama Secretary of State

The Limited Liability Company (LLC) is a popular business entity choice. It provides the liability protection of a corporation with the ease of operation like a sole proprietorship.  The Limited Liability Company does not have the many burdens a corporation such as holding a board of directors meeting, shareholders meeting, taking minutes, etc.  The LLC also 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.    

The initial cost to file the Certificate of Formation and form an Alabama LLC is at a minimum $177, which includes a probate judge fee (which at a minimum is $50), a name registration fee of $27 and a $100 filing fee to the Secretary of State. 

Learn more about forming an Alabama LLC with our step-by-step guide. 

To compare the pros and cons of each of the entities, see our comparison chart of business entities.

STEP 3 - REGISTER A BUSINESS NAME

Register a Business Name in Alabama

After deciding on a business entity, the next step in starting a business in Alabama is to register a business name. 

HOW TO FILE A DBA IN ALABAMA FOR SOLE PROPRIETORSHIPS & GENERAL PARTNERSHIPS

Sole proprietorships or general partnerships do not have to register a Trade Name in Alabama. A Trade Name is sometimes referred to as a DBA, Doing Business As, Assumed Business Name or Fictitious Business Name but they all mean the same thing. Businesses can, but are not required to register their name with the Alabama Secretary of State’s website. A business might want to do this as some lenders and vendors will require it to verify the existence of the business.

Learn how to register a Trade Name in Alabama.

HOW TO RESERVE A BUSINESS NAME IN ALABAMA FOR A CORPORATION OR LLC

Corporations and LLCs have to pick a name at the time of filing for the entity and each corporation/LLC has to also be uniquely named. 

See how to check the availability of corporation and LLC names.

STEP 4 - FILE FOR AN EIN

File an EIN in AlabamaThe Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number or FEIN) is a nine-digit tax identification number from the Internal Revenue Service (IRS). This number identifies a business operating in the U.S, tracks tax returns and is used to open a bank account. Much like what a social security number is to a person, the EIN is a social security number for a business. While most businesses will need to get an EIN, some do not.

Partnerships, corporations and many LLCs OR sole proprietorships with employees must file for an EIN.

Sole proprietorships or a single-member LLC with no employees is NOT required to get an EIN. In these instances, the owner’s social security number is used.

Filing the EIN online takes only a few minutes and the number is available immediately. For more information about how to apply and to see our video with a step-by-step guide, check out how to file for an EIN.

STEP 5 - APPLY FOR BUSINESS LICENSES & PERMITS

To start a business in Alabama, certain licenses and permits will be needed.  Depending on the activities and location of the business, licensing may be needed from federal, state and local agencies. Some common registrations include:

Business Privilege License – The State of Alabama requires anyone conducting business to obtain a Business Privilege License in each county where business is conducted.

Sales Tax Permit – Businesses selling products and certain services will need to register for a Sales Tax Permit with the Alabama Department of Revenue.

Professional Licensing – Some services such as beauty shops, photographers, restaurants, diaper services, fruit stands, and contractors require licensing in Alabama.  While this isn’t a license on the business, licensing is required in order to operate.

City Business Licenses – In addition to the Business Privilege License, however many cities also require businesses to be licensed in order to operate. 

Learn more about Alabama business licenses and permits.

STEP 6 - FIND FINANCING

finding financing for a small business in alabama

Obtaining financing for a small business can be a stressful and time-consuming process.  Similar to getting a home loan, the bank is going to want lots of documentation on your personal finances in addition to a solid idea and the business plan.

As a rule of thumb, banks will want to see the owner invest 15%-25% of their money (equity) into a start-up business.  That can include cash but also any buildings, tools, vehicles, inventory and equipment that will be used in the business.  It is likely that the bank will want a lien on those items.

Credit score is going to play a large part in getting a loan approved.  Start-up business loans are largely based on the owner’s personal credit and their personal financial statement.

There are a number of options to finance a business.  A few of the more popular ones include:

Conventional Bank Loan – These are available at many financial institutions like banks and credit unions.  Banks are typically very conservative and place a lot of weight on the owner’s personal credit, equity and collateral.  After reviewing the business plan and personal financial information, they will respond with a yes, no or maybe.  Yes is great but we recommend talking with at least three banks to get the best rates and terms for your business.  No isn’t necessarily bad, as a bank may have many loans with other businesses in your industry or they don’t make loans for your type of business (restaurants are a typical example).   If your loan has more risk than they want or if you don’t have sufficient credit, equity or collateral they may answer with a maybe and want a loan guarantee.

Expect the loan approval process to take anywhere from 2 weeks to 6 months (and possibly more) depending on the amount being borrowed, the complexity of the project and owner’s personal financial condition.

SBA Loan Guarantee – When a small-business loan is riskier than the bank wants to take on, there are loan guarantee programs from the Small Business Administration (SBA).  This is a federal program that provides a guarantee to the bank that will pay a percentage of the loan back to the bank if the loan isn’t paid by the business owner.  The percentage depends on the program but typically ranges from 50%-85%.  Contrary to popular belief the SBA doesn’t provide business financing but they do help in getting money to small businesses by taking a majority of risk and encouraging the bank to make loans.  Another thing to note is that SBA guaranteed loans will cost the owner more in closing costs, fees and interest.

Peer-to-Peer LendingSometimes a bank isn’t the best option, due to the difficulty in getting a start-up business loan, credit purposes or the time needed to get funding.  In this case, peer-to-peer lending provides an interesting way to borrow money without going to a bank.  These are personal loans and rates will vary on the owner’s credit.  Loans will typically go up to the $35,000 – $40,000 range.  Two popular options are Prosper and LendingClub.

Grants – There is a lot of information online about all of the free money for businesses and most of it isn’t true.  There are some small business grants.  Most are for established businesses doing research and but occasionally there are private grants for business startups.  Do your research before applying and don’t pay for information telling you where the grants are, no matter how good their money-back guarantee is.  All of the federal grant information is available for free at http://grants.gov.

Here is more information about finding money to start a business.

STEP 7 - HIRE EMPLOYEES

new hire reporting

Hiring employees is a complex and often intimidating process for a new business owner as there are multiple agencies to register with and labor laws to understand. 

In Alabama, a business will register with the IRS, Department of Revenue, Department of Labor and U.S. Immigration and Customs Enforcement. 

Businesses are responsible for reporting new hires, verifying employees are eligible to work in the U.S., and withholding state and federal taxes.

Employers will also pay federal and state unemployment taxes, Social Security and Medicare in addition to staying on top of state and federal labor laws. 

Learn more about the steps to hiring your first employee in Alabama.

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