Steps to Starting a Business in Alabama
Step 1: Choose a Business Idea
The first step in starting a business in Alabama is having a good business idea. Maybe you already have an idea picked out, or maybe you are still deciding on one. Regardless, you can 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 create a roadmap for where they want the business to go. Just as most builders wouldn’t build a house without blueprints, an entrepreneur shouldn’t build a business without a business plan.
The thought of writing a business plan is overwhelming, so here are some resources to help in getting started.
Related: How to write a business plan
Resource: Sample Business Plans
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 referred to as 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 brief description of each is below.
A Sole Proprietorship is an individual that decides to go into business. This is the easiest and least expensive of the four entities to set up as there is no state filing. The ease of startup is a big selling point, however, a major downside to the sole proprietorship is that the owner is personally responsible for all debts and actions of the company. If the business is sued, the owner’s personal assets are potentially at risk. Another potential downside is the owner will pay self-employment tax on all business profits and may be more costly than some of the other entities.
Related: What is a sole proprietorship?
General Partnerships consist of two or more people conducting a business together. Like the sole proprietorship, there is no formal state filing. Also, like the sole proprietorship, the partnership has unlimited liability. If the partnership were to be sued, the partner’s personal assets are 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.
There are multiple ways a corporation can elect to be taxed, which includes the C-corporation and S-corporation. Electing how the entity should be taxed is complicated, so be sure to talk with your CPA as there is the potential of double taxation where profits and dividends are both 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, which may be beneficial.
The initial costs to form a corporation in Alabama include:
Certificate of Formation – $177 minimum. Includes a probate judge fee (which at a minimum is $50), a name reservation fee of $27, and a $100 filing fee to the Alabama Secretary of State.
Initial Business Privilege Tax Return – $100 minimum.
Related: How to form an Alabama Coropration
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 like 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.
The initial costs to form an Alabama LLC include:
Certificate of Formation – $177 minimum. Includes a probate judge fee (which at a minimum is $50), a name reservation fee of $27, and a $100 filing fee to the Secretary of State.
Initial Business Privilege Tax Return – $100 minimum.
Related: How to form an Alabama LLC
Forming a corporation or LLC sounds complicated and expensive, but entity formation services guide you through the process to guarantee the filing was done right.
Some popular services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
IncAuthority - $0 plus state fees & free registered agent the first year!
ZenBusiness - $49 plus state fees & free registered agent for 1 year!
Step 4: Register a Business Name
After deciding on the business entity, the next step in starting a business in Alabama is to register the business name.
Registering an Alabama Trade Name for Sole Proprietorships & General Partnerships
Sole proprietorships and general partnerships may want to register for 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 business’s existence.
Registering an Alabama Business Name for a Corporation or LLC
Corporations and LLCs will pick a name at the time of formation. This name has to be different from the other entities that are registered with the Alabama Secretary of State. Registering the entity name will not provide much protection from anyone else from using the name, other than being able to register with the Secretary of State.
Legally Protect Your Business Name
A trademark can legally stop others from using names, slogans, or logos. The U.S. Patent & Trademark Office (USPTO) manages the registration of trademarks.
Before settling on a name, you will want to first check and make sure the name you want to use isn’t already registered to another business.
You can also register to keep others from using the name of your business, product, or service.
Related: How to do a trademark search
Step 5: Get an EIN
The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number or FEIN) 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 similar to a social security 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 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 to identify the business.
Filing the EIN can be done online through the IRS website, which 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.
Step 6: 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:
Sole proprietorship & partnership – Trade Name Certificate, EIN or SSN and owner(s) drivers license
Corporation – Certificate of Formation, bylaws, Certificate of Good Standing, EIN, and owner(s) drivers license
LLC – Certificate of Formation, Operating Agreement, Certificate of Good Standing, EIN and owner(s) drivers license
Step 7: Apply for Business Licenses & Permits
Certain licenses and permits will be needed to operate a business in Alabama and the ones needed will vary on the business’s activities and location. Some common registrations include:
Business Privilege License – The State of Alabama requires anyone conducting business in the state to obtain a Business Privilege License in each county where the business operates.
Sales Tax Permit – Businesses selling products and certain services will need to register for a Sales & Use Tax Permit with the Alabama Department of Revenue.
Professional Licensing – 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 on the business, occupational licensing is required to offer the service.
City Business Licenses – In addition to the Business Privilege License, many cities also require businesses to be licensed by the city in order to operate.
Step 8: Find Financing
Obtaining the funds to start a small business is a challenging process for many.
Not only are there unfamiliar terms like collateral, equity, assets, liabilities, and others, but there are several sources of funding 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 best for your business.
Step 9: 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 10: 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.
Most types of business insurance are optional, except for workers’ compensation insurance in most states. Some states will also require professional liability insurance for businesses offering certain services and commercial auto insurance.
Even if insurance isn’t required and there is a fire, theft, or personal injury lawsuit, the business owner may have to pay out-of-pocket for damages and legal fees. Home-based businesses and side-businesses may want to consider business insurance too as personal home and vehicle policies may not cover in the event of a business loss.
Step 11: 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 it can be used to track and monitor trends in the business and maximize profits.
Fortunately, understanding the numbers doesn’t mean getting a finance degree. Tracking a business’s financials can be done with pen and paper (not really recommended), spreadsheets, accounting software, or hiring a bookkeeper.