Perhaps the most important, but often undervalued step to starting a business in Alabama is writing a business plan. While the business plan is most often thought of as something that is required to get a business loan, it can also serve as a roadmap for your business. Starting and running a business is complex and there are so many parts in motion, it’s next to impossible to keep track of everything – and that’s where the business plan comes in.
When most people think of business plans, most think about a formal document that’s as thick as a text book. Those don’t happen much anymore because they just aren’t useful. If you are writing a business plan for the bank, some formality is in order but you should also have a business plan that you can use to execute your vision, even if it’s just scribbled on notebook paper.
The second step in starting a business in Alabama is selecting a business entity. The business entity is how a business is legally organized to do business. The four primary types include the sole proprietorship, partnership, corporation and LLC. Each has pros and cons and a short description of each is below.
Sole Proprietorship: A sole proprietorship is an individual that decides to go into business. This is easiest and least expensive of the four to set up but has a serious potential downside which is unlimited liability. This unlimited liability opens the business owner up personally should the business be sued. There is no filing for a sole proprietorship in Alabama.
General Partnership: A general partnership is similar to the sole proprietor, except it involves two or more people conducting a business together. Like the sole proprietorship, there is no formal filing and also like the sole proprietorship, the partnership has unlimited liability.
Corporation: The corporation is more complex to form than the sole proprietorship or partnership but that complexity provides the owner with the ability to protect their personal assets through liability protection. If the corporation gets sued, the owner’s personal assets should be safe.
The cost to form a corporation in Alabama is a minimum of $177. To form a corporation, the Certificate of Formation must be filed with the Alabama Secretary of State.
Limited Liability Company (LLC): The LLC is similar to the corporation because of the liability protection but provides the ease of operation of a sole proprietorship by eliminating the administrative requirements of the corporation.
The initial cost to get an LLC in Alabama is $177 at a minimum. To form an LLC, the Certificate of Formation is also filed with the Alabama Secretary of State.
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
1. Sole proprietorships or general partnerships do not have to register a trade name in Alabama. A trade name is sometimes referred to as DBA, Doing Business As or Assumed 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.
2. To register a DBA in Alabama, the name must be unique to others in the state. To check the availability of names and to register, visit the Alabama Secretary of State.
3. The DBA will cost less than $30 and has to be renewed every 10 years. Each name will need to be unique.
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.
To check the availability of names, visit the Alabama Secretary of State.
Registering does not necessarily keep others from using the business name. For more details on registering a business name and protecting it with a trademark, click here.
The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number or FEIN) is a unique nine digit number from the IRS to identify a business operating in the U.S. Much like what a social security number is to a person, the EIN is essentially a social security number for a business. While most businesses will need to get an EIN, some do not need to.
Businesses that are required to get an EIN include partnerships, corporations or LLCs OR sole proprietorships with employees.
A sole proprietorship with no employees isn’t required to get an EIN and would simply use the owner’s social security number instead.
For more information about how to apply and to see our video with step by step directions check out how to file for an EIN.
Starting a business in Alabama may require special permits and/or licensing, potentially from a variety of agencies before legally operating. Some of the most common licenses a business may need in Alabama include;
Alabama Business Privilege Licenses – Every business in the Alabama is required to obtain a Business Privilege License which allows businesses to operate in the state. One business may need multiple business privilege licenses depending on the products or services offered and depending on where business is conducted. This license is administered through the Alabama Department of Revenue but purchased through the county Probate Judge or License Commissioner.
Municipal Business Licenses – In addition to the Business Privilege License, some local municipalities require a municipal business license in addition to local requirements for certain professions, zoning, building improvements, signage requirements, etc.
Alabama Store License – A store license is required for any business with a physical location in Alabama. Licenses are obtained by filing with the Probate Judge or license commissioner of the county in which the store is located.
Vocation or Occupational Licenses – Some professions are required to register with the state of Alabama such as beauty shops, photographers, restaurants, diaper services, fruit stands, contractors, in addition to many others. Professional licenses are administered by the Alabama Department of Revenue.
Alabama Tax Account Number – Business collecting sales taxes, lodging taxes or businesses that will have employees, will need to register for a tax account number with the Alabama Department of Revenue.
Click for more details on Alabama business licenses & registrations.
Getting the funds together to finance a business start-up can be a 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 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.
There are a number of small business loan options, but the primary ones that are used by small businesses include:
Conventional Bank Loans – These are available at most local banks and are where most entrepreneurs start when looking for a loan.
Loan Guarantee – When a loan is riskier than the bank wants to take on, many have the option to use 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 should the business owner default.
Alternative Lenders – A newer type of lender has emerged to make business loans online.
Revolving Loan Funds – Several communities, economic development agencies, etc. offer revolving loan funds to businesses as a way to encourage investment and job creation. They are often low interest and approval is typically not as strict as a bank since job creation in the community is a priority.
Expect the loan approval process to take anywhere from 2 weeks to 6 months (and possibly more) depending on the amount being borrowed, complexity of the project and owner’s personal financial condition.
Before stepping into a bank for financing, it is a good idea to know your credit score. A major factor in getting start-up business loan approval is the owner’s credit score. Typically scores above 650 are considered viable so if you aren’t sure, get a copy of your credit report.
More details about different loans for businesses is available on our financing a business page.
Depending on the type of business, there are a variety of taxes a business in Alabama needs to be aware of with the most common being sales tax, privilege tax and self-employment taxes.
Sales Tax – The Alabama Department of Revenue is the state body responsible for collecting taxes. If your business sells tangible personal property, operates places of entertainment or amusement and/or some services, sales tax will need to be collected.
Alabama Privilege Tax – Every corporation, limited liability company and disregarded entity (limited partnerships, limited liability partnerships or non-profits) doing business in Alabama is required to pay the Alabama Business Privilege Tax.
Self-Employment Taxes – Sole proprietors, partnerships and LLCs that elect to be taxed as such will be required to pay state and federal income taxes, Social Security, and Medicare based on the profits generated by the business.
More details are available on our Accounting & Taxes in Alabama page.
Before hiring employees, there are several items that businesses need to be familiar with before making their first hire.
Register as an Employer – Employers will need to register with the IRS (EIN number) Alabama Department of Revenue (Withholding Account Number) and the Alabama Department of Labor (Unemployment Compensation Account Number)
Fill Out Paperwork For New Employees – When hiring a new employee there are four forms that will need to be filled out; New-Hire Reporting Form (Alabama Department of Labor), I9 (Form I-9, Employment Eligibility Verification), W-4 (IRS’s Publication 15 Employer Tax Guide), and the A-4 (Alabama Form A-4, Employee’s Withholding Exemption Certificate).
Federal & State Income Tax Withholding – Employers withhold money from each employee’s paycheck to pay that employee’s federal and state income taxes. The employer pays no part of the withholding tax, but is responsible for collecting and remitting the taxes that are withheld.
Social Security & Medicare – To comply with the Federal Insurance Contributions Act (FICA), an employer must withhold the employee’s portion of Social Security and Medicare taxes and the employer matches.
Federal & State Unemployment Insurance – Employers are responsible for paying taxes to compensate workers who have recently lost their jobs, which is through federal & state unemployment insurance.
Worker’s Compensation Insurance – Workers’ compensation provides compensation benefits and covers medical costs to employees injured on the job. Worker’s Compensation Insurance is administered through the Alabama Department of Labor.
In Alabama, any business that has 5 or more employees, other than contractors, is required by law to have workers’ compensation coverage. An employee in Alabama includes all full or part-time employees, officers of a corporation or members of an LLC.
Employers should also understand the various regulations and laws pertaining to employees. If you plan to hire employees, learn the rules that apply to your business. Federal laws, depending on your sales volume and number of employees, may supersede state laws.
Consult with the Alabama Department of Labor and U.S. Department of Labor to learn more. If you are unsure of your obligations, an attorney’s guidance can be also useful in assisting you to meet legal requirements.
This is a very brief overview and more information is available on our Hiring Employees in Alabama page.