Starting a Business in Alabama

Last Updated: April 24, 2018

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.

There isn’t a set formula for how to write a business plan since every business plan is unique.  Here are five sections that need to be included.

1. Executive Summary – The first section of the business plan is a summary of the entire plan. What makes the executive summary unique is that it is at the beginning of a plan, though it is written last. This gives the reader, usually a lender or investor, a quick summary of what the business owner is wanting to do. They can decide whether to continue reviewing the plan or not.

2.Business Overview – This section paints a picture of what the business sells and why it’s a good opportunity. It’s important to provide relevant details since the plan will end up going to a review committee. Keep the overview focused, easy to understand and show there is a need for the company to fill.

This is the section where long-term goals will be discussed.  Sometimes there are phases of a business that will need multiple rounds of funding.  If the plan can capture the reader with the long-term vision, getting the loan for the next phase will be much easier.

3.Management & Employees – Here, details of day-to-day operations, staffing needs, salaries, etc. will be addressed. The owner’s experience will also be discussed in this section. The experience of the owner is a huge factor in getting a loan, so be sure to provide all relevant details.

4.Marketing – A marketing strategy needs to be developed to ensure there are enough customers to financially support the business and how to best advertise to them. While this section isn’t as important to the bank it may be the most important one to the business owner. Many people gloss over this section because they will figure it out later as they feel the business idea is more important. The most important thing to keep in mind is a business must have customers giving trading money for that business’s product or service.  Without a clear plan to acquiring customers, there may ultimately be no business.  It’s usually not as easy as posting on social media and then customers start coming in the doors.

A few things to focus on in the marketing section:

  • Who is the primary target market and how many of them are there? What are the common demographic characteristics (age, gender, income) or interests (hobbies, organizations, etc) the primary target market share?  These common characteristics help group people into categories to make it easier to market to them.  Figuring how many potential customers are in the geographical market provides insight on the feasibility of a business.  This in no way means you plan on excluding people, but you can’t effectively advertise to everyone.  Grouping the largest numbers of people who are most likely to purchase a product or service makes advertising more effective.
  • How will the business be promoted? Once the target market is identified, it’s time to figure out how to market to them. Find out what websites they visit, watch on TV, newspapers they read, etc and develop a marketing strategy. Don’t guess at how much this advertising will cost. Get actual quotes as advertising tends to cost more than anticipated.
  • Who are the competitors? Perform a SWOT analysis (strengths, weaknesses, opportunities and threats). Also, what does this business do better and different than the competition?  If the new business doesn’t do anything different, why will customers shop there?
5.Financial Projections – are the section a lender or investor is going to analyze the closest. They are also important to the business owner to evaluate whether the idea can potentially make a profit. When preparing financial projections for a start-up, it’s next to impossible to know how much the business will make.  Therefore, the business owner will need to make financial assumptions based on limited information. What is important is that those assumptions are reasonable and preferably have some data to back them up.

Some of the elements in the financial projections include:

  • Business start-up costs
  • Sales projections
  • Financial statements (Cash flow projections, profit & loss statement, balance sheet)
  • Break-even analysis
A lot of people struggle with the financial statements and some of the resources below will help.

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.

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 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. 

To form an LLC, the Certificate of Formation is also filed with the Alabama Secretary of State.

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 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.

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.

The assumed name will cost less than $30 and has to be renewed every 10 years. 

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.

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 only takes a few minutes and the number is available immediately. Filing can also be done by mailing the SS-4 form or by calling the IRS. 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

how to get a business license in alabama

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 Alabama business licenses include;

Alabama Business Privilege Licenses – The State of Alabama requires anyone conducting business to obtain a Business Privilege License.   While the Department of Revenue administers the licensing, the license is issued at the local level by the county Probate Judge or License Commissioner.  It is important to note that one business may require several different types of Business Privilege Licenses depending upon the products or services offered by the business.  Most businesses will also need to get a Business Privilege License in every county where business is conducted.

Privilege licenses expire September 30th every year.

The costs for the Alabama Privilege Tax vary depending on the type of license required and in some cases, upon the population of the area where the business is located or the sales volume of business. Some businesses may require several different types of business privilege licenses depending upon the services offered or products sold by the business.

Alabama Tax Account Number – Businesses collecting sales taxes, lodging taxes or will have employees, will need to register with the Alabama Department of Revenue to obtain a tax account number.  

It typically takes 3-5 days to receive a tax account number and there is no cost to apply.

Alabama Store License – Every person or business that opens one or more physical stores in Alabama is required to get a Store License for the privilege of operating in the state.  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 – A variety of professionals in the state are regulated and will also need to be registered before starting a business.  A few of these professions in Alabama that need to register include beauty shops, photographers, restaurants, diaper services, fruit stands, contractors and many more.  More information on these licenses can be found at the Alabama Department of Revenue.

Local Business Licenses – In addition to the Business Privilege License, some local municipalities require a municipal business license or a certificate of occupancy.  Others may have requirements for certain professions, zoning, building improvements, signage requirements, etc.  Check the Alabama League of Municipalities for contact information in your local area to find out more about licensing requirements and get confirmation that all of the local business licenses, registrations and permits have been applied for before opening the business.

The Alabama Department of Revenue has more information about municipal business licenses.

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.

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.

Many people will use peer-to-peer lending to get their business off the ground and go after more conventional financing once the business is established.

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.

Step 7 - Hire Employees

new hire reporting

Before hiring employees in Alabama, 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.