How to Start a Business in Alabama
Ready to start a business in Alabama? Whether you are an aspiring entrepreneur or a seasoned business owner, setting up shop in Alabama can be a smart move. “The Yellowhammer State” is home to 408,374 small businesses that employ 809,024 people (according to statistics from SBA.gov). In 2022, 71,146 new businesses were formed in the state. Thanks to it’s low cost of living, which ranks 4th in the US, Alabama is a great place to start a new business. This article will cover all of the steps you need to take in order to get your business up and running in Alabama.
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12 Steps to Starting a Business in Alabama:
- Research and Plan your Business
- Choose a Business Structure
- Choose your Business Name
- Register your Alabama Business
- Get an EIN
- Register for Alabama Sales and Use Tax
- Apply for Business Licenses and Permits
- Open a Business Bank Account
- Set Up Credit Card Processing
- Establish an Accounting System
- Get Business Insurance
- Hire Employees and Set Up Payroll
When looking to start a business in Alabama, a crucial first step is to thoroughly research your business idea and develop an initial plan. Conducting due diligence before taking any action is imperative and essential to the success of your venture. To understand what it takes for your Alabama business to thrive, you’ll want to engage in preliminary market research and in-depth competitive analysis. Your research should provide insight into who constitutes the target customers for your products or services, identify your competitors, and offer measures for providing unique solutions.
Once you have relevant preliminary research, you can use it as a building block for creating your business plan. Writing a business plan is a pivotal step that will guide you through the initial stages of launching and growing your business. Even if you feel that you know your business idea inside and out, creating a formal business plan should not be undervalued as a study by the Harvard Business Review revealed that entrepreneurs who had a formal business plan were 16% more likely to succeed than those that did not create a plan.
Additional Information:Master the Art of Writing a Successful Business Plan
Now it’s time to select a legal structure for your business. Take into account the level of personal liability risk you are comfortable with, the desired tax status, and your source of capital. There are four common types of business structures to consider:
Limited Liability Companies (LLCs) are the most popular type of formal business entity. LLCs offer protection to their members’ personal assets in case of legal action or any outstanding business debts. For small business owners wanting tax advantages and flexibility, LLCs, by default, have pass-through taxation and offer the flexibility to choose C-Corporation or S-Corporation taxation.
Additional Information:What is a Limited Liability Company (LLC)?
Corporations offer a great option for business owners seeking legal separation from their businesses. Shareholders own a percentage and receive stock representing their ownership interest. While there are advantages like extra liability protection, there are also disadvantages such as higher tax rates. Consider tax implications and other factors before deciding to set up a corporation to protect your business and assets.
Additional Information:A Detailed Explanation of Corporations
If you’re beginning your entrepreneurial journey as a solo business owner in Alabama, registering as a sole proprietorship is the best way to go. Its simplicity makes it a great option; you only need to obtain the necessary business licenses and permits essential to your business. Though keep in mind- with this ease and affordability, there’s a catch: sole proprietorships are deemed indistinguishable as a separate entity from their owner. If the business becomes liable for any debt or lawsuit, your personal assets are at risk to cover the expense. Having unlimited personal liability can be a concern for many, but considering the benefits of getting an affordable and quick start without rigid regulations, it’s a decent trade for the drawback.
Additional Information:Pros and Cons of starting as a Sole Proprietorship
If you start a business with two or more owners, a general partnership might be the easiest way to structure it. Like LLCs, general partnerships also get pass-through taxation, meaning you pay your taxes based on the profits or losses of the business. Since the company isn’t a separate entity in the eyes of the law, a general partnership is considered an informal structure, much like a sole proprietorship. However, remember that you and your partner(s) are personally responsible for anything that goes wrong with the business. To summarize, a general partnership may be the right choice to form a company with someone else with as little cost and complexity as possible. But just be aware of the unlimited liability that comes with it.
Additional Information:A Guide to Understanding Partnerships
Need More Info to Choose a Structure?
If you’re having difficulty determining which business structure best suits your needs, our How to Choose a Business Structure guide can provide more help. In the guide, we go over the 4 business structures and how they compare to each other in more detail.
Choosing a name for your Alabama business is one of the most important parts of planning, and it can often be one of the most difficult too. Once you have named your business and started to grow it, it’s not easy to make a name change. The name that you choose can affect how you’re seen, so it’s worth taking your time.
If you’re finding it hard to think of a good name for your business, there are three key things to keep in mind:
- Choose a name that creates an identity for your business
- Pick something memorable
- Use a name that’s easy for people to search for online and find elsewhere
For more tips visit our guide: How to Create a Great Business Name.
After deciding which business structure is best for your Alabama business, the next step is to officially register your business. The steps for registering a business name in Alabama depend on which business structure you have chosen. Keep reading to find out how to register your preferred business type.
- Register an Alabama LLC
- Register an Alabama Corporation
- Register an Alabama Sole Proprietorship
- Register an Alabama Partnership
To register your LLC in Alabama, you need to file Certificate of Formation with the Alabama Secretary of State, which has a state filing fee of 200. Check that the name you want is available before you register your business. You can do this by searching the Business Entity Database on the Alabama Secretary of State website. When you have done that, you can file the Certificate of Formation. You will need to provide several details, including the business’s name, address, and owner contact information. You will also need to designate a Alabama registered agent. At this stage, it’s also a good idea to create an operating agreement for your business.
Learn How to Start an LLC
If forming an LLC is something you’re interested in, take a look at our comprehensive guide on how to start an LLC in Alabama. We provide a detailed outline of each essential step to help you navigate successfully.
To form a Corporation in Alabama, you need to file Certificate of Formation with the Alabama Secretary of State. The fee for this filing is 236. Another necessary step is to appoint a registered agent for your Corporation. You should also consider creating a corporate bylaws document to outline how your business will operate.
If you plan to start your business as a sole proprietor in Alabama, there’s no need to file any formal papers at the state level. However, sole proprietors are required to operate under their personal name or a name that at least includes their last name. If you plan to operate your business under a more unique and brandable name that doesn’t include your name, you’ll need to register an Alabama DBA, officially referred to as a Trade Name, with the state. In addition you’ll also be required to obtain all required federal, state, and local permits and business licenses, which we cover in step 7 of this guide below.
As with a sole proprietorship, there’s no need to formally file anything to form a partnership in Alabama. You may still need to complete an Alabama DBA registration, also known as a Trade Name if you’re planning on a business name that doesn’t include the last names of the partners. A partnership agreement document is also useful to create at this stage, helping you and your business partner to agree on how the business will operate.
An EIN is an acronym that stands for Employer Identification Number. It is issued by the IRS for the purpose of filing taxes and employment. If you run a business that is organized in the form of a Corporation, Partnership, or LLC you must obtain an EIN. Even if your business is not required to do so, you should look into getting an EIN as it is useful for numerous business filings.
How to Apply for an EIN
The IRS has created an Online EIN Assistant where you can apply directly for an EIN free of charge, as long as you have an SSN. If you are having trouble or don’t have an SSN you can use Northwest Registered Agent’s EIN service to obtain your EIN.
If you are a business owner, retailer, or seller of personal property in Alabama with nexus in the state, then you will need to collect Alabama sales tax. Consumers who use property in the state may also be required to pay sales tax. It is important to comply with these regulations as failure to do so can result in penalties.
How to Know if you have a Sales Tax Nexus in Alabama?
The Alabama Department of Revenue (ADOR) typically considers the following factors to determine nexus:
- Physical presence: If you have a commercial space like an office, store, warehouse, etc. in Alabama.
- Business activities: If your sales reps, employees, or agents conduct business in Alabama, such as selling, delivering, or taking orders for taxable items.
- Product-related activities: If you assemble, install, service, or repair products in Alabama.
- Property ownership: If you own or rent real or tangible personal property in Alabama, including computer servers or software that solicit orders for taxable items.
- Inventory storage: If you have inventory in Alabama, including through the use of third-party fulfillment services like Fulfilled by Amazon (FBA).
These factors help determine if you have nexus and should pay sales tax in Alabama.
For more detailed information visit the <a href="https://www.revenue.alabama.gov/division/sales-use/" target="blank"Alabama Department of Revenue's page on Sales and Use Tax or contact a qualified Alabama tax professional.
Get Help Registering for Alabama Sales and Use Tax
If you’d like assistance registering for Alabama Sales and Use Tax you can use Swyftfilings Seller’s Permit service to complete your registration.
To ensure legal compliance with federal, state, and local laws, it is important for your business to obtain all requires licenses and permits. The specific licenses and permits required will vary depending on various factors, such as the nature of your business, the products and services you offer, the data you collect, and your location. It is crucial to understand and adhere to these requirements to operate your business smoothly and within the bounds of the law.
Federal Licenses and Permits
Your business may need a license or permit to operate legally if your business is involved in an activity that is regulated at the federal level, such as:
- Alcoholic beverages
- Firearms, ammunition, and explosives
- Fish and wildlife
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Transportation and logistics
For more detailed information on federal business licenses and permits visit the Small Business Administration: Federal Licenses and Permits page.
State and Local Licenses and Permits
Licenses are required by the state but issued at the county level. Contact the relevant county probate judge’s office for more information.For more detailed information visit the Alabama Department of Revenue Business License page.
Alabama Business License Research
Figuring out what business licenses you’ll need can be pretty complicated. You can use MyCorporation’s Business License Compliance service for expert help to determine which licenses you’ll need.
You should try to create a separation between your personal finances and your business finances. If your personal financial activity is routinely mixed up in your business activity, it could place your personal assets in jeopardy. Since banking activity is monitored and recorded, any such events will not be hard to find. This activity is known as “co-mingling funds” and can result in serious consequences for your business.
Co-mingling funds could result in the loss of your company’s limited liability status. This can result in creditors being able to go after both your business and personal assets. Furthermore, it even makes accounting for yourself, and your business that much more challenging since a significant portion of resources will be dedicated to determining which transaction is in a personal capacity and which one is for the business.
Opening a bank account specifically for your business can protect you from such consequences down the road. To gain more insight on the issue, read through our detailed how-to guide on opening a business bank account. It covers, among other things, matters such as which bank to choose and what documents will be required.
It is now expected for most businesses to recognize and accept payments through credit and debit cards. Around 60% of all transactions over $10 are through a credit or debit card. As a result, your business must accept card payments to if you want to maximize your businesses revenue.
For more information, visit our guide on the topic:How to Accept Credit Card Payments
One of the biggest mistakes new businesses make is improper or non-existent accounting. Having an accounting system setup from day one of your business is the sensible thing to do. It can offer you incredible returns on top of recording financial information. Managers and owners need good data to make prudent financial decisions. A good accounting system does just that. It streamlines that business’s finances and offers incredible insight into business performance.
A modern and efficient accounting system allows you to draft budgets with great ease, control cash flow, and produce the required financial reports to have maximum control over your business’ financial operations. For more detailed instructions on the subject, you can consult our Small Business Accounting 101 guide. It walks you through the steps required to do small business accounting, plus much more.
Recommended Accounting Software
We recommend using Freshbooks for your accounting needs. Freshbooks allows you send professional invoices, take online payments, timetrack and more.
Business insurance, much like regular insurance, is something that many people treat as a burden until the day that they end up needing it. It is only logical that you safeguard the thing you’ve worked so hard to build. Proper insurance mitigates risk on the off chance that an accident, natural disaster, or lawsuit strikes your business.
Go over the variety of insurance you might need for your business in our Small Business Insurance Guide,and make certain that you’re protected.
As the business grows, you may need extra help to run it smoothly. As such, you’ll have to hire employees and set up a payroll. It is your responsibility as an employer to report freshly hired employees and verify your employment status.
There are two items that employers must complete to be federally compliant when hiring new employees. You must verify that any employee is eligible for employment in the US and obtain a signed IRS Form W-4 to ensure you are withholding the correct amount for federal taxes. For more detailed information, visit the IRS page for Businesses with Employees.
Since Alabama has a state level income tax, you’ll need to withhold taxes from your employees and remit them to the state. In addition to this you’ll also need to register for unemployment insurance. Luckily in Alabama both of these registrations are done with the Alabama Department of Revenue . For more specific information about your requirements as an employer in Alabama visit the Alabama Department of Labor: New-Hire page for more info.
Recommended Hiring Software
If you’re hiring employees we recommend using Gusto. Gusto can not only automate your payroll but also help with hiring & onboarding, file employment taxes, aid with compliance and even identify hidden tax credits for your business.