Alabama Business License Basics

After selecting your business idea, business registration is the next phase of starting a business in Alabama. The registration process involves several important decisions and actions, such as choosing a business structure that suits your needs, selecting a unique name for your company, and filing the required documents with the appropriate agencies. Follow along to learn about the steps and licensing requirements to set up your business in Alabama legally.

Related: Starting A Business In Alabama Checklist

Step 1: Choose a Business Structure

The first step in registering a business in Alabama is selecting a business structure. A business structure, also known as a business entity, refers to the legal organization of your business. It determines:

• How your business is taxed
• Your personal liability for business debts
• Your ability to raise capital

Related: Comparison of Business Structures

Alabama recognizes several business structures, but the four most common are the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC).

Sole Proprietorship

In Alabama, a sole proprietor is a business owned by one person. It is the simplest form of business structure, with no legal distinction between the owner and the business. The owner has complete control over the business but is also personally liable for all debts and obligations.

To set up a sole proprietorship in Alabama, the owner does not have to file any formation documents with any governmental agency or pay any filing fees, making it the easiest and least expensive of the four entities to set up. While ease and cost are big selling points for the sole proprietorship, the biggest disadvantage is that the owner has unlimited liability to creditors for business obligations and liabilities.

Related: How to Start a Sole Proprietorship in Alabama

General Partnership

A general partnership is an agreement between two or more individuals to operate 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, each of the partner’s personal assets would be 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, which is subject to self-employment tax.

Related: What is a partnership?

Corporation

An Alabama corporation is a legal entity separate from its owners, known as shareholders. It offers limited liability protection, meaning shareholders are not generally personally responsible for the corporation’s debts and liabilities.

While corporations are more expensive and difficult to form than sole proprietorships and partnerships, their major advantage is that they provide personal asset protection for the owners should the corporation be sued. The downsides include the compliance requirements and administrative burdens of annual meetings for directors and shareholders, taking minutes at the meetings, issuing stock certificates, appointing an Alabama registered agent, and more.

Related: How to Form an Alabama Corporation

Limited Liability Company (LLC)

An Alabama LLC combines aspects of a sole proprietorship or partnership and a corporation. It provides limited liability protection to its owners, called members, shielding their personal assets from the company’s debts and liabilities. In addition, it has the most flexible management and tax options.

Related: How to Form an Alabama LLC

Step 2: Select a Business Name

The next step in the registration process is choosing a name for your Alabama business. Your business name is often the first impression potential customers will have of your company, so it’s important to select one that is memorable and compliant with state regulations.

Here are some key considerations when selecting a business name in Alabama:

1. Availability: The process of registering a business name will vary on the business entity, but the name must be distinguishable from the names of all of the other businesses registered in Alabama. Before registering a business name, you will want first to do an Alabama business name search through the Alabama Secretary of State’s business entity database to verify that no other business is using it. 
2. Legal Requirements: The name must comply with Alabama’s naming rules, which vary depending on your chosen business structure:
   • For corporations, the name must include “Corporation,” “Incorporated,” or an abbreviation like “Inc.” or “Corp.”
   • For LLCs, the name must contain “Limited Liability Company” or an abbreviation like “LLC” or “L.L.C.”
   • For sole proprietorships and partnerships operating under a name different from the owner’s legal name, they will register an Alabama Trade Name (also known as DBA or “Doing Business As”).
3. Trademark Considerations: While not required, you may want to search federal and state trademark databases to ensure your chosen name doesn’t infringe on existing trademarks.

Related: How to do a Trademark Search Before Choosing a Business Name

Step 3: Federal Employer Identification Number (FEIN)

The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number, FEIN, or employer ID number) is a unique 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. 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 single-member LLCs with no employees are NOT required to get an EIN. In these instances, the owner’s social security number can be used to identify the business; however, an EIN can still be requested.

Registering for an EIN is free through the IRS and takes only a few minutes to get.

Step 4: Business Privilege Licenses

The State of Alabama requires every business to obtain an Alabama Business Privilege License in every county where the business operates. The Alabama Department of Revenue administers the licensing, but 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 on the products or services being sold.

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 and/or the business’s sales volume.

Step 5: Professional & Industry Licensing

Depending on your profession or business type, you might need an occupational license in Alabama. The state regulates 151 different occupations, each requiring specific licensing. Here’s what you need to know about occupational permits:

State-Level Licensing:

• Many professions require a license from a state regulatory board.
• You can find a list of regulatory boards and agencies on the Alabama Department of Revenue website.
• Each board has its own requirements, application process, and fees.

Local Licensing:

• In addition to state licenses, some cities or counties may require their own occupational permits.
• Check with the city office in each location where you plan to conduct business through the Alabama League of Municipalities online municipal directory.
• Requirements can vary between municipalities, so if your business operates in multiple areas, be sure to check.

Step 6: Alabama Business Tax Number

After choosing your business structure, name, and business privilege license, most businesses will register with the Alabama Department of Revenue (ADOR) for specific taxes. The three most common are sales tax, withholding tax, and rental or leasing tax.

• Sales tax applies if you sell tangible goods or certain services.
• Withholding tax is necessary if you have employees.
• Rental or leasing tax is required if you rent out tangible property or provide specific real estate services.

To register for these taxes, create an account with the Alabama Department of Revenue on the My Alabama Taxes (MAT) website, and be sure to have your federal Employer Identification Number (EIN) or Social Security Number ready. After registering, you’ll receive account numbers for each tax type.

Step 7: Resale Certificate

After receiving a Business Tax Number, many businesses will want to obtain an Alabama resale certificate. A resale certificate, also known as a tax-exempt certificate, allows a business to purchase goods from suppliers without paying sales tax (sales tax will be collected by the business when they sell the product to their customer).

Once you have the business tax number, you can generate a resale certificate through your My Alabama Taxes (MAT) account.

Step 8: Business Licensing

Many cities in Alabama require businesses to be licensed to operate, and the rules for business registration vary depending on location and the business’s activities. Below are a few cities that require a city business license.

• Tuscaloosa: All businesses are required to get an annual business license from the City of Tuscaloosa. The cost of this business license varies depending on the type of business and its annual sales.
• Birmingham: The City of Birmingham requires an annual business license for certain businesses, such as those that sell alcoholic beverages, dance or pool table licenses, street vendors, and more.
• Montgomery: The Montgomery Division of License and Revenue requires all businesses within city limits to apply for a business license.
• Mobile: A business license is required to operate a business within the City of Mobile.
• Huntsville: The Huntsville City Clerk Treasurer’s Office requires a business for commercial and residential-based businesses operating in city limits. Additional licenses are also required for Airbnb rentals, businesses selling alcohol, taxis, or rideshare businesses.

Step 9: Local Building & Zoning Permits

Before establishing a business location in Alabama, it’s essential to understand and comply with local building and zoning requirements. These regulations ensure that businesses operate in appropriate areas and that structures meet safety standards.

Zoning regulations determine where different types of businesses can operate within a community. Some areas also have specific ordinances or require special permits for home-based businesses. To confirm if a location is suitable for your business, check with the local zoning department or planning office.

Building permits are typically required for new construction, renovations, or changes in a building’s use. These permits ensure that any modifications or new structures meet local building codes and safety standards. The local building department or inspection office usually handles these permits.

Many municipalities in Alabama require a Certificate of Occupancy before a business can begin operations in a building. This document certifies that the structure complies with all building codes and zoning laws and is safe for occupancy.

It’s advisable to consult with local agencies early in the planning process to understand all applicable requirements. This can help avoid potential issues or delays when setting up your business location.