Want to start a business in Alabama and not sure what to do first? It’s simpler than you might think with our step-by-step guide that breaks down the process into easy steps – from choosing how to structure your business to understanding permits and licenses, and lots more.

Steps To Starting A Business In Alabama

Step 1: Choose a Business Idea

The first step in launching your business in Alabama is deciding what kind of business to run. If you’ve already got an idea, that’s great! If not, that’s okay too.

If you’re looking for a good business to launch in Alabama, there are plenty of promising ideas. Looking at online search information for starting a business in Alabama, the top types of startup searches in the state include:

While these are popular business ideas in Alabama, it’s important to do your research and make sure the venture is right for you. Consider factors such as your interests and expertise, in addition to the cost of startup and potential return on investment, before making any decisions.

If you are looking for more ideas, we offer profiles of hundreds of business ideas, complete with information on different industries, the costs involved in starting up, and helpful industry tips.

Step 2: Write a Business Plan

Once a solid business idea is in place, it’s time to start working on the business plan. Just as most builders wouldn’t build a house without blueprints, an entrepreneur shouldn’t build a business without a 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 anticipate challenges a business owner may face during the course of running the business.

The business plan helps research the feasibility of the idea by exploring questions like whether there is demand for your product or service, what you will do differently from the competition, and how you will get customers to buy from your business.

Related: How to write a business plan

Step 3: Find the Money

Obtaining funding can be a major roadblock when starting a business, and that is why it’s here as the next step. Without a realistic way to get the funds, it may not be worth pursuing the remaining steps. If personal savings aren’t enough to start, here are a number of funding options to look at:

Friends and family: Your personal connections who believe in you and your idea may be interested in making a loan or investing in your business. Be sure to write down repayment expectations, as misunderstandings about money can ruin relationships.
Bank loans: Traditional bank loans are a common funding source for small businesses. To qualify for a bank loan, you’ll typically need a strong credit history, business plan, collateral, and personal investment of at least 15%-25% of the total startup costs.
SBA loan guarantee: The U.S. Small Business Administration (SBA) offers loan guarantee programs to help small businesses receive financing. The SBA doesn’t provide loans directly to small businesses but guarantees a portion of the loan made by approved lenders, so the lender’s risk is lower.
Investors: Another funding option is to seek investment from angel investors who invest in startups in exchange for equity. While these investors can provide substantial funding and valuable expertise, they often require a share of ownership and control in your business. Some investor groups in Alabama include the AIM Group and the Central Alabama Angel Network.
Microloan programs: Microloans are small loans for businesses with limited capital requirements or who cannot qualify for conventional lending. These loans are typically provided by nonprofit organizations, community development financial institutions (CDFIs), and specialized Alabama microlenders such as the South Central Alabama Development Commission, TARCOG, Neighborhood Concepts, and others.

Step 4: Select a Business Structure

The next step in starting a business in Alabama is selecting a business structure. The business structure is sometimes called a business entity but refers to how a business is legally organized to operate. There are four primary business entities: sole proprietorship, partnership, corporation, and Limited Liability Company (LLC).

A sole proprietorship is an informal business structure with only one owner. The sole proprietorship is actually not an entity, but it is an individual operating a business. This is the simplest form of business structure and the cheapest to create.

To operate as 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. There is one optional filing as a sole proprietorship can register for a Trade Name (also referred to as a DBA, Doing Business As, Assumed Business Name, or Fictitious Business Name). 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.

General partnerships are another type of business structure and consist of two or more people conducting a business together. Like the sole proprietorship, there is no formal state filing (with the exception of the optional Trade Name registration). Also, like the sole proprietorship, the partnership has unlimited liability. If the partnership were to be sued, 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. 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.

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 a sole proprietorship. The LLC does not have as many burdens as 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.

Related: How to form an Alabama LLC

Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.

Some popular formation services include:

IncFile - Great service and free registered agent the first year.

Northwest - Privacy-Focused: Free registered agent and private business address for 1 year!

ZenBusiness - Easy to use and free registered agent for 1 year!

Step 5: Register the Business

After setting up the business structure, the next phase is to register the business. The registrations that your business will need vary depending on the business’s activities and location. Some common things a business could register for in Alabama 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.

City business license: In addition to the Business Privilege License, many cities also require businesses to be licensed by the city to operate.

Employer Identification Number: The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number, FEIN, or employer ID number) 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 a unique 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 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 an EIN is free and takes only a few minutes through the IRS website. The number is available immediately. Alternatively, an EIN can be registered by mail or fax by submitting IRS Form SS-4.

Alabama sales tax license: In Alabama, most businesses that sell tangible goods or certain services must obtain an Alabama sales tax license. This license allows businesses to collect and remit state and local sales taxes on taxable goods or services.

According to the Alabama Department of Revenue, businesses that need a sales tax license include, but are not limited to:

Retailers: Any business that sells tangible goods at retail, whether in a physical store or online.
Service providers: Certain services are also subject to sales tax in Alabama, such as admission fees, lodging, and telecommunications services.
Wholesalers: Businesses that sell tangible goods at wholesale, depending on the nature of the goods and the customers they serve.
Manufacturers: Manufacturers that sell finished products at retail may need to collect and remit sales tax on those sales.

Occupational license: Some services, such as beauty shops, photographers, restaurants, diaper services, fruit stands, contractors, and others, require professional licensing in Alabama.

Step 6: Open a Business Bank Account

Now that the business structure is taken care of and the registrations in place, the next step is to set up 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 proof of the business structure, such as a Trade Name Certificate (sole proprietorship or partnership) or formation paperwork (corporation or LLC), in addition to other documents such as the EIN and ID’s of the owners.

Step 7: Hire Employees

If hiring employees is a part of your business plan, the next step is to begin preparing to get set up as a new employer. It’s important to take the time to understand your responsibilities as an employer, such as understanding the legal requirements and taking care of the necessary registrations, such as the EIN from the IRS, in addition to a Withholding Account Number from the Alabama Department of Revenue and Unemployment Account Number from the Alabama Department of Labor.

Employers are also responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment taxes, and payroll withholding taxes.

Step 8: Obtain Business Insurance

Before opening your business, you will want to consider the insurance policies you may need. Insurance is a low-cost way to protect against common liability claims such as slip and fall accidents or professional errors. Also, if you rent or lease a building, you will likely require general liability insurance in case of damage to the property. In addition, if your business has 5 or more employees, not counting contractors, workers’ compensation insurance is required by the Alabama Department of Labor.

Home-based businesses may also want to consider business insurance, as personal home and vehicle policies may not cover them in the event of a business loss.

Step 9: Set up a Bookkeeping System

Setting up a system for your business is the next step to tackle when setting up a new business. 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. But as the business owner, you are responsible for correctly paying state and federal taxes, and you’ll want to be prepared. There are a number of ways to do this, from keeping invoices and receipts in a shoe box to using a spreadsheet or accounting software to hiring an accountant. The important thing is to have a system.

This material is property of StartingYourBusiness.com

Common Questions When Starting A Business In Alabama

Is an LLC better than a sole proprietorship?

Choosing a business entity is a very difficult decision, and we get a lot of questions about whether the sole proprietorship or Limited Liability Company is the best option. The benefits are different for each business owner, but here are a few things to consider when considering the two.

The sole proprietorship is a popular business entity and has advantages such as ease of setting up, fewer administrative requirements, and lower cost than the Limited Liability Company. The biggest downside of the sole proprietorship is that the owner’s personal finances and the finances of the business are tied together. This means if the business is sued or the business can’t pay its debts, the owner is personally responsible.

The LLC is a legal entity that separates the assets of the business and its owners. If the business is sued, the owners are typically not personally liable. Another significant advantage of the LLC comes from its tax flexibility. Once the LLC is profitable enough, it can provide distributions to the owners, which are taxed much less than the self-employment taxes of the sole proprietorship.

How much does it cost to start an LLC in Alabama?

The cost to start an LLC in Alabama is $200 to file the Certificate of Formation, which is the state LLC formation document, plus the name reservation fee of $28, both of which are paid to the Alabama Secretary of State.

How much is a business license in Alabama?

The cost of a business license in Alabama varies depending on the type of business, where the business is located, and sometimes the gross receipts or other factors related to the business.

There is no state business license, and generally, the city or county government has licensing requirements. Each city or county in Alabama has its own fee schedule for business licenses, so it is essential to check with the local government to determine the exact cost. In general, fees can range from as low as $10 to several hundred dollars or more, depending on the nature of the business and the specific location.

To obtain a business license in Alabama, contact the appropriate city or county government office, such as the revenue or finance department, City Hall, or the economic development to get more information on the necessary licenses.

What is the Alabama business privilege tax?

The Alabama Business Privilege Tax is an annual tax imposed on corporations and Limited Liability Companies doing business within the state of Alabama. The privilege tax is a tax for the privilege of conducting business within the state and is separate from other taxes that businesses might owe, such as income tax or sales tax.

The tax is calculated based on a business’s net worth (also called the “taxable base”) in Alabama, as well as its total income generated within the state.

Alabama Small Business Resources

There are 422,586 small businesses in Alabama, which is 99.4% of all businesses in the state,¹ and over 800,000 people are employed by these small businesses.² Because of the economic impact of small businesses, there are a number of small business resources to help Alabama businesses start and grow. From the Alabama Small Business Development Center (SBDC), SCORE, and others, there are a variety of free and low-cost services to help launch your business.

See the list of Alabama business assistance programs