How to start a business in Alabama in 8 steps
For many budding entrepreneurs, doing business in Alabama offers a lot of promise. As a state with some of the lowest tax burdens and costs of labor in the nation, Alabama provides business owners with a high possibility of success. However, startups aren’t just fun and games, and while this southern state might offer some business perks, many will be faced with a lot of hard work.
Before starting your new business, it’s critical to think about whether entrepreneurship is right for you. Not only does an Alabama business require time and money, but as the boss, the buck stops with you. For some, running a small business is a dream come true, and if you find yourself in that boat, keep reading to learn exactly how to start the organization of your dreams in Alabama.
1) Think about the type of business you want to start
If you’ve had a business idea for years that you just can’t get out of your head, it might be time to start your own organization. You may want to sell uniquely designed items from home or could long to operate a brick and mortar store, but whatever the case may be, you’ll want to do some research before you dive in.
Take a look at the industry you’d like to enter into and see who else has established themselves in the space. Is there another business entity that is doing what you want to be doing? If so, perhaps you can offer the same goods or services at a lower price. Or, if you’ll be largely alone when it comes to competition, explore how other businesses around the nation have handled their opportunities and challenges. You’re never too experienced to learn from others when it comes to entrepreneurship!
Even if you think you have your business plan completely figured out, there are still some nuts and bolts to consider in this initial phase. The Alabama Secretary of State makes it pretty easy to start a company, but you’ll want to consider some of the items below before you move forward.
2) Set up your legal structure
Beyond simply knowing what type of business you want to start, Alabama residents need to determine the business structure that best meets their needs. Depending on your goals, you may want to select one of these options:
- Sole proprietorship: Many individuals running their own business prefer to keep things straightforward, and if you aren’t planning on hiring employees or scaling any time soon, a sole proprietorship might be right for you. While it’s appealing to be completely independent when it comes to how you run your business, remember that this business structure doesn’t offer any type of liability protection. If your business falls into debt or is sued by a client or customer, you are held personally responsible.
- Partnership: If your new business wouldn’t be the same without your best friend or your cousin at the helm with you, then a general partnership might be best for your Alabama business. Like a sole proprietorship, a partnership doesn’t offer asset protection should you encounter tough times. However, a partnership is by far one of the easier types of businesses to establish and doesn’t require any official bylaws, operating agreement, or other types of recurring paperwork.
- Limited Liability Company (LLC): Individuals who want a straightforward business structure but require protection for their personal assets might opt to form an LLC. In most cases, an Alabama LLC enjoys a pretty low tax rate as tax obligations bypass the company and instead are issued to the business owners. Most limited liability company members find that the combination of minimal paperwork and liability protection makes this option a no-brainer.
- Corporation: Those with big business dreams could decide that a sole proprietorship or even an LLC doesn’t meet their needs and instead opt to form a corporation. Alabama business owners can select from an S corporation or C corporation regarding their taxation status. Still, we advise that you work with a CPA to ensure that you avoid double taxation when it comes time to file your tax return. Unlike smaller types of business structures, a corporation completely protects the personal assets of its owners.
- Nonprofit: Finally, should your new organization promote a social cause or meet other specific types of criteria, you might want to designate yourself as a nonprofit. For most Alabama nonprofits, their business structure earns them exemption from some taxes and typically offers a low barrier of entry to get started. Many of the steps to create this type of business are similar to other forms of business, so it’s something to consider if your company wants to make a difference in the world.
It’s smart to take time to think about how each of these business structures could serve your new venture and select the one that makes the most sense for your unique situation. In the future, if your business needs change, you may have the ability to convert your company from one structure to another.
3) Name and register your business
As you’re selecting how to structure your business, you’ve likely had a few ideas for your business name. If you’re operating a corporation or nonprofit, the naming process is often a little more straightforward, where sole proprietorships and partnerships may need to complete an additional step. In these cases, if you choose to use a trade name, also called a DBA (doing business as), you may want to register it with the state to provide an extra layer of legitimacy.
You’ll need to complete a Name Reservation form and pay a $25 filing fee if you form an LLC or corporation. Then, once your name is secured, you can complete your formation documents and submit them to the Alabama Secretary of State. This can cost roughly $200 as it includes a probate judge fee and a filing fee, but once it’s finished, you’ll receive your official Certificate of Formation.
Many business owners also use this time to select their registered agent, who will accept legal documents on behalf of the company. In the case of a sole proprietorship or partnership, it’s pretty easy to figure out who this person will be, but some business types will require a more careful selection process.
4) Apply for licenses and permits
Some states across the nation are rather relaxed about acquiring licenses and permits, however, Alabama does require business owners to complete several steps before they open for business. No matter what industry you’re in, you’ll need to apply for a business license, also called a business privilege license, from the Alabama Department of Revenue.
Additional licenses and permits may be necessary, including a sales tax permit, occupational license, or city business license. Some business owners will find their list of needed permits is even longer as zoning, signage, and building permits may be mandatory.
5) Choose a location
This can be one of the most fun steps in the process of starting a business, as a lot of your success can hinge on where you’re located. In fact, selecting your future storefront can be so exciting that many business owners want to start with this step before they’ve completed any steps toward formalizing their company. Keep in mind that paying for your retail space without actually being able to open your doors is an expense you probably don’t need at this stage.
If you do think you’ve found the perfect location for your business, make sure to think about more than just your own spot. What kind of foot traffic is common in this area? Are there other businesses around you, or will you be operating in a largely residential environment? Not only does your location need to be affordable, but it must be conducive to your overall success.
6) Open a bank account and prepare for future taxes
The state of Alabama is one of the least tax-heavy places to start a business, but that doesn’t mean you can avoid the topic altogether. We recommend applying for an Employer Identification Number, also called an EIN or a Federal Employer Identification Number, even if you don’t currently have employees. This number will help you in completing the next few items we discuss.
Most entrepreneurs like to open a business bank account as it helps to separate their personal assets from their company revenue. Sole proprietors may do this using their Social Security Number, while others can use their EIN on the application. Those who want to expand their financial horizons in the future, either via business credit card or business loan, will find the experience easier when lenders can see that a business bank account is already established.
Your EIN will also be used by the IRS when it comes time to pay income taxes. Depending on the type of business structure you’ve formalized, you may be responsible for paying federal taxes and state taxes on either a company or personal level. Still, ultimately, it’s best to work with a CPA to determine exactly what you’ll be liable for.
The Alabama Department of Revenue also requires companies to pay an annual business privilege tax based on your company’s net worth. The minimum business privilege tax is $100 for very small companies but can be as high as $15,000 for most entities.
7) Purchase business insurance
You’re now in the home stretch when it comes to starting a business in Alabama, and while all steps are equally important to get your company up and running, this one will help to ensure you’re protected in the future. Small business insurance is a must no matter what industry you’re in, and obtaining this coverage in Alabama is pretty straightforward.
Some companies might find that liability insurance makes the most sense, while others with employees will be required to enroll in workers’ compensation insurance. A range of options are available, and with Huckleberry, you can get the coverage you need in just a few minutes.
8) Create a marketing plan, hire employees, and more
The final step in starting a small business in Alabama might look pretty different from one company to the next, and rightfully so, as each organization will have its own goals to consider. You might find that you’re still planning certain aspects of your business at this point and may need help from various business resources. The Small Business Administration, or SBA, can help with a range of questions and even offers small business loans to help you hire employees or pay for marketing campaigns.
Maybe at this stage, you want to focus your efforts on developing a social media presence and building an amazing website to attract customers to your e-commerce store. Perhaps you opened a restaurant, and hiring your staff is at the top of your priority list. Or, you may want to focus on designing a retail space that’s warm and inviting, offering customers a relaxed shopping atmosphere.
Whatever the future of your business looks like, make sure to protect it with small business insurance. Business owners can get a free online quote from Huckleberry in just a matter of minutes and have the confidence that they’ll be covered no matter what unexpected circumstance comes their way.