How to Start a Sole Proprietorship in Alabama

If you've started selling your homemade jewelry online or running personal training sessions out of your garage, you've likely formed a sole proprietorship already—and you're not alone. When an individual starts a business (sells goods or services) and that person hasn't filed any legal documents with the state officially registering the business, then the person has automatically created a sole proprietorship.

A sole proprietorship is low maintenance. It doesn't typically require you to file any creation documents or submit renewal filings or fees, and you can usually report your income on your personal tax return. But sole proprietors are personally liable for the business's debts and obligations, so you might need to dip into your personal funds to satisfy any debts your business can't pay.

In Alabama, you can establish a sole proprietorship without filing any legal documents with the Alabama state government. Though no action is required to legally create a sole proprietorship, you should follow four simple steps to start your business:

1. Choose a business name.
2. File a trade name application with the Alabama Secretary of State (SOS).
3. Apply for licenses, permits, and zoning clearance.
4. Obtain an employer identification number (EIN).

For more information, read our article on how to start a business in Alabama.

1. Choose a Business Name

In Alabama, a sole proprietor can use their own legal name or a trade name—also sometimes known as an "assumed business name" or "doing business as" (DBA)—to conduct business. If you plan to use an assumed name for your business, it shouldn't be the same name as any other company currently registered with the state.

It's also a good idea to choose a name that's not too similar to another registered business to avoid trademark infringement. Under trademark law, your trade name can't be used by someone else in a way that would cause confusion among consumers. So, if you use a name that's the same as or too similar to someone else's trademark and you both provide similar goods or services, then you could be infringing on that other person's trademark. If you find a competitor company already exists with a similar name, then it's best to choose another name.

For example, suppose you want to operate a small boat repair shop under the name Brown River Outboard Repairs. But in the next town over, there's a boat store with the name Brown River Outboards. Because your shop would have a similar name to a store that already exists, you should choose a different name.

To make sure your business name is available, you should run a search in the following government databases:

• Alabama Secretary of State's business entity search, and
• United States Patent and Trademark Office's Trademark Electronic Search System.

For more information, read our FAQ on how to choose and register a business name.

2. File a Trade Name With Alabama

If you use a business name that's different from your legal name, you can register your trade name with Alabama. For example, suppose Jeremy Simms runs a seafood stand under the name Gulf Stomach Gumbos and Sandwiches. Because Jeremy's business name, Gulf Stomach Gumbos and Sandwiches, isn't the same as his legal name, he might choose to register his trade name with the state or find that his local government expects him to register the business name locally.

Unlike some other states, in Alabama, you're not required to register your trade name. But registration might have some potential benefits such as:

• putting others on notice that you're using a particular name
• giving weight to your claim of ownership of a name in a trademark dispute, and
• providing a separate name for a business bank account.

If you do choose to register your trade name, complete an application to register and submit it to the SOS. As of 2023, the registration fee is $30. You also might want to check with your local government to ensure there is no local business name registration requirement.

3. Apply for Licenses, Permits, and Zoning Clearance

Depending on your business activities, you might need to apply for business or professional licenses. At a minimum, Alabama does require you to obtain a business privilege license from the county where you do business. This license is usually issued by the county probate court. Check the business privilege license webpage on the state's Department of Revenue (DOR) website for more details. For other state business licenses, check the DOR's business and license division webpage.

For professional and occupational licenses, check the Alabama Department of Labor's dowloadable Licensed Occupation Guide that covers 150 different occupations. It provides information about an occupation's:

• license title
• qualifications
• application process
• fees and costs
• agency contact information, and
• workforce information (like average wages).

You might also need to comply with local regulations, building permits, and zoning laws. Check with your city and county governments for more information.

4. Obtain an EIN

Sole proprietors who wish to have employees need to obtain an EIN. This is a nine-digit number issued by the IRS for tax reporting purposes. All businesses with employees are required to report wages to the IRS using an EIN. You can register for an EIN online with the IRS.

Sole proprietors without employees aren't required to have an EIN. Instead, you can use your Social Security number to report taxes. Nevertheless, you might want to obtain an EIN. Some banks require an EIN to open a bank account, and having an EIN can reduce the risk of identity theft.

In Alabama, businesses are required to report taxes and file various employee reports. You might need to use your EIN when reporting business taxes. If you have employees, you must report and pay employment taxes to the DOR on a periodic basis. For more information on employer taxes, check the withholding tax section of the DOR website.

Next Steps for Sole Proprietors

You should consider taking the following additional steps once you've started your sole proprietorship:

• Open a business bank account for your sole proprietorship. Using your trade name and EIN, set up a bank account to keep your business and personal finances separate. You should keep your business income and expenses separate from your personal funds so you can easily distinguish your business's financial profile for tax purposes. For instance, you can more easily report business deductions on your tax return if you've created a separate account.
• Obtain general liability insurance. Because sole proprietors are personally liable for all debts and obligations of the business, a business liability insurance policy can offer financial protection against unforeseen events. You should also consider other types of insurance for your business, including property and auto insurance. For more information, read our article on the types of insurance your small business might need.
• Report and pay taxes. Depending on your specific business activities, you could be required to report such items as sales tax and use tax. Check the sales tax section of the DOR website for more information, including details on exemptions, local sales tax, and filing deadlines. The section also includes a link to the My Alabama Taxes (MAT) portal where you can file and pay taxes for your business. You can find additional information on business taxes, including the business privilege tax at the businesses section of the DOR website. (For more information, see our section on business taxes and deductions.)

To find out how to form a sole proprietorship in any other state, see our 50-state guide to establishing a sole proprietorship.

Consulting a Small Business Attorney

You might not need to submit paperwork to start a sole proprietorship in Alabama. But your specific circumstances could require you to file certain forms and comply with certain rules and regulations. As a business owner, it's important to understand what steps you need to take to legally start and operate your sole proprietorship.

If you have business experience and only need to meet a few requirements to establish your sole proprietorship, you can probably do the work yourself. But if you need specific guidance or run into a complicated issue when starting your business, you should talk to a small business lawyer. They can help you register your name, file your taxes, and obtain licenses and permits.