How to Establish a Sole Proprietorship in Alabama

To establish a sole proprietorship in Alabama, here's everything you need to know.

In Alabama, you can establish a sole proprietorship without filing any legal documents with the Alabama Secretary of State. There are four simple steps you should take:

1. Choose a business name.

2. File a trade name (optional).

3. Obtain licenses, permits, and zoning clearance.

4. Obtain an Employer Identification Number.

1. Choose a Business Name

In Alabama, a sole proprietor may use his or her own given name or may use an assumed name. It is always a good idea to choose a name that is not too similar to another registered business because of common and federal law trademark protections. To make sure your business name is available, run a search in the following government databases:

2. File a Trade Name

Alabama does not require sole proprietors to register fictitious or assumed business names. If you use a business name that is different from your legal name, Alabama provides the option of filing for a trade name. This process is identical to registering a trademark. For details, see Nolo's section on Trademark Law.

3. Obtain Licenses, Permits, and Zoning Clearance

Your business may need to obtain a variety of licenses and permits depending on its business activities. All businesses in Alabama must obtain a privilege license. This is an annual license that begins October 1 through September 30. You can obtain a privilege license by visiting the probate judge in the county where your business is located. The Alabama Department of Revenue website provides a list of contact information for the various counties. There are other licenses that may be required depending on your specific type of business activity. The Alabama Business and Tax License Division provides a comprehensive Occupation License Brochure listing license requirements by occupation. Additionally, local regulations may apply to your business. You should check with your city or county clerk or licensing department.

4. Obtain an Employer Identification Number

Sole proprietors who wish to have employees need to obtain an Employer Identification Number, or 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 their EIN. Registering for an EIN can be done online at the IRS website.

Sole proprietors without employees are not required to have an EIN because they can use their Social Security number to report taxes. Nevertheless, you may want to obtain one anyway for your business. Some banks require one to open a bank account and it can reduce the risk of identity theft.

In Alabama, businesses that have employees are required to file a report whenever they hire a new employee. Employers will need to use their EIN to file this report. Relevant information is available on the Alabama Department of Industrial Relations website.

As an employer in Alabama you should be aware of all relevant tax issues related to your employees. For more information on being an Alabama employer see the frequently asked questions section on the Alabama Department of Revenue website.

Next Steps

It is important to consider doing the following once you have established your sole proprietorship:

  • Open a business bank account. Using your business name and EIN, you should set up a bank account to keep your business and personal finances separate.
  • Obtain general liability insurance. Because sole proprietors are personally liable for all debts and obligations of the business, a business liability insurance policy may be the only form of financial protection against unforeseen events.
  • Report and pay taxes. Depending on your specific business activities, you may be required to report such items as sales tax and use tax. The Alabama Department of Revenue publishes a brochure called Starting a New Business to address tax issues businesses may face while doing business in Alabama.

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