How to Start a Business in Alabama

Here's an overview of the key steps you'll need to take to start your own business in Alabama.

1. Choose a Business Idea

Take some time to explore and research ideas for your business. At this stage, take into consideration your own interests, skills, resources, availability, and the reasons why you want to form a business. You should also consider the likelihood of success based on the interests and needs of your community. Read our article for more tips on how to evaluate business ideas.

After you select an idea, consider drafting a business plan to evaluate your chances of making a profit. When you create a plan, you will have a better idea of the startup costs, your competition, and strategies for making money. Typically, investors and lenders will ask to review your business plan before providing financial assistance. To learn more about the benefits of business plans and how to create one for your enterprise see Why You Need to Write a Business Plan.

2. Decide on a Legal Structure

The most common legal structures for a small business are:

• sole proprietorship
• partnership
• limited liability company (LLC), and
• corporation.

There also are special versions of some of these structures, such as limited partnerships and S corporations. You'll want to consider which business entity structure offers the type of liability protection you want and the best tax, financing, and financial benefits for you and your business. Read our article for information on how to choose the best ownership structure for your business.

3. Choose a Name

For LLCs and corporations, you will need to check that your name is distinguishable from the names of other business entities already on file with the Alabama Secretary of State (SOS). You can check for available names by doing a business entity search on the SOS website. You can reserve an available name by filing a Name Reservation Request Form. There are certain name requirements for LLCs and corporations (like including a word such as "LLC" for LLCs or "Corporation" for corporations). See How to Form an LLC in Alabama and How to Form a Corporation in Alabama for more information.

Is your business a sole proprietorship or partnership that uses a business name that is different from the legal name of the business owner (for a sole proprietorship) or surnames of the individual partners (for a partnership)? Alabama does not require you to file a fictitious or assumed business name. However, you have the option to file a trade name application with the SOS, which is the same as registering a state trademark.

If you plan on doing business online, you may want to register your business name as a domain name. See Choose and Register a Domain Name for more information. In addition, to avoid trademark infringement issues, you should do a federal and state trademark check to make sure the name you want to use is not the same as or too similar to a name already in use. See How to Do a Trademark Search for more information.

4. Create Your Business Entity

• Sole proprietorship: To establish a sole proprietorship in Alabama, you don't need to file any organizational documents with the state. For more information, see How to Establish a Sole Proprietorship in Alabama.
• Partnership: To create a general partnership in Alabama, you don't need to file any organizational documents with the state. Although not legally required, all partnerships should have a written partnership agreement. The partnership agreement can be very helpful if there is ever a dispute among the partners. For more information, see How to Form a Partnership. To form a limited liability partnership (often used by professionals), you must file a Certificate of Formation with the Alabama SOS. For more information, see How to Form a Limited Liability Partnership in Alabama.
• LLCs: To create an LLC in Alabama, you must file a Certificate of Formation with the Office of the Judge of Probate in the county where the LLC's initial registered office is located. You will also need to appoint a registered agent in Alabama for service of process. In addition, while not required by law, you also should prepare an operating agreement to establish the basic rules about how your LLC will operate. The operating agreement is not filed with the state. For more information, see How to Form an LLC in Alabama and How to Form a Professional LLC in Alabama (for professionals).
• Corporations: To create a corporation in Alabama, you must file a Certificate of Formation with the Alabama SCC. You will also need to appoint a registered agent in Alabama for service of process. Although not legally required, you also should prepare bylaws to establish your corporation's internal operating rules. Bylaws are not filed with the state. S Corporations must also file IRS Form 2553, Election by a Small Business Corporation, with the IRS. For more information, see How to Form a Corporation in Alabama.

5. Apply for Licenses and Permits

Tax Registration. If you will be selling goods in Alabama, you must register with the Department of Revenue (DOR) to collect sales tax. If your businesses will have employees, you must register with the DOR for employer withholding taxes. You can register for both types of tax, as well as other business taxes, either online via the My Alabama Taxes website or on paper using Form COM 101, Combined Registration/Application.

EIN. If your business has employees or is taxed separately from you, you must obtain a federal Employer Identification Number (EIN) from the IRS. Even if you are not required to obtain an EIN, there are often business reasons for doing so. Banks often require an EIN to open an account in the business's name and other companies you do business with may require an EIN to process payments. You can get an EIN by completing an online application. There is no filing fee.

Regulatory licenses and permits. These cover areas such as:

• health and safety
• the environment
• building and construction; and
• specific industries or services.

Most Alabama businesses are required to have one or more business privilege licenses. Each business privilege license covers the period October 1 through September 30 and must be renewed annually. You apply for licenses from the probate judge or license commissioner in the county where your business is located. In addition, you'll generally also need a license from every other county where you conduct business. For your convenience, the ADOR has an online listing of county probate offices.

Professional and occupational licenses. These cover people who work in various fields. You can get information about the state agencies that license and regulate many professions and occupations by going to the Regulatory Boards/Agencies Requiring Permits/Certificates/Licenses page of the Alabama Department of Revenue's website.

6. Pick a Business Location and Check Zoning

You'll need to pick a location for your business and check local zoning regulations. Before you commit to a location, take time to calculate the costs of running your business in the desired spot, including rent and utilities. You can refer back to your business plan to evaluate whether you can afford your desired location during your company's early months.

It is important to verify that the spot is zoned for your type of business. You might find zoning regulations for your town or city by reviewing your local ordinances and contacting your town's zoning or planning department. Read our article for more tips on picking a location.

One alternative to opening your business at a new location is running your company out of your home. If you decide to run a home-based business, again check your local zoning laws. In addition, review your lease (if you rent your home) and homeowners association rules (if applicable), either of which might ban some or all home businesses.

7. File and Report Taxes

Alabama taxes every kind of business. See Alabama State Business Income Tax for more information on state business taxes in Alabama.

Sole proprietorships. Pay state taxes on business income as part of their personal state income tax returns (Form 40).

Partnerships. Partners pay state taxes on partnership income on personal tax returns. In addition, most Alabama partnerships also must file Form 65, Partnership/Limited Liability Company Return of Income.

LLCs. Members pay state taxes on their share of LLC income on personal tax returns. In addition, LLCs themselves have to file an additional state tax form. The specific form used will depend on how the LLC is classified for federal tax purposes. Alabama LLCs also are required to file an annual report which is linked to payment of the state's Business Privilege Tax. See Alabama LLC Annual Filing Requirements for more information.

Corporations. Shareholders must pay state taxes on their dividends from the corporation. A shareholder-employee with a salary also must pay state income tax on his or her personal state tax return. Moreover, the corporation itself is subject to Alabama corporation taxes. And, finally, corporations must file an annual report which is linked to payment of the state's Business Privilege Tax.

If you have employees, you must also deal with state employer taxes.

And, apart from Alabama taxes, there are always federal income and employer taxes. Check IRS Publications 334, Tax Guide for Small Business, and 583, Taxpayers Starting a Business.

8. Obtain Insurance

Business insurance can protect your company and your personal assets from the fallout of unexpected disasters, such as personal injury lawsuits or natural catastrophes. An insurance agent can help you explore the different coverage options, such as general liability insurance to protect your business against claims relating to bodily injury or property damage. To learn more, see Nolo's article, What Types of Insurances Does Your Small Business Need?

9. Open a Business Bank Account

No matter the type of business you form, you should consider opening a separate business account to make it easier to track your income and expenses. For some business types, like LLCs and corporations, a separate bank account is necessary to maintain your liability protection. To learn more, see Opening a Business Bank Account.