Alabama is a very business-friendly state. According to recent data, Alabama has the 3rd lowest tax burden in the USA, along with the 7th lowest cost of labor, on average. Plus, owners enjoy low personal income tax, as well as the 19th lowest cost of living in the country. This all makes your own living expenses cheaper, plus makes it easier to attract skilled workers from out of state.
Small businesses can certainly thrive in Alabama. In fact, there are around 400,000 small businesses registered in the state, which makes up about 99.4% of all businesses in the state.
But how do you start a business in Alabama? The answer to this question depends on many factors, including what type of company you want to start, what business structure you need (LLC, corporation, etc.), and many other factors. This guide will help you navigate the process from start to finish!
Decide on a business idea
First and foremost, you’ll need to decide what kind of business you want to start! Chances are you already have something in mind, but if not, here are some things to consider:
- What are you talented or naturally skilled at? Could this talent make you well suited to a certain type of business?
- What business does your community need? Have you talked to people to find out?
- What are you interested in? Can you combine any of your passions with a business idea?
- Is this going to be a full time business, or more of a side hustle?
These are questions to ask yourself when deciding on a business idea. Once you have decided, move on to the next step.
Plan your Alabama business
Now it’s time to start planning. This means coming up with a business plan, naming your business, researching locations, and more. There’s a lot to cover here, so let’s break it down:
Select a business name
You’ll need to find a name for your business that is available (not taken by another business in Alabama). Ideally, you want a name that is relevant to the business, and that is memorable for your clients or customers.
The name must also meet the requirements set out by the state of Alabama:
- Alabama requires that business owners reserve business entity names ahead of time (the cost is $25)
- See the full Alabama business naming requirements here
- Search the Business Entity Database to see if a name is available
You may also make use of a “doing business as” name, otherwise known as a DBA or trade name. This is a secondary name that you can use for branding purposes. You can file for a DBA by filing this form.
Keep in mind that Alabama requires you to make use of the DBA before you register it. So you should first search for the name (to make sure it’s not already in use), and if it’s not, you can then begin using the DBA before you register it.
Before you decide on a name, it’s worthwhile to check if the domain name is available.
Register a domain name
Once you choose a name, you should immediately register a domain name for your new business. In most cases, getting a .com domain name is ideal, but there are many other extensions (.biz, .net, etc.) that are worth considering.
You can use a tool like Namechk to search for an available domain name and find a great deal on the registration cost. You may find that your desired names are taken, so you may need to get creative.
Complete market research
Once you have an idea, you’ll want to do some market research. You want to gain a better understanding of who your customers (and competitors) are. You can achieve this by conducting online research, running focus groups, sending out surveys, and more. There are also companies that can help you complete market research, for a fee.
Select a business location
Unless you plan to run a remote/virtual business, you will need to find a physical location for your company. Research commercial property in your area, and take note of typical costs. For customer-facing businesses (retail and some services), location is very important, so take your time in selecting the right area for your business.
Create a business plan
You will now need to create a detailed business plan for your new venture. This plan is helpful for your own purposes, and will also be necessary in order to obtain funding from a bank. A good business plan should contain these elements:
- Finances: How much funding does the business need to get started? How many sales does it need each month to break even on expenses?
- Product: What do you plan to sell? Is it a product or a service? What problem does your business solve, and how is it distinct from your competitors?
- Marketing: How will you drive sales? What marketing and sales efforts do you plan to employ? How much money will you set aside to fund marketing efforts?
- Staff & Partnerships: How many people will you need to hire, and what skill sets do they need to have? Will you have any partnerships or arrangements with other local businesses?
If you need help, you can find business plan templates online that will help walk you through the steps you need to take to draft a detailed business plan. If you plan to seek funding, you may also wish to call your bank to see what they require in terms of business plans.
Decide on a business structure
Before you form your business as a legal entity, you will need to decide which business structure you will use. There are a few different types of businesses, each with its own pros and cons.
Sole props are single-person operations. Examples include freelancers, gig economy workers and consultants. A sole proprietorship business is very easy and inexpensive to form, and tax reporting is also fairly simple. As a sole proprietor, your business taxes are reported as part of your personal tax return.
The downsides to a sole prop are that you cannot hire employees, and you don’t have the legal liability shield that something like an LLC or corporation would provide. 100% of the debts and liability of a sole proprietorship go to the sole owner: you.
A general partnership is an unincorporated business structure similar to a sole proprietorship, except with two active owners/participants. Partnerships do not have liability protection.
Limited Liability Company (LLC)
A limited liability company, or LLC, is a popular choice for business owners because it provides liability protection to the owners. It separates the business from the owners, which means the personal assets of owners will not be at risk if the company gets sued or goes into bankruptcy.
LLCs are also a bit easier to form than corporations. Even so, there is definitely more work involved with an LLC than there is with a sole proprietorship.
A corporation is owned by its shareholders and is a separate entity. There are a few different types of corporations (C-corp, S-corp, etc), with the main differences being the way they are treated tax-wise.
Corporations are more regulated than LLCs, which makes them more attractive to outside investors. For this reason, most large companies are corporations. The downside is that it takes more effort, and more paperwork, to form a corporation.
A nonprofit is a legal entity that is set up with charitable status, meaning that its goal is not to make a profit, but rather to address a certain cause. Nonprofits are funded by donations, rather than investors, and are subject to many regulations. They are exempt from most forms of taxation, although tax returns must still be filed.
Register your business in Alabama
The next step for business owners is to actually register the business with the state of Alabama.
For this process, we recommend using a business formation service, such as Northwest Registered Agent, ZenBusiness, and Incfile. These companies can help walk you through the entire formation process, saving you time and hassle – and ensuring everything is done accurately.
Registering your business will include a number of important steps, including:
- Selecting a formal business name
- Choosing a Registered Agent to represent you (this agent is responsible for receiving important legal documents on behalf of your company)
- Filing formation documents with the state of Alabama
- Applying for an Employer Identification Number (EIN) from the IRS
Form a business in Alabama
You will need to work with the Alabama Secretary of State. The specific requirements will vary a bit depending on what type of business entity you are forming (LLC, corporation, etc), but generally speaking, you will need to file some paperwork with the Secretary of State.
Form an Alabama LLC
Follow these steps:
- Name your LLC (follow the Alabama LLC naming rules)
- File an LLC Name Reservation
- Choose a Registered Agent (or use a service such as Northwest Registered Agent)
- File the LLC Certificate of Formation online or by mail, and pay the $200 filing fee
- Draft an LLC operating agreement
- Apply for an EIN with the IRS
Form an Alabama corporation
Follow these steps:
- Decide on the type of corporate tax treatment you want (C corporation or S corporation)
- File a Corporate Name Reservation
- Choose a Registered Agent (or use a service such as Northwest Registered Agent)
- Hold an organizational meeting
- File the Certificate of Incorporation online or by mail, and pay the $200 filing fee
- Apply for an EIN with the IRS
Apply for business licenses and permits
Registering your business and forming an LLC or corporation is an important part of starting your business – but in order to operate legally, you will likely also need to obtain certain permits and/or business licenses.
The specifics vary depending on the type of business you are running, as well as your location. For example, restaurants will need health permits, bars will need liquor licenses, and medical service providers will need various professional licenses and federal permits. You will need to research the specifics that relate to your business type.
There are different requirements at each level of government:
- Local: Cities and counties may require certain business licenses or permits. Contact your county clerk for details.
- State: Alabama may require certain permits or licenses. Check the Alabama Department of Revenue’s business licensing page for details.
- Federal: Federal permits/licenses may be required for certain regulated industries, such as construction, medicine and legal services. Check the Small Business Administration (SBA) guide for more details.
At this time, you should also apply for an Employer Identification Number (EIN). An EIN is a federal tax ID that is required to hire employees. You can apply for an EIN online with the IRS – the application is free and quick.
For most businesses, some startup funding will be necessary in order to get started. In step #2, you should have calculated your funding needs while drafting a business plan. Use this information to determine how much funding you need to raise.
For bootstrapped companies, you may be able to get by with your own personal savings, or some seed investments from friends and family. If your funding needs are small, this is likely your best route.
If your business plan indicates that substantial funding is needed, you will likely need to apply for a loan and/or a grant.
- Small business loans are offered by banks, credit unions and other lenders. They can range from as little as a few thousand to hundreds of thousands. Specifics will depend on your business, as well as your personal creditworthiness. Most small business loans are issued in a lump sum, and paid back on a monthly basis, with interest.
- Small business grants are offered by government agencies and some nonprofits. They are essentially business loans that don’t need to be paid back – but they usually have substantial fine print. It’s worth looking into, however, as there may be grants available, particularly for businesses serving an important social need, or for underprivileged entrepreneurs starting their first business.
Set up your business finances
Beyond securing funding, there are other routine tasks that you need to take care of to get your business’ finances in order. This includes:
- Opening a business checking account. You should have a separate business bank account that you use solely for business purposes. You can open this account at most banks, credit unions and financial institutions. Call ahead to see what documents will be required to open this account.
- Open a business credit card or line of credit. This is not strictly necessary, but most businesses can benefit from having a business credit card, and/or a business line of credit. This can be used for day-to-day expenses and purchases, and may also earn you some rewards.
- Set up your accounting system. As a business owner, you will need to keep very detailed records about all revenue and expenses. To do this, you’ll want to set up the proper foundation from day one. This could be investing in an account software such as QuickBooks or Xero, hiring a bookkeeper, or at the very least establishing a spreadsheet to track everything. If you do not have any accounting experience, it’s wise to hire a professional to help.
- Purchase business insurance. Most businesses should have some form of liability insurance, and potentially other forms of business insurance as well. Insurance policies can help protect your equipment and buildings from costly damage, and help shield your company from liability if a worker or customer is injured or otherwise harmed. Speak with a local business insurance provider to get started.
Create a business website
In this day and age, having a solid web presence for your business is very important. And social media profiles, while important, are no replacement for an actual website. You will want to build a professional business website that you can use to drum up business, inform your customers, and stay connected with your clientele.
The simplest way to build a website is to use a website builder from a web hosting provider. When you register a new domain name, look for a provider that also offers web hosting and a site builder, so that you can purchase everything at once and get your site set up quickly.
Unless you plan to operate a solo business (with you as the only worker), you will likely need to hire employees. To do this, you will need a federal employer identification number (EIN), which is a free tax ID number issued by the Internal Revenue Service (IRS).
You will also need to report new hires to the state of Alabama.
At this point, you also should look into setting up your payroll system – whether you handle it yourself, or use a payroll service.
Run and grow your business
Now it’s time to get down to business and engage with the day-to-day activities that are sure to bring your business success. This means marketing your products and services, maintaining good relationships with your return customers, and setting yourself apart from the competition.
Alabama business FAQs
Still have questions about running a business in Alabama? Here are some answers to frequently asked questions.
What are some business resources in Alabama?
Entrepreneurs in Alabama have many useful resources at their disposal. A great place to start is the Alabama Small Business Development Center (ASBDC). This resource provides free business advisory services, webinars and training, and many other useful resources. Entrepreneurs can also contact the Birmingham District Office of the Small Business Administration (SBA).
Are there business assistance programs available in Alabama?
Yes, there are a variety of business assistance programs set up in the state, many of which target certain types of entrepreneurs. For instance, Alabama VetStart helps veterans start new companies, while the Women’s Business Assistance Program helps female entrepreneurs get started in the business world.
What is the minimum wage in Alabama?
Alabama does not have a state-level minimum wage, which means that the federal minimum wage applies. Currently, the federal minimum wage is $7.25 per hour. The minimum tipped wage is $2.13 per hour, and applies to employees who receive tips such as waitstaff.
What business taxes does Alabama have?
Alabama has a variety of taxes that businesses may be subject to. There is a state sales & use tax, which businesses will need to collect on transactions and pay to the Department of Revenue. There are employer-related taxes, such as withholding tax and unemployment insurance tax. And there is the Business Privilege Tax, which applies to most small businesses. See this page on the Alabama Department of Revenue website for more details.
How do I dissolve an LLC or Corporation in Alabama?
If you need to dissolve (close) your business for any reason, you will need to complete some steps. You will need to close down your business tax accounts with the Department of Revenue, and you will need to file the LLC Articles of Dissolution with the Secretary of State. Closing a business can be complex, so it may be worthwhile to hire a certified public accountant (CPA) for this process.
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