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How to Start a Business in Alabama

With a lower than average state income tax and property tax, and a healthy tech sector, Alabama is a great place to start a business. At a basic level, starting a business in Alabama is as simple as selling a product or service. However, starting, running, and maintaining a business is a bit more involved. What business structure will best protect your assets? How do you pay taxes? What kind of business license will you need? These questions, and more, are answered in our guide on how to start a business in Alabama.

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1. Make a Business Plan

You’ve got an idea. Time to turn it into a plan.

If you’re thinking seriously about starting a business in Alabama, you’ve probably thought through a lot of the details—what you’ll sell, who you’ll sell it to, and how you’ll get the word out. Making a business plan allows you to get those details down on paper. Plus, it’ll force you to think through any of the details you haven’t considered yet and give you a chance to spot any weaknesses in your idea before you start bleeding money.

But drafting a business plan is more than just a helpful exercise. It’s also key for getting investors or lenders on board. Online, you’ll find business plan templates and opinions aplenty. Some say you need a buttoned-up, 35-page document. Others say to keep it short, sweet, and focused with a one-page plan. In the end, it depends on what your goals are. Just make sure your business plan:

  • Identifies the problem your business will solve
  • Describes the consumers your business will serve
  • Highlights your competitive advantages
  • Describes the structure of your company
  • Analyzes your market
  • Describes your marketing strategy
  • Provides a financial projection

Don’t have a business idea yet? Check out our library of small business ideas.

Is a business plan really necessary?

Well, no. Plenty of people jump into business without a business plan and do okay. But the true point of drafting a business plan is to figure out if you can actually make money off your idea (before you start spending money on it). The only way to do that is to do a little research, math, and brainstorming—in a business plan.

2. Pick a Business Structure

Sole proprietorships are the most common type of business structure because they are easy to start, and they don’t require you to register with the state. If you simply start selling goods or services without filing state paperwork, you’re a sole proprietor by default. If you have a business partner or two, you have a general partnership. The problem is that in a sole proprietorship, you are your business. This means that a sole proprietor has no asset protection in the event that the business gets sued or goes bankrupt. If you want to protect your personal assets, you’ll need your business to be a legally separate entity. The most common business entity types with liability protection are LLCs and corporations.

Alabama Limited Liability Company (LLC)

LLCs are the laid back cousin of corporations. Like corporations, LLCs have limited liability protection, but unlike corporations, they have flexibility in how they can be managed and taxed.

To start an Alabama LLC, you’ll need to first reserve a business name with the state. Once your business name has been approved and reserved, you’ll be able to file a Certificate of Formation with Alabama’s Secretary of State (SOS).

Alabama corporation

Like LLCs, corporations are legally separate from the people who own and operate them and have liability protection. Corporations are owned by individual shareholders who have the power to vote on issues facing the business. Corporations are more rigidly structured and require more paperwork than LLCs, but they often have an easier time winning over investors.

To form an Alabama corporation, you’ll need to first complete and file a Certificate of Name Reservation with the state. From there you’ll file a Certificate of Incorporation with the Alabama SOS.

Can an LLC be just one person?

Yes! A one-person LLC is called a single-member LLC. Single-member LLCs are one of the most common kinds of businesses in the country. For the most part, single-member LLCs are just like multi-member LLCs, but there are some slight differences in how they file taxes and protect personal assets.

Read all about Single-Member LLCs.

What about an Alabama nonprofit?

Business isn’t always about money and maximizing profits. If you have a specific mission in mind that benefits a larger community, you can start an Alabama nonprofit corporation. Just as you would with an Alabama LLC or corporation, you’ll need to reserve a business name for your nonprofit and file formation paperwork with Alabama’s SOS.

Want to learn more? Check out our Nonprofit Guide.

3. Reserve Your Alabama Business Name

Unlike most states, Alabama requires entities to reserve a business name before the registration documents are filed. So before you can name your dog-friendly cupcake business Pupcakes Inc., you’re going to have to make sure that name is available to reserve.

Start off by searching Alabama’s Business Entity records to see if any other business has used your preferred name. If the name is available, you’ll be able to reserve it by filing a Certificate of Name Reservation with Alabama’s SOS. The name reservation costs $28 if filed online. You can also file by mail and save a few bucks ($25 for mailed filings), but the process will take longer.

LLCs and corporations need to keep in mind that their business name must meet Alabama naming requirements. Your business name must:

  • Be unique in the state of Alabama.
  • Include identifiers like “LLC” or “limited liability company” for LLCs, or “Inc.” and “Corp.” for corporations.
  • Not use words that are reserved for government agencies (Police, Fire Department, etc…).
  • Not use words that suggest the business offers a professional service, such as engineering, medical, or legal services, unless the business has obtained the appropriate professional license.

What is a DBA?

A DBA, which stands for “doing business as,” is any name used by a business other than its legal business name. The legal name of your business is the one listed on the paperwork filed with the state (if you have an LLC or corporation). If you’re a sole proprietor, your business name will be your own name, unless you register a DBA. For LLCs and corporations, DBAs are often used when the business expands operations, offers new services, or changes branding.

Register Any Trademarks

A trademark is a design, symbol, word, phrase—or any combination thereof—that represents a brand’s goods or services exclusively. Only some businesses register trademarks.

You can apply to register your trademark with the State of Alabama or federally with the U.S. Patent and Trademark Office (USPTO). Registering your trademark in Alabama is cheaper and easier than registering with the USPTO, but doing so only protects your trademark in Alabama.

You can only register a trademark once you’ve started using it, and not all applications are approved. Trademark law is complex, and the strength of a trademark application (and the trademark itself) depends on many factors.

Our attorneys can review your application, offer advice, and prepare and submit the application for you—Check out our Trademark Service.

How do I register a trademark in Alabama?

To register a trademark in Alabama, you’ll need to file an Application To Register or Renew Trademark, Service Mark, or Trade Name in Alabama and pay the $30 filing fee. Alabama asks that you attach three clear “specimens” (examples) that show the mark in use must be submitted with your application.

Can I register a trademark before I use it?

No. But you can file an application with the USPTO under Intent-to-Use status. This gets your application in line before you’ve actually used the mark, which could be helpful if you’re worried someone else might register your mark before you’ve had a chance to use it.

For your trademark to become official, you’ll eventually need to show proof that you’re using it. An Intent-to-Use application buys you some time to do that.

Learn more about filing an Intent-to-Use Trademark.

4. File Formation Paperwork

LLCs and corporations need to file entity formation paperwork with Alabama’s SOS. If you’re a sole proprietor or part of a general partnership, you can skip this step because you’re not creating a separate business entity.

The process to start an Alabama LLC or corporation requires you to file official state paperwork with the Alabama Secretary of State. The filing of your formation documents is what makes your business a separate legal entity, which protects your personal assets.

Note: The information on these forms becomes part of the public record, meaning that the names and addresses you include will be visible in Alabama’s online Business Entity Records.

What is a registered agent? 

A registered agent is a person or business responsible for accepting legal and state mail on behalf of your business. Alabama law states that your registered agent is required to have a physical address in Alabama (no P.O. Boxes), and be present at that address during regular business hours.

Both the Certificate of Formation and Incorporation require the name and address of your Alabama registered agent. You can be your own registered agent, ask a friend or employee, or hire a professional registered agent service like us.

How can I keep my information off the public record?

Hiring a professional registered agent like Northwest can help you protect your privacy. Instead of your personal information being included on public documents and ending up on state databases for anyone to find, a reputable registered agent will let you use their name and business address on state formation documents whenever possible.

Learn how to get a business address.

5. File an Alabama Initial Business Privilege Tax Return

Alabama requires new corporations and LLCs to file an Initial Business Privilege Tax Return with the Alabama Department of Revenue. The report is due within two and a half months of the business registering with Alabama’s SOS.

The tax rate for the Business Privilege Tax is based on the entity’s federal taxable income apportioned to Alabama. Tax rates range from $0.25 to $1.75 for each $1,000 of net worth located in Alabama.

The minimum tax is $100, with a maximum of $15,000.

What about an Alabama annual report?

After your business files its initial report, it will still need to file an Alabama Business Privilege Tax Return and Annual Report each year. Alabama corporations, LLCs, limited liability partnerships, and limited partnerships are required to file a report each year with the Alabama Department of Revenue. Nonprofits are exempt.

Annual report fees are based off a business’s federal taxable income from Alabama sources. If your LLC sells widgets in Alabama and Florida, your fee will be based off your widget sales in Alabama. Fees range from $0.25 to $1.75 for each $1,000 of net worth located in Alabama, with a minimum tax of $100, and a maximum of $15,000.

C-corps and S-corps will also need to attach form AL-CAR to their annual report filing and include a $10 filing fee.

Read more about How to File an Alabama Annual Report.

What if I don’t file an annual report in Alabama?

Late reports earn a penalty of $50 or 10% of your total fees due, whichever is greater. If you don’t pay your fees on time, the state will charge you 1% of the total due each month until you are paid up.

6. Draft Internal Records

So far in this guide, we’ve dealt with public forms that you’ve had to file with the Alabama Secretary of State. Now, it’s time to organize your internal records. These are the documents your business will keep on record within your company.

Though these documents are internal, you’ll likely need to show them to third parties like the bank or—if you start a nonprofit—the IRS.

Here are the major internal documents you need to organize for LLCs and corporations:

Alabama LLC Operating Agreement

This is your LLC’s rule book. It defines how your LLC will do things like make decisions, distribute money, manage operations, and appoint officers. Your operating agreement plans for every big picture scenario your LLC is likely (or unlikely) to face, including dissolution.

Drafting an operating agreement is hard, and the internet is full of shabby templates that have been copy and pasted from who knows where. So we had our attorneys draft an Alabama LLC Operating Agreement template that you can use as a solid foundation.

Alabama Corporate Bylaws

Bylaws are the rules your corporation will adopt and follow internally. Bylaws detail how your corporation will appoint directors and officers, hold shareholder and board meetings, and handle emergencies, among other things. Unlike operating agreements, corporate bylaws are required by law in Alabama (see AL Code § 10A-2A-2.05).

As with operating agreements, you can find plenty of bylaws templates online. But bylaws are pretty serious, so you don’t want to just use the first template you come across. Our attorneys drafted an Alabama Corporate Bylaws template you can use to get started.

Starting a nonprofit? Learn about Alabama nonprofit bylaws.

7. Get Alabama Business Licenses

Most Alabama businesses will need both state and local licenses (and sometimes federal licenses as well) in order to legally operate. Licensing requirements for each business are determined by the industry and location of the business. For example, if you run a bar, you’ll need a liquor license. If you renovate homes, you’ll need a contractor’s license.

Alabama Business License

All Alabama businesses, with the exception of some veteran-owned businesses, are required to annually register with the Alabama Department of Revenue for a Business Privilege License. (Note, this is not the same as the Business Privilege tax.) Businesses must apply for a Business Privilege License from the probate judge in every municipality where they do business. The license is valid for one year, and privilege license fees vary by location.

Professional Business Licenses

Alabama requires professional licensing for businesses that require training to be performed safely. Professional licenses are necessary for accountants, dentists, doctors, and massage therapists, among others. Professional licenses are obtained through the state licensing board that regulates your industry.

Local Business Licenses

Depending on your business type and location, you may have to jump through a few hoops before you can apply for a Business Privilege License. For instance, if you’re starting a home-based business in the town of Madison, you’ll need to complete a Residential Zoning Compliance Certificate before you can apply for a regular business license. Opening a restaurant in Huntsville? Be prepared to get a health certificate from the local health department before you begin the application process for a business license.

Learn more about How to Get a Business License.

How do I get an Alabama business license?

Because licensing is left up to each municipality, you’ll need to contact your local licensing office to apply for any necessary licensing. Here is a list of Alabama municipalities.

How much does it cost to get an Alabama Business Privilege License?

Alabama’s Privilege and Store Licenses Handbook is a good place to start if you want to know how much your business license will cost. Fees for obtaining a business license will vary depending on where the business is located, and what kind of business it engages in. For example, a heating and air-conditioning company will pay $151 per employee for an Alabama business license, whereas an individual barbershop pays only $4.75 per employee. Any business involved in the sale of automobiles pays a business privilege fee based on the size of the city where the business is located.

How do I get a professional license in Alabama?

Professional licenses are obtained by applying through the state licensing board that regulates your industry. Fees will vary by profession. For example, general contractors will need to pay $300 to obtain a license through Alabama’s Licensing Board for General Contractors. Some licensing requires continuing education. For instance, to maintain their licensing, engineers will need to complete a minimum of 30 hours of education every two years.

8. Organize Your Money

The liability protection you get from forming an LLC or corporation is only as strong as the separation between you and your business. At a minimum, you’ll need to open a bank account for your business. And if you’re going to hire employees, you’ll need to tackle payroll, too.

Open a Business Bank Account

To keep your business spending separate from your personal spending, you’ll need to open a business bank account. If you don’t, a court could find that your business is not actually separate from you, the owner, under the Alter Ego Doctrine. Also known as piercing the corporate veil, this is the outcome when a judge finds that a company is not a separate entity but rather an alter ego of the owner. If this ever happens, you could lose your limited liability status.

Opening a business bank account as a sole proprietor is important, too. Though sole proprietors and general partnerships have no limited liability status to protect, both will benefit from organizing their business finances come tax season.

How do you set up a business bank account?

LLCs and corporations will need to provide the bank with their formation documents, operating agreement or corporate bylaws, EIN, and in some cases, a Corporate Resolution to Open a Bank Account or LLC Resolution to Open a Bank Account.

Do I need a business bank account to accept credit card payments?

Probably. Payment processors require you to provide them with a bank account. This is where they’ll deposit funds from transactions. Most of the time, this needs to be a business bank account.

Some payment processors may let you get away with listing a personal bank account, but it’s not a great idea. Mixing your business finances with your personal finances erodes the separation between you and your business, weakening your liability protection. It also turns tax season into a nightmare.

Learn more about Payment Processing.

Set up Payroll

Plan to hire employees or independent contractors? If so, you’ll need to set up a payroll system. Here’s how that’s done:

  • get an EIN for your business
  • register for an Alabama Withholding Tax Account Number
  • find your Unemployment Compensation (UC) Contribution Rate
  • determine whether you’re hiring employees or independent contractors
  • prepare the forms your employees will fill out
  • manually enter your own payroll, install payroll software, or hire a service
  • implement a schedule for payroll

Since setting up payroll isn’t simple, most businesses, large and small, use payroll software like Quickbooks or outsource payroll processing to a professional service.

What forms do my employees need to fill out?

Your new employees will need to fill out a W-4 to determine how much you’ll withhold and an I-9 to verify that the employee is eligible to work in the US.

What’s the difference between an independent contractor and an employee?

It’s important to understand the difference between an independent contractor and an employee. That’s because for employees, you’ll need to withhold and pay income, social security, and Medicare taxes. Independent contractors pay these taxes on their own.

An independent contractor is self-employed—how they complete their work is not directly controlled by an employer. An independent contractor may perform the same kind of work for other businesses, and can do the work when and how they choose.

An employee, on the other hand, performs their work how and when their employer chooses.

If you’re unsure, you can file Form SS-8 with the IRS and let them decide.

Learn more about hiring independent contractors.

How do I get an Alabama Withholding Tax Account Number?

To get a Alabama Withholding Tax Account Number, you’ll need to apply online through My Alabama Taxes. Once completed, you’ll have your account number in about five days.

9. Get Business Insurance

Forming an LLC or corporation protects your personal assets. But if anything disastrous befalls your business—like a lawsuit, burglary, flood, or fire—your business is going to have to pony up some cold hard cash. Business insurance can help cover the costs.

Do you really need business insurance? That depends. Alabama requires workers comp insurance for some businesses, but for other types of insurance, whether you need it comes down to the level of risk you can handle.

Here’s a breakdown of the most commonly purchased business insurance:

Workers’ Compensation Insurance

Workers’ compensation insurance is insurance that covers medical and lost wage expenses for employees who become injured or sick on the job. Workers’ comp also includes employee rehabilitation and death benefits. Alabama requires that all employers with at least five employees obtain workers’ comp. Some jobs are exempt, including:

  • Farm workers
  • Domestic employees working in private homes
  • Casual employees, who don’t have guaranteed work hours
  • Municipalities with less than 2,000 residents

Obtaining workers’ compensation insurance for your business is as easy as picking up the phone and calling any national or local insurance agency, and it definitely pays to shop insurance rates.

Liability Insurance

This covers the costs of claims against your business for injuries or damages to the property of others, like clients or customers. This includes medical expenses, legal fees, settlements, and judgments. Whether or not you need it depends on whether your business is likely to be sued and how many assets your business needs to protect. If it’s just you and your computer in your basement, you might feel comfortable skipping liability insurance. Or maybe you won’t. Beyond general liability insurance, you can purchase or add on more specific types, like professional, cyber, commercial, home-based business, or product liability insurance.

Do business owners need workers' compensation insurance in Alabama?

According to Alabama Workers’ Compensation Law, unless your business is involved in the construction of residential dwellings, you are not required to have workers’ compensation insurance coverage if your business employs fewer than five people.

Do I need business insurance for my home-based business?

Probably. That’s because you can’t count on your homeowners’ or renters’ insurance policy to cover damages related to your business. Most insurance companies offer a home-based business insurance plan.

10. Understand Your Tax Burden

Compared to other states, Alabama has fairly low personal income and corporate income tax rates. Taxes don’t end there. You’ll also need to pay attention to federal and local taxes.

Federal Taxes

  • LLCs. Single-member LLC? By default, you’re taxed similar to a sole proprietor. More than one LLC owner? You’re taxed as a general partnership. Either way, your default tax status is “pass-through,” which means you don’t pay corporate taxes. Instead, your LLC’s owners report profits and losses on their personal tax returns. LLC members need to cover their own federal self-employment taxes (15.3%). Each LLC member will pay this tax on all business profits until the maximum annual contribution ($147,000 in 2022) is met. Additionally, LLCs can file paperwork with the IRS to be taxed as an S-Corp or C-Corp.
  • Corporations. Corporations are taxed as C-Corps by default. This means that corporations pay the 21% federal corporate tax rate and the applicable Alabama corporate tax rate.

To pay your federal taxes (and take a good deal of other steps required to start a business), you’ll need to get an Employer Identification Number (EIN). You can apply for one with the IRS or hire us to get one for you.

Do I need an EIN if I’m self-employed?

If you’re operating a sole proprietorship or single-member LLC that doesn’t employ anyone else and you don’t need to file excise or pension plan returns, you don’t legally need an EIN.

However, you can still get one—and you probably should. Otherwise, you’ll have to use your own social security number to do business. Plus, you’ll likely need an EIN to open a business bank account.

How do I get an EIN?

To get an EIN, you can either apply online or file form SS-4 by mail with the IRS. Getting an EIN is free.

Check out our guide to applying for an EIN.

What is an S-Corp?

An S-Corporation is a federal tax election. Registered business entities like LLCs and corporations start out with a default tax status, but can file paperwork with the IRS to be taxed as an S-Corp. Like LLCs, S-Corps are taxed as pass-through entities. Like corporations, S-Corps can make distributions that aren’t subject to the 15.3% self-employment tax.

Learn more about the S-Corp tax election.

What is an C-Corp?

A C-corporation is the default federal tax election assigned to corporations. Most corporations are taxed as C-Corps, but LLCs can also apply for C-Corp tax designation by filing paperwork with the IRS. C-corps file federal corporate income taxes and state corporate income taxes (in Alabama, the corporate tax rate is a flat 6.5%). C-corps can pay their shareholders in distributions, and the shareholders report those profits on their personal tax returns.

Learn more about the C-Corp tax election.

Alabama Income and Sales Taxes

Alabama has a graduated personal income tax that tops out at 5% for single filers making over $3,000. Alabama corporations pay a flat income tax rate of 6.5%. Alabama’s sales tax is 4%, with an average combined state and local sales tax rate of just under 10%.

Local Alabama Business Taxes

Business taxes don’t end at the federal or state level. Each county or municipality in Alabama has the power to impose additional taxes on businesses. Your business should pay attention to not just sales and property taxes, but also to other local taxes like rental tax, lodgings tax, consumer use tax, and sellers use tax.

For example, while the state of Alabama collects a flat 4% sales tax, in the city of Mobile you’ll be expected to pay an additional 6% in sales tax (1% Mobile County sales tax and a 5% Mobile city tax). If your business is based in Shelby County, you’ll need to pony up an added 1% for a general sales tax, 3% for a lease tax, and 7% for lodging services, among other local taxes.

11. Build Your Business Website

If you want actual local Alabama customers to find your business, they have to be able to find you online. This means you’ll need a website, a business email account, and social media accounts. Don’t worry if you’re not especially tech-savvy—you don’t have to be a web developer or an annoying influencer to establish a robust online presence. You’ll just need the following:

  • Domain name. Your domain is the address where your website will live. You’ll want a domain name that is short, unique, local, and—most importantly—available. If your domain is trademarked, you could face legal trouble.
  • Domain registrar. Once you’ve decided on a domain name, you’ll want to register it with a domain registrar. Some domains are more expensive than others. Some domain registrars also offer hosting and most will provide you with a business email that includes your domain name (“name@yourbusiness.com”).
  • SSL certificate. An SSL certificate signals to your users that your website is secure. If your website will use forms—like a sign-up form or a “contact us” form—an SSL certificate is critical. But even if you don’t you use forms, you’ll still probably want one—it allows an encrypted connection, which means your users’ data is transported securely. There are several types of SSL certificates, and you can often get one through your domain registrar.
  • Site design. The easiest option is to use a free website creation tool—there are a number of free options available. Most are easy even for a newcomer to use, with styles and built in templates. For a more custom design, you can hire a web designer to work on your website, but this will be much more expensive.

Ready to Start Your Alabama Business?