With a relatively low tax burden and low cost of labor, Alabama is the 14th fastest-growing state in the United States. It’s becoming the sweetheart state for business start-ups. If you’ve been thinking about forming a business in Alabama, here is a comprehensive look at the many things business owners should know and address to get their new Alabama businesses up and running.
1. Fine-tune Your Business Idea
Before spending time and money starting a business in Alabama, entrepreneurs should do their due diligence to ensure their business concept has the potential to succeed. A feasibility study can help you reach an informed “go” or “no go” decision. Also, consider bouncing your idea by trusted advisors like SCORE mentors, business consultants, accountants, and attorneys who can help you identify red flags.
2. Write a Business Plan
With so many moving parts involved in starting a business in Alabama, writing a business plan helps you focus on your business objectives and the strategies for achieving them. A business plan is a document that outlines and defines your goals and describes the efforts you will make to accomplish them. Some business plans should be in-depth and detailed, while others can be short and sweet. The complexity depends on the type of business you’re starting. If you plan to appeal to outside financial sources and get funded, you need a formal business plan.
Typically, a business plan contains the following sections:
- Executive Summary
- Company Overview
- Products and Services Descriptions
- Market Analysis
- Competitive Analysis
- Sales and Marketing Plan
- Management and Operations Description
- Financial Projections
You can find business plan templates online to use as a starting point for creating your own plan.
3. Create a Name for Your Business
Besides choosing a business name that works well for marketing and branding purposes, ensuring the desired name is available in Alabama is vital. To find out if any other Alabama companies are using a business name, you can use CorpNet’s free Corporate Name Search tool. When registering an LLC or corporation in Alabama, the business name becomes protected against another similar business from using the name. Registering for a state trademark can offer additional peace of mind. When forming a legal business entity, a company must comply with the entity-specific name requirements (e.g., a Limited Liability Company must use an acceptable form of “LLC” behind it).
Sole Proprietorships and General Partnerships do not have to register their companies. Still, if they use a name that doesn’t include the legal names of the business owners, they must file a Registration for Application of Trade Name. In addition, when forming a legal business entity, a company must comply with the entity-specific name requirements (e.g., a Limited Liability Company must use an acceptable form of “LLC” behind it).
Registering a business in a state only protects the company’s name within that state. So entrepreneurs who want to expand their businesses to other states or ensure their companies’ names are protected in all 50 states should conduct a trademark search, which helps identify if the desired name is available throughout the U.S. And if your trademark application is granted, it ensures similar businesses cannot use the name in other states.
4. Choose a Business Entity Type
Several business structure types are available in Alabama. These include Sole Proprietorships, General Partnerships, For-Profit Corporations, Nonprofit Corporations, Limited Liability Companies (LLCs), Limited Partnerships (LPs), Registered Limited Liability Partnerships (RLLPs), and Limited Liability Limited Partnerships (LLLPs).
Which entity type will work best for your business? You’ll need to consider various factors, including the desire for personal liability protection, tax ramifications, ownership and management flexibility, and business compliance requirements. Let’s look at a few of the business entities and their characteristics.
- In Alabama, Sole Proprietorships are not required to register their companies with the state. The business and its owner are considered the same entity in a Sole Proprietorship, which means the assets and liabilities of the company are those of the owner. While this creates simplicity operationally and from a tax perspective, it can also be a disadvantage. For example, if someone sues the company or the business can’t pay its bills, the owner risks losing their personal money and property.
- Another potential disadvantage of a Sole Proprietorship is that the business can only be transferred to the owner’s heirs to be continued, restructured, or dissolved if the owner dies.
- Sole Proprietorships also have limited funding options, so investors often hesitate to finance businesses not formally registered as statutory entities.
- Sole Proprietors report their business income and losses on their individual federal tax returns. The business owner doesn’t receive a company paycheck that withholds federal income tax and payroll taxes. So, they must submit quarterly estimated federal income tax payments, including self-employment taxes.
- The self-employment tax rate is 15.3%, which includes 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). In some situations, that self-employment tax burden can become lofty and prompt a Sole Proprietor to look at business structures that can minimize those costs.
- A General Partnership is a non-registered business co-owned by two or more partners.
- Like Sole Proprietors, General Partners, and their businesses are the same entity for legal and tax purposes and are not required to register with the state.
- A General Partnership is a simple and inexpensive way to form a multi-owner business. There are no state, federal, or local filings to register a partnership formally, and partners can easily make decisions without the meeting formalities required of corporations.
- In addition to the personal liability risk to business owners, other potential disadvantages of owning a general partnership include the limited funding possibilities, a heavy self-employment tax burden, and the cessation of the business if a partner leaves (unless the partnership agreement has provisions to remedy that).
Limited Liability Companies (LLC)
- A Limited Liability Company (LLC) provides legal and financial separation between the owners (called members) and the business. An LLC structure offers peace of mind to business owners who don’t want to risk having their personal assets, including bank accounts and retirement savings, used to settle their company’s debts or legal problems.
- From a tax perspective, however, the LLC and its members are viewed as a single tax-paying entity. So the LLC’s profits and losses are reported through its owners’ federal personal tax returns.
- Single-member LLCs (called disregarded entities) get taxed as Sole Proprietorships, and multi-member LLCs get taxed as Partnerships.
- Federal income tax flexibility is one of the most attractive features of the LLC structure because an LLC (if it meets all IRS eligibility requirements) can elect to be taxed as an S Corporation or a C Corporation.
- The Alabama Department of Revenue requires LLCs to file an annual report, which keeps the state updated on a company’s vital information.
- Alabama allows registration of Series LLCs, which are variations of the LLC structure, providing each series with its own membership interests, assets, and operations. In a Series LLC, each series has its own name and operates independently with a separate bank account and financial records.
Limited Partnerships (LP)
- A Limited Partnership has general partners and limited partners. The general partners are the owners who manage the company. They face the same personal liability risks as in a General Partnership because there’s no separation between the individuals and the businesses.
- Limited partners do not manage the company. Instead, their role is to fund the business. Therefore, their personal liability is limited to the amount of their investment in the company.
- Some potential disadvantages to an L.P. are that it can get complicated to run from an accounting standpoint, and limited partners have no say in how the company is operated after they’ve made their investments. Plus, an L.P. can become costly to form and operate.
- Alabama Limited Partnerships are required to file an annual report.
- Businesses that operate as C Corporations in Alabama offer the highest degree of personal liability protection to the owners (shareholders).
- The C Corporation is a separate entity legally and for tax purposes. Accordingly, it reports and pays federal income tax on its profits on its own tax return.
- C Corporations must appoint a board of directors to oversee the company’s affairs and ensure the business is managed with the interests of its shareholders and stakeholders in mind.
- C Corporations have more financing options, too. For example, they can sell stock to raise capital, and investors typically show more interest and confidence in funding businesses registered as Profit Corporations.
- The “double taxation” on C Corporations sometimes dissuades entrepreneurs from choosing this entity type. That term refers to how company profits that get distributed to shareholders as dividends are taxed twice: (1) once to the corporation at the corporate tax rate and (2) again to the individual shareholder at the applicable individual tax rate.
- Corporations that meet the Internal Revenue Service’s (IRS) eligibility requirements can opt for S Corporation tax treatment to avoid double taxation (see next section).
- Other potential disadvantages of the C Corporation structure include its higher formation costs and more extensive ongoing compliance responsibilities (such as submitting annual reports, holding shareholder and board of directors’ meetings, and other requirements).
- Alabama C Corporations are also required to file an annual report.
- As noted in the LLC and C Corporation overviews, an S Corporation is a tax election option, not an entity type.
- LLCs or C Corporations that qualify can file for an S Corporation election by submitting IRS Form 2553.
- If a C Corporation opts for an S Corp election, the corporation gets pass-through tax treatment, eliminating double taxation.
- If an LLC opts for an S Corp election, it retains its underlying legal structure, so compliance requirements remain minimal. It also maintains pass-through tax treatment, but unlike the default LLC taxation, not all business profits are subject to self-employment taxes.
- Only an S Corp’s owners’ wages and salaries are subject to Social Security and Medicare taxes; owner income from the company’s profit distributions is not subject to those taxes.
- Alabama S Corps are also required to file an annual report.
5. Appoint a Registered Agent in Alabama
Businesses registered in Alabama must designate a Registered Agent in the state. The Registered Agent must have a physical address in Alabama and be available to accept “service of process” (official government documents, legal papers, etc.) for the business Monday through Friday from 9 a.m. to 5 p.m. The ramifications are serious if an LLC, corporation, or other registered business entity fails to maintain a Registered Agent.
CorpNet offers Registered Agent services in Alabama and throughout the United States., which saves businesses that want to expand into other states the trouble and expenses of looking for a Registered Agent in each state.
6. Register Your Business Entity
Here’s a run-down of some of the initial paperwork required when starting a business in Alabama:
- Sole Proprietorships: Business owners don’t have to file organization documents to operate as Sole Proprietors in Alabama. Note that a trade name (sometimes called doing business as or fictitious name) filing is required if the business’s name is other than the owner’s first and last name. Also, like formally registered businesses, sole proprietorships must obtain the necessary licenses and permits to operate legally in the state and local jurisdictions.
- General Partnerships: Alabama state does not require General Partnerships to formally register their businesses. If they use a business name that does not reflect the legal names of the business partners, the partnership must file a DBA. Also, although not required by state law, partners should consider having a written partnership agreement drawn up to document all the business partners’ responsibilities and rights. General Partnerships in Alabama must obtain all the necessary licenses and permits to operate legally in the state, county, and local municipalities.
- Limited Liability Partnerships: A Limited Liability Partnership may be formed by the general partner(s) by creating a partnership agreement, filing a Domestic Registered Liability Partnership form with the Alabama Secretary of State, and paying a $200 filing fee.
- Limited Liability Companies: To form an LLC in Alabama, a Certificate of Formation must be filed in Alabama, and the LLC must pay a filing fee of $200. In addition, a name reservation form must be filed, along with a $25 registration fee. Go to the Department of State Online Filing System to file formation documents online. LLC members should consider creating an operating agreement. The state doesn’t mandate this, but it serves a critical role in defining how the LLC should be run and describing the responsibilities of the LLC’s members (and managers).
- C Corporations: The state requires businesses that want to incorporate in Alabama to file a Corporation Certificate of Incorporation and pay a filing fee of $200. Profit Corporations in Alabama must appoint a Board of Directors, adopt bylaws, and have regular board meetings. In addition, every Alabama business corporation must designate in its certificate of incorporation the number of shares it will have the authority to issue.
7. Obtain an Employer Identification Number
Any business that hires employees must get an Employer Identification Number, which is also referred to as an EIN Federal Tax ID Number. This is a 9-digit I.D. number obtained from the IRS. Often, a bank will require a company to have an EIN before opening a business bank account, even if it doesn’t have any employees. Other official paperwork may ask for a business’s EIN, as well.
The IRS issues EINs for free, however, if you’d like help obtaining this, CorpNet can help companies by completing and submitting the application (Form SS-4) for them. Note that the IRS recently announced that it’s revising the EIN application process to enhance security.
8. Open a Business Bank Account
Keeping a business entity’s financial accounts, documents, and records separate from those of the business owners is imperative for accurate bookkeeping and legal reasons. Setting up business bank accounts and credit card accounts for company use helps ensure this separation. If an LLC, LP, C Corporation, or other registered company commingles personal and business expenses and income, the owners jeopardize their personal liability protection and may incur additional penalties.
9. Prepare to Pay to Alabama’s Business Taxes
Although the State of Alabama does not have a corporate franchise tax, it does impose an Alabama Business Privilege Tax. According to the Alabama Department of Revenue, every “corporation, limited liability entity, and disregarded entity doing business in Alabama or organized, incorporated, qualified, or registered under the laws of Alabama is required to file an Alabama Business Privilege Tax Return and Annual Report.” Sole Proprietorships and General Partnerships are not required to pay the Alabama Business Privilege Tax.
The Business Privilege Tax rate is based on the company’s net worth and not its income. The rates range from $0.25 to $1.75 for each $1,000 of net worth in Alabama.
In addition, the following taxes and fees may need to be remitted in Alabama:
- Annual Report Fee – The filing fee is $10.
- State Sales Tax – Alabama’s sales tax rate is currently 4%. Localities may charge an additional sales tax of up to 7.5%.
- Employer Taxes – Alabama manages state payroll taxes through its Department of Revenue.
- Income Taxes – Alabama has a progressive income tax from 2% to 5%. Depending on where your employees live or work, some cities in Alabama also impose a levy on income taxes from 1% to 2%.
- Unemployment Insurance 0 Alabama State Unemployment Insurance (SUI) varies by calendar year. 2022 rates range from 0.64% to 6.24%. New employers pay a flat rate of 2.7%. The tax rates for 2023 range from 0.2% to 5.4% and include a 0.06% employment security assessment.
- Corporate Taxes – Alabama corporations pay a flat 5% corporate tax rate.
- Business Specific Taxes – Depending on the nature of your business, additional taxes may apply. The following are a few examples of business taxes applies to specific products or services:
- Lodgings tax
- Rental tax
- Pharmaceutical provider tax
- Nursing home privilege tax
- Mobile communication services tax
The Alabama Department of Revenue can advise business owners on the taxes they must pay and how to pay them. Your accountant or tax advisor can also help you identify your tax obligations.
10. Obtain Business Licenses and Permits
Depending on their industry, businesses may need specific licenses, permits, or other federal, state, or local government authorizations. All individuals and companies doing business in Alabama must obtain an Alabama Business Privilege License. A privilege license is a license requirement for every person, firm, company, or corporation engaged in any business, vocation, occupation, or profession described in Title 40, Chapter 12, Code of Alabama 1975. Alabama has a detailed handbook to help new business owners ascertain if they need to apply for additional licenses or permits.
You can also turn to CorpNet to help you identify and apply for the business licenses and permits required in the area where you plan to operate your business.
11. Research Other Business Essentials
- Businesses physically located in Alabama must comply with their local municipality’s zoning regulations.
- To protect your business in the event of unforeseen and unfortunate circumstances, research the types of business insurance you want, need, or are required for your industry.
- Will you need to apply for loans, seek investors, or get additional money to launch your business?
- If your business plans to hire employees, there are many human resource-related responsibilities and regulations you must follow. Learn more about registering for payroll taxes in Alabama to help get you started with your new staff.
- Register a Google Business Profile so your new business can easily be found online. It’s a free account and one that is critical for any new business.
12. Stay in Compliance
Businesses must stay current on their annual report and tax filing requirements to stay in good standing and operate legally in Alabama. If you’re unsure of your obligations to maintain corporate compliance, ask your attorney and tax professional for guidance.
One convenient way to track future filings is using CorpNet’s Compliance Portal. The free online portal makes tracking license renewal and annual report deadlines easy.
13. Keep a Resource List Handy
You don’t have to go it alone when starting and running a business. Keep a list of resources that provide information and insight. Here are a few helpful ones:
- Alabama Secretary of State
- Alabama SOS Business Forms
- Alabama Department of Revenue
- Alabama Small Business Development Center
- Alabama Women in Business
- IRS Website
- Alabama Department of Labor
- S. Patent and Trademark Office
- SCORE Alabama
- Alabama U.S. Small Business Administration
- Manufacture Alabama
Lastly, CorpNet is here to help you with your business registration and compliance filings after you consult with your legal and accounting experts to determine what to do. We’ll save you time and legal costs while ensuring your filings are done accurately and on time.
Choosing a business structure can be a tough decision for the new business owner. CorpNet wants to make the process easier.
This free, online tool helps small business owners navigate the process of picking the right business structure for their new business.