How to Start a Business in Alabama in 11 Easy Steps

If you’re an Alabama-based entrepreneur, now is the perfect time to launch your new business idea. According to a report by Area Development, the Cotton State is the eighth-best state in which to start a business and the third-best in terms of the cost of doing business. Everything from low property taxes to workforce development programs makes Alabama ripe for small business owners who want to thrive in their new venture. 

However, while the state is highly competitive and favorable to new business developments, starting a company from scratch still requires hard work and perseverance. To help ensure you get your new business started on the right track, we’ve broken down the process into 11 actionable steps. No matter what products or services you’re trying to provide, these steps can keep you focused and streamlined the whole time. 

The 11 Steps to Start a Business in Alabama

1. Fine-Tune Your Business Idea
2. Create a Business Plan 
3. Choose a Business Name
4. Choose a Business Structure
5. Set up Banking, Credit Cards, & Accounting
6. Get Funding for Your Alabama Business
7. Get Insured
8. Obtain Permits & Licenses
9. Find Your Team
10. Market & Grow Your Business
11. Open the Doors!

1. Fine-tune your business idea

For every successful business venture, there are a thousand flops. So, before you start filling out paperwork and raising funds, you need to make sure your idea has the best chance of success. When fine-tuning your business concept, consider these elements: 

• Personal Skills – What are you best (or most experienced) at, and how can you leverage your strengths to run your business? 
• Market Trends – Which industries are thriving, and which ones are on the decline? In Alabama, some of the top industries include aerospace, automotive, agriculture, and information technology. In certain areas, hospitality and tourism are surging, such as in Huntsville, Tuscaloosa, and Birmingham. 
• Market Competition – Being a new business means competing against well-established companies and brands. Research the competition in your target areas so you can figure out how your enterprise can gain an edge. 
• Business Type – Are you trying to sell products or services? Will your customers be individuals, large corporations, or other small businesses? 
• Physical vs. Online – Will you have a brick-and-mortar storefront, or will your company be exclusively digital? Or are you trying to sell both ways? 
• Passion and Motivation – Starting a business is hard work and requires constant effort. If you’re not passionate about your new venture, it’ll fail before you have a chance to get off the ground. 

Overall, you need to balance these factors and consider both short- and long-term goals. Make sure your idea is strong enough to last a long time, but flexible enough to adapt to changing consumer trends and habits. 

2. Create a business plan

Having a killer idea is great, but without a comprehensive plan of action, it will be tough to turn your idea into reality. Writing a business plan not only ensures you consider every element of starting your new company, but it can also help secure funding and draw interest to your brand. Investors and banks often need a detailed business plan before they can approve funding, so it’s crucial to get this step right. 

Some critical elements to include within the plan are: 

Market research

This section should highlight your competition and customer base. If you’re a consumer business, you need to know the demographics of your target area and how your business will appeal to them. If you’re creating a B2B company, you should know which other businesses you’ll sell to and the potential for increasing your market share. 

Financial plan

Being an entrepreneur means investing some of your own money, but you’ll also likely have to secure funding from banks, angel investors, business partners, and more. Outline how you plan to get these funds and how they will be used when starting and running your business. You should also develop profit-and-loss projections for the first few years. 

Marketing plan

Marketing is an essential component of running any successful business, but how will you market your new venture? Options include pay-per-click (PPC) marketing, print marketing, email marketing, content marketing, and more. For each type of promotion you’ll use, outline specific goals and marketing materials, such as slogans, mascots, and campaigns. 

Overall, you should be able to market your business before you even launch, so now is the time to develop your ideas and how you will reach your target audience. 

Choose a location

In Alabama, cities like Birmingham, Tuscaloosa, Huntsville, and Mobile are all ideal for small businesses. This is because the populations of these cities are growing, meaning there is more potential for customers, as well as a well-developed workforce. While you can start your company in a small town, you’re limiting your growth potential. That said, it’s possible to start in a smaller metro area and expand as you make money. 

But picking a city with a rising population is only one aspect to consider when choosing a business location. If you’re operating a storefront, you must think about elements like foot traffic, utility costs, rent costs, and taxes. While Alabama has favorable property taxes, some cities may impose heavier taxes, so there’s a bit of a trade-off. 

Decide if you’re an online-only business

These days, it’s never been easier to start an online business from scratch. All you need to get off the ground is: 

• A website
• Social media profiles
• An email address

However, if you’re selling physical products, you must also consider inventory and distribution needs. While you can rely on third-party suppliers, sometimes it’s better to maintain total control over your inventory for quality assurance. 

Also, although you don’t have to pay for a storefront, if your business is based in Alabama, you’ll need a Business Privilege License and a Seller’s Use Tax Permit. This particular permit is different from a sales tax permit, which is necessary for businesses that operate a physical storefront. 

Finally, while you may start your business online, it may make sense to open a physical location in the future. In many cases, selling products both online and in-store can increase your revenue potential, especially if you open a storefront in a desirable, high-traffic locale. 

3. Choose a business name

Although the products or services you provide matter, sometimes your business name is what’s most important. The name is the first thing people will associate with your company, so you must choose wisely. Ideally, your company name should reflect multiple aspects of your operation, such as: 

• What you offer
• The industry you’re in
• Who your target demographic is (e.g., family-friendly, posh and elegant, etc.)
• Your brand voice (authoritative, fun, luxurious, etc.)

Your business name will appear on everything from your website to business cards to social media, so you need to take the time to craft something that works now and into the future. But, just as importantly, you must also make sure the name is available. 

First, perform an Alabama business entity search to with the Alabama Secretary of State to see if the name is already taken. Then, you can reserve the name for up to a year before launching your company. Alternatively, if you’re ready to form your business now, you can use the name on the formation paperwork. 

If you’re forming a sole proprietorship or partnership, you’ll need to register your business name separately by filing a DBA (Doing Business As), also known as a trade name. You can file a DBA Alabama through the Alabama Secretary of State to legally operate under a name different from your personal name.

If you’re forming an LLC or Corporation, you typically won’t need a separate DBA as your chosen business name becomes your legal name once it’s registered. However, if your LLC or Corporation wants to operate under a different name than the one on your formation documents, you’ll still need to file a DBA to use that alternate trade name.

4. Choose a business structure

As with everything else, the structure of your business can have a substantial impact on your success. Alabama supports all common types of structures, including sole proprietorships, partnerships, LLCs, and corporations. You can also form limited liability partnerships (LLPs) and limited partnerships (LPs), depending on your company’s specific needs. 

The Common Types of Business Structures

If you’re unfamiliar with each structure type, here’s a quick breakdown for reference. 

• Sole Proprietorship – In this case, you are the owner, operator, and sole employee of the company. As such, your business and personal accounts and tax information are often the same. 
• Partnership – A partnership is when you form a business with one or more partners. In this case, you’ll need to draft a partnership agreement that outlines the roles and responsibilities of each partner. You can also form a limited partnership, in which one or more partners have limited control over the company, and a limited liability partnership, which limits the financial liability of each partner. 
• Limited Liability Company (LLC) – An LLC can be formed with a single member or multiple members, and it’s designed to limit the liability of all founders and managing members. In this case, you’ll need to create articles of organization that outline the structure of your business, including the roles and responsibilities of each member. You must also pick a registered agent to receive mail and official correspondence on behalf of the LLC. 
• Corporation – There are two primary types of corporations: C corps and S corps. In both cases, a corporation is a separate entity from its founders and requires a strict organizational structure. Also, because corporations are separate entities, they are taxed independently of those within the company, such as the CEO, CFO, and others. 

Tax Advantages of Each Structure

One of the most crucial factors to consider when picking your business structure is how you will pay taxes. Each structure type has pros and cons when it comes to taxation, so let’s break those down. 

• Sole Proprietorship – This option is easy and convenient if you don’t plan on hiring employees or opening merchant accounts. Typically, you’ll use your own social security number, and all of your business liabilities and earnings will “pass through” to you personally. 
• Partnership – A general partnership also allows for “pass-through” earnings based on how the company is split. For example, in a 50/50 partnership, each partner receives 50 percent of the revenue, but they are also liable for 50 percent of the company’s debts and obligations. Limited and limited liability partnerships can minimize these liabilities while still allowing for pass-through earnings. 
• LLC – LLCs are generally good for most businesses, especially small startups with one or two founding members. By creating an Alabama LLC, you limit your liability for business debts and obligations, but still receive “pass-through” income. However, with a single-member LLC, revenue is usually taxed at the self-employment rate, not the marginal tax rate, so keep that in mind. Also, multi-member LLCs may require complex paperwork to determine taxation. 
• Corporation – A corporation is taxed separately from its members, so your profits are technically taxed twice. S corporations allow for pass-through income, but they still require rigid company structuring and payment limitations based on profits. The main advantages of forming a corporation is that you can potentially deduct more expenses from your earnings and limit all liabilities for business debts and obligations. 

5. Set up banking, credit cards, and accounting

Unless you’re forming a sole proprietorship, it’s always a good idea to set up separate business banking accounts, credit cards, and lines of credit. Not only does this help make accounting and taxation easier, but it can also allow you to secure better funding and financing for large purchases, such as inventory, equipment, and building space. 

Creating these accounts is the same process in Alabama as it is in other states. Before you can open a merchant account or credit card, though, you must register your business with the Secretary of State and keep it in good standing. You must also obtain an Employer ID Number (EIN) from the IRS. This number serves as a Social Security number for your company, helping to maintain a separation between business and personal finances. You may also need your business plan for the bank to review before it can open a new account. 

Before setting up a merchant account, review different banks in your area. Sometimes, the bank you use for personal finances may offer business accounts and credit cards. In other cases, it may make sense to open an account with a separate bank, especially if you’re working in a particular field, such as agriculture or technology. 

Business credit cards and lines of credit can help finance large purchases and allow you to spread repayments over time. However, pay attention to interest rates as they can eat into your profits, especially if you can’t pay off a card quickly. 

Finally, it’s imperative to work with an accountant or accounting firm to maintain your finances. Trying to juggle business expenses, earnings, and other financial matters yourself can be overwhelming, especially as your company grows. Accountants and CPAs can also help ensure you’re staying compliant with regulations and tax rules. 

6. Get funding for your Alabama business

Fortunately, you don’t have to finance your business entirely by yourself to get it off the ground. In Alabama, there are multiple ways to secure funding to ensure you start off on the right track. Some options include: 

• Small Business Loans – After opening a merchant account with a bank, you may be able to secure a small business loan. However, if you don’t have excellent personal credit, you may be limited in how much you can borrow and may have higher interest rates. One way to mitigate these problems is to apply for a loan through the Small Business Administration (SBA). SBA loans come with more favorable terms because the federal government essentially acts as a cosigner on the loan. 
• Grants – Funding for small business grants Alabama is often more preferable to a loan because you don’t have to repay the grant. However, grants also come with stricter requirements and may only apply to companies within specific industries or fields. One of the best resources to find grant funding and other investments is through Innovate Alabama. The state also has a Small Business Development Center (SBDC) network that can help you find and secure grants. 
• Angel Investors – An angel investor is a person or organization that invests directly in your business in exchange for a percentage of the profits. This funding option can be a great way to secure large amounts of cash, as investments are based on the strength of your business idea, not necessarily your own credit score or financial situation. However, the downside is that you must give up some control or ownership of the company. 

Before working on any funding options, make sure to have a comprehensive budget outline that illustrates how much you need and where the money will go. Not only will a financial plan help you succeed faster, but it could make investors and lenders more likely to approve funding since they can see how you will use the capital. 

7. Get insured

Starting a business is a financially risky venture, no matter how stable or resilient your business idea may be. Insurance can help mitigate losses in emergency situations, such as natural disasters, theft, fraud, or worker injury. The state of Alabama only requires two types of business insurance: workers’ compensation and commercial auto insurance. 

• Workers’ compensation insurance is designed to protect workers in case they are injured or get sick while on the job. Alabama requires this coverage for companies employing five or more people, although there are a few exemptions. 
• Commercial auto insurance is required if you use a vehicle for business purposes. This vehicle can be a company car, or it can be integral to your operation, such as a food truck or delivery truck. 

Although these are the only two insurance types required by the state, other coverage options you might want to get include: 

• General Liability Insurance – This coverage protects your business from most liability claims, including bodily injury or property damage. You can also obtain specific liability insurance, such as professional liability, which is crucial if you are providing a professional service (e.g., massage therapy). 
• Property Insurance – If you run a brick-and-mortar storefront or rent an office space, property insurance can help cover damages to the building and the contents inside. Typically, these policies cover natural disasters, fires, and accidental damage, such as if someone drives a car into your store. 
• Errors and Omissions Insurance – If you’re providing services that involve documents and correspondence, E&O insurance can help protect you from any liability that occurs because of errors or incorrect advice you provide to your clients. 
• Cybersecurity Insurance – Most insurance policies don’t cover cyberattacks. This type of insurance is crucial if you operate your business fully or partially online, as it can cover lost income or legal fees related to a cyberattack. This coverage can also cover liabilities if client information is leaked or exposed during an attack. 

8. Obtain permits and licenses

As we mentioned, all businesses must obtain a business privilege license to operate in the state of Alabama. You will need to secure a privilege license from both the state and the county in which your company operates. Some cities also set business license requirements, such as Huntsville, Birmingham, and Pelham. 

In addition to a generic Alabama business license, you may also need to obtain specialty licenses and permits before you can launch your business. Some common options include: 

• Food Service Permit
• Alcohol Permit
• Professional Service License (e.g., contractor, accountant, massage therapist, clinician, lawyer, etc.)

Make sure to check with the corresponding Alabama agency overseeing these permits and licenses to determine requirements and fees. 

Federal income tax and Alabama state tax

Both the federal and state governments will tax your revenue as a small business, so you must file the correct forms to ensure you’re taxed accordingly. As we mentioned, the type of business structure you create can affect your tax liability, and it’s always smart to work with an accountant to ensure you’re compliant with all laws and regulations. 

Generally speaking, all businesses must pay a business privilege tax and collect sales taxes on behalf of the government. For example, Huntsville levies its own taxes on businesses operating within the city limits. 

9. Find your team

The strength of your business relies on the dedication of your workforce. Hiring the right employees can ensure your company succeeds from day one, but you must also make sure you’re compliant with all state and federal laws. 

Alabama requires all businesses to report all new and recalled hires to the Department of Labor. Fortunately, you can do so through an E-verify program for convenience. The purpose of this reporting is to ensure individuals don’t take advantage of workers’ compensation or unemployment claims fraudulently. 

As far as wages and hourly rates, Alabama doesn’t have any state-level requirements, so you only have to follow federal guidelines. These guidelines are also used for matters such as discrimination, harassment, and family leave. 

People are the backbone of your business

No matter how talented or motivated you are as an entrepreneur, you can’t start a new business by yourself. Surrounding yourself with the right people can make or break your new venture, but there’s more to it than just hiring high-quality employees. Other types of people that can assist you include: 

• Mentors – Other business owners who can guide you through different obstacles or challenges. 
• Vendors and Suppliers – Create a network of reliable vendors and suppliers to keep your business running smoothly. 
• Professional Services – Accountants and CPAs can keep your books on track and ensure your money is going to the right places. 

Comply with Alabama payroll regulations

Although Alabama doesn’t have any specific payroll requirements, it’s essential to use software (or a payroll company) to manage your finances. Not only do you have to pay your employees, but you must also collect payroll taxes, including Social Security, city taxes, personal income taxes, and more. Using the right software ensures you remain compliant and know where every dollar is going. 

Hire contractors

As with payroll requirements, Alabama does not have specific guidelines or regulations regarding who is classified as an independent contractor (except those working within an app marketplace like Uber or Lyft). Instead, the state defers to the IRS’s definition of an independent contractor, which is related to the control an employer exerts on a contractor. 

Generally speaking, if you can control what a contractor does and how they do it, they should be classified as an employee, meaning they qualify for employee benefits (such as overtime or tax withholding). If you don’t control how the contractor performs their job (instead paying for results), they may not be categorized as an employee. 

10. Market and grow your business

Marketing is an essential part of any business, whether you’re just starting or have been established for years. Ideally, as a new company, you should be able to validate your business idea by promoting it before you launch. If customers are receptive or eager to order your products or services, the easier it is to start earning profits immediately. 

Here are some excellent marketing methods that can help your business reach and retain new customers. 

Creating a mailing list or newsletter

Mailing lists allow you to send offers and invites to customers repeatedly. Over time, you can earn repeat business by promoting various products, services, or deals through your mailing list. An informative newsletter can also help position your business as an authoritative and reliable brand that customers trust for valuable insights and knowledge. 

Special offers for first customers

Sometimes, the best way to get people in the door is to make them an offer that’s too good to pass up. Many companies will run special launch campaigns to encourage customers to stop by and purchase products or services once the business is open. For example, you can offer a substantial percentage off for the first 50 or 100 customers who shop in-store or online. 

Collaborating with local brands and businesses

Ideally, you’ll be able to create a vibrant network of small businesses and brands within your community. For example, you may be able to participate in a local festival or event, where you can offer your services or sell products to visitors. 

Collaboration can also help if you can align with another business for mutual benefits. For example, if you run a food truck, you might be able to park in the lot of a local convenience store or bank to attract customers to both businesses. 

Encourage word of mouth advertising

In most cases, word-of-mouth is the best marketing. Your customers act as brand ambassadors, recommending your products or services to their friends, families, and co-workers. In some cases, you may be able to encourage these referrals by offering incentives, such as discounts or rewards for each referral. 

Utilize online reviews

While word of mouth is highly engaging, the next best thing is online reviews. Utilize platforms like Yelp, Google Maps, and others to establish a strong online reputation. While you can’t solicit positive reviews, you can incentivize customers to leave honest reviews on these platforms. Additionally, make sure to respond to negative reviews to show that you are willing to fix mistakes and engage with all of your customers, not just the cheerleaders. 

Make content to boost your online presence

In the modern era, content marketing is an excellent way to boost your online presence and drive traffic to your website and social media accounts. This option works best for online-only businesses or those who sell online in addition to a brick-and-mortar location. The idea is to increase overall site traffic, which can boost sales and help with other marketing tactics, such as building an email list or generating online reviews. 

11. Open the doors!

Once you’ve dotted all the Is and crossed all the Ts, it’s time to open your business doors, whether they’re physical or digital. Ideally, if you start marketing your brand beforehand, you should have customers from day one.

However, don’t get discouraged if people aren’t knocking the door down immediately. Sometimes, it may take a while before you get a steady stream of shoppers or clients, but the important thing is to keep promoting your brand. 

Planning a launch event

When opening a business, there are two types of openings: the “soft” opening and the “grand” opening. A soft opening is when the business is open to the public but not announced. The purpose of a soft opening is to test operations and staff to overcome any issues before the grand opening, which should coincide with a launch event. 

For a successful launch event, try to make it as enticing as possible. For example, you can invite food vendors or family-friendly vendors (e.g., balloon artists) and offer discounts for those who attend. You can even give away free branded swag to help promote your business. 

Landing your first sale

Nothing helps validate your entrepreneurial enterprise more than getting sales from satisfied customers. Ideally, you’ll get a wave of new customers as soon as you open, but even if it’s only a trickle, that is better than nothing. Then, as you start getting more sales, you can gather data to improve your process and build a larger audience. 

For example, you can ask customers for feedback on what they like about your products or services and tailor your marketing efforts accordingly. Alternatively, you can re-target existing customers by adding them to a mailing list or newsletter and offering them more products (with a discount) in the future.  

Conclusion

Overall, starting a business in Alabama is easy and straightforward once you know the steps and the paperwork involved. The Cotton State has many resources to help you finance and grow your new enterprise so it’s as successful as possible. That said, the more time you spend preparing your business before launching, the smoother it will be once you open the doors to your customers. 

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